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Hong Kong Summary

Introduction

Since becoming a Special Administrative Region (SAR) of China in July 1997, Hong Kong has been governed by a 'one country, two systems' formula, under which it manages its own economic and financial affairs, its own currency, and its own involvement in international economic organizations and agreements. Since its conferral from Britain to China, Hong Kong has maintained its traditional policy of noninterference in commercial decisions, low and predictable taxation rates, conservative government spending, and generally nonrestrictive trade and investment policy. These baseline policies, combined with continued efforts toward trade-liberalization, helped earn high commendation for Hong Kong from other WTO members during its most recent routine Trade Policy Review in December 2002. [1]

Hong Kong's economy is itself highly dependent on international trade. Natural resources are limited, and food and raw materials must be imported. Imports and exports each exceed GDP in dollar value. Although Hong Kong's merchandise trade account has been in deficit, it has been more than offset by a large surplus in services trade, which today drives the economy. [2] This fact affirms Hong Kong's long-pursued goal of establishing a knowledge-based economy.

Services and Investment

Following its integration into China in 1997, Hong Kong has become a major provider of services to the mainland. With services accounting for 92.4% of GDP in 2000, and the manufacturing sector for a mere 5.5%, Hong Kong continues two-decade-long transition from a manufacturing-based economy toward a high-value-added and service-based economy. [3] Although the government has traditionally adhered to laissez-faire policies, it created an Innovation and Technology Commission (ITC) in 2001 in response to a period of economic slowdown. The ITC is proactive in efforts to promote financial services, tourism, and producer and professional services. The government's willingness to fund technology investment reflects a belief that in 2001 Hong Kong could not compete in the high-tech sector without an intial boost of targeted government support. [4] However, in other instances, authorities have generally resisted pressures for large-scale government expenditure to kick-start the economy.

Due to the centrality of services in its economic portfolio, most governmental intervention resides with Hong Kong's investment policy. While there are a number of barriers to entry for foreign service-firms in the form of licensing restrictions, recent developments affecting Hong Kong's investment environment have been positive. The conditions for foreign banks to apply for a license to operate in the territory were relaxed in 2000, and the interest rate rules set by the Hong Kong Association of Banks were also liberalized in 2000 and 2001. [5] As with many South Asian economies, copyright infringement is a perpetual challenge and a failure to adequately address the issue has negatively impacted investor confidence. Hong Kong has generated a comprehensive body of legislation aimed at protecting intellectual property, and government has taken steps in terms of education campaigns and enforcement to strengthen the protection accorded to it. Consequently, Hong Kong's piracy rates are low, relative to its neighbors. While enforcement of copyright and trademark has improved measurably in recent years, eliminating intellectual property piracy will require a sustained effort.

Anti-dumping

Hong Kong is party to a 17-member group (also including Canada, Taiwan, Japan, Singapore and South Korea) hoping to revise the WTO's anti-dumping agreement. The group contends that the US and the EU have used anti-dumping measures to prohibit imports from other countries, such as textiles and clothing products from Hong Kong. [6] In the Doha Round, Hong Kong is energetically supporting key issues in anti-dumping, including the review and possible amendment of investigation procedures and assessment of damages pertaining to anti-dumping, as well as regulations regarding which country is at fault for dumping in cases under the agreement.

Regionalism and FTA's

While Hong Kong has demonstrated increased involvement in regional and bilateral trade agreements, including the initiation of free trade agreement negotiations with Mainland China and New Zealand, the authorities stress their commitment to the multilateral trading system. Given its high degree of openness, resumption of growth in Hong Kong depends on an acceleration in external demand. Thus Hong Kong can be expected to pursue trade in all arenas. In January 2004, the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and mainland China went into effect, marking the first bilateral FTA for both parties. [7] China remains the largest export market for Hong Kong, followed by the United States, the European Union, and Chinese Taipei. In terms of merchandise imports, China, Japan, the EU, Chinese Taipei, and the United States are its largest suppliers.

Conclusion

In addition to being one of the world's most open economies, Hong Kong enjoys a number of economic strengths, including accumulated public and private wealth from decades of unprecedented growth, a sound banking system, a strong legal system, low taxation and infrastructure. Consequently, US companies have a generally favorable view of Hong Kong's business environment and trade and investment ties are strong. Still, Hong Kong is endeavoring to improve its attractiveness as a commercial and trading center, especially after China's entry into the WTO as China's growing openness to the world economy is expected to increase competitive pressure on Hong Kong's vital service industries. China's growing prominence in the world economy, however, also presents Hong Kong with opportunity. With numerous international corporations anxious to gain access to the fastest-growing Chinese market, Hong Kong's potential status as a gateway to China will certainly attract substantial increases in its trade and investment activity.

Last updated June 2004

[1] Concluding Remarks by the Chairperson, Trade Policy Review: Hong Kong, China, 18 Dec 2002.
[2] Secretariat Report, WTO Trade Policy Review: Hong Kong, China, 18 Dec 2002, page viii.
[3] Hong Kong's economy increasingly turning towards services, Agence France Presse, Financial Pages, 18 Dec 2002.
[4] For information regarding Hong Kong's future development strategy, reference the Commission on Strategic Development.
[5] Fordyce
[6] Fordyce
[7] CEPA and Opportunities for Hong Kong, CRI Online, 14 January 2004.


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