Hong Kong Ready for a Fast-Track Accession to World’s Largest FTA

DI MARCO ZECCHILLO

17/11/2022

The Special Administrative Region (SAR) of Hong Kong appears to be on the verge of joining RCEP, the Regional Comprehensive Economic Partnership. The deal consists of a regional free trade agreement joining together, at the time of writing, 15 countries in the Indo-Pacific region accounting for one third of world’s output. This makes RCEP the largest trade deal in the world and in human history, linking economies worth a cumulative thirty trillion USD.
Hong Kong’s recent pushes for accession are likely to succeed. Entering the RCEP network would permanently link HK’s future to ASEAN’s economies, socialise the city even more closely with its partners and ease trade and facilitate intra-regional investment flows.

The Special Administrative Region (SAR) of Hong Kong appears to be on the verge of joining RCEP, the Regional Comprehensive Economic Partnership. The deal consists of a regional free trade agreement joining together, at the time of writing, 15 countries in the Indo-Pacific region accounting for one third of world’s output. This makes RCEP the largest trade deal in the world and in human history, linking economies worth a cumulative thirty trillion USD.

Hong Kong’s recent pushes for accession are likely to succeed. Entering the RCEP network would permanently link HK’s future to ASEAN’s economies, socialise the city even more closely with its partners and ease trade and facilitate intra-regional investment flows.

Since its signature in late 2020, the RCEP gathered wide consensus across the economies of East Asia, South East Asia and Oceania. After becoming effective in early 2022, the preferential trade agreement is expected to lift tariffs for 92% of traded goods between its members and to provide a ground of predictability for technical standards and rules of origin in the area.

The potentially beneficial impacts of the future cooperative regional framework set some key opportunities for the firms in the city of Hong Kong.

The port of the city has historically been very open, even before the Handover to China, which occurred in 1997, despite starting its history as a rather small and irrelevant village from the standpoint of trade. An example of the importance trade has gained for Hongkonger businesses, is the fact that the special region is amongst the funding members of the World Trade Organisation, which it joined separately from Mainland China. After the return to the People’s Republic, HK has been able to maintain its seat as an independent constituency to the organisation under the name of Hong Kong, China. In this regard, the signature of the People’s Republic to the FTA in 2021 did not directly correspond to the accession of the Bay Area.

Hong Kong already entertains an FTA with ASEAN since 2018 and posseses a number of deals with other countries such as Australia and New Zealand. Plus, it has developed a complex network of agreements with the People’s Republic of China under the ideal of the “Closer Economic Partnership”. Additionally, HK has embraced the OBOR (One Belt, One Road a.k.a. the Belt and Road Initiative) and it has agreed to partake in the Asian Infrastructure and Investment Bank.

Things appear to be pointing in the direction of a fast-track entry in the RCEP deal, which would enhance the already existing ties and create new links with Japan and South Korea, countries currently outside the FTA network of HK. This seems promising, also in the light of Mainland China’s clear commitment to socialise the SAR in the group, which was properly stated during September 2022’s BRI Summit.

Being a rather small territory, it is no surprise that the Hong Kong SAR’s economy relies strongly on trade openness, for which a fully-fledged RCEP accession could be reinforcing. In this regard, it is worth considering that the bulk of the city’s relations have been entertained with neighbouring countries.

Indeed, the Special Administrative Region shows very high levels of trade openness (a measure related to the ratio of the overall value of trade out of Gross Domestic Product), with figures just short of 400% witnessed in recent years, according to the World Bank. Entering the grouping could potentially open a window of opportunities for grasping the benefits of integration. Namely, HK would become eligible for the preferential treatments ensured by the deal. These forces could provide a renovated impetus to the economy of the Bay, strongly impacted by the Covid-19 pandemic and the temporary interruption of Global Value Chains, which have caused its GDP to shrink sensibly in 2020.

As far as investments are concerned, the RCEP’s scope does not directly touch the matter. However, it can be expected that trade deals, in practice, lead to further investment integration due to the improvement of market access for businesses in member economies. For this reason, a tighter regional network is believed by Hong Kongers to be a key opportunity, especially for the Greater Bay Area firms. According to the South China Morning Post, six firms out of ten in the Bay would be currently ready to bolster their investments in operations in ASEAN member countries such as Singapore, Malaysia, Vietnam and Thailand.

Particularly, the cooperation with Singapore seems promising, being two important financial centres for the whole region with similar structures (a strong reliance on the services sector over the industrial and the agricultural ones), despite substantial differences in size – Hong Kong’s financial services market is, currently, 1.5 times larger than Singapore’s.

Conversely, the closeness of connections between HK and China’s wealth could provide other signatory countries with a pivot to accede PRC’s financial opportunities.

All elements seem to be leaning towards a quick accession of Hong Kong into the Regional and Comprehensive Economic Partnership, thanks to China’s commitment for a fast-track accession. By becoming a member, HK can improve its market access in countries it already has a strong link with and develop novel connections with Japan and South Korea. Indeed, a step forth towards a East and South East Asian integrated bloc.

The extent of effects surely depend on how deep and rooted the RCEP network will become. Is it the beginning of a new chapter for world trade? Or will integration fail to go further? Some doubts on the developments of the RCEP have been cast by Australian and American commentators, who criticise the absence of labour or environmental issues in the deal. This could make it less desirable than the TPP11 (the Comprehensive and Progressive Agreement for Transpacific Partnership) to some countries.

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