Brexit offers HK golden opportunity

The UK will be eager to close a deal, giving the SAR a chance to the seize the day, Ken Davies writes

As outgoing Chief Executive Leung Chun-ying said earlier this year, Hong Kong business people and investors can turn the challenges of Brexit into new opportunities, and not just because the devaluation of the pound sterling since last June's referendum vote has made United Kingdom property and other assets cheaper in terms of Hong Kong dollars.

Once out of the European Union the UK will be able to sign trade agreements on its own and will not have to wait for the signatures of the 27 other EU members, as is now the case.

Hong Kong has not signed many trade agreements so far, partly because, as a free trade territory with almost no tariffs and no quantitative restrictions on imports, and no controls on foreign investment, other countries and territories have been spending their time and efforts on opening more closed markets like India.

By contrast, Hong Kong has every reason to want improved access to less open markets, which means most of the rest of the world. The UK is relatively open by comparison with most other countries but obviously maintains more restrictions than Hong Kong, so Hong Kong would benefit from a free trade agreement with it more than the UK would.

Trade agreements can make life easier for Hong Kong's companies. Not only can such agreements include free trade clauses that reduce or remove tariffs on exports from Hong Kong, they can also get rid of non-tariff barriers, such as complex technical requirements. As well as acquiring duty-free access to the market of another economy, Hong Kong can also benefit from, for example, the right to bid for government procurement contracts on the same terms as domestic companies. Rules on such things as technical standards and intellectual property rights can be harmonized. And customs procedures can be simplified on a reciprocal basis.

Although political leaders usually talk about "trade agreements", modern free trade area agreements almost always include clauses that relate to cross-border investment, which can be more important in the long run to both economies than trade. Hong Kong businesses and individuals have for many years invested in the UK without too many problems. However, this could change as the UK, like other countries, starts to look more carefully at foreign acquisitions of companies regarded as "national champions" and as London considers how to fight back against the rampant speculation by foreigners in the property market that has put housing totally out of reach of locals.

To ensure continued access to the UK both as an export market and as an investment target, it would be strongly advisable to negotiate a future-proofed agreement on this with the UK government as soon as possible. Failure to do so could result in some rather nasty shocks for Hong Kong people.

This is a good time for Hong Kong to negotiate such an agreement, because the UK is currently desperate to find partners willing to sign free trade agreements with it as Teresa May's government needs to demonstrate that leaving the EU will make the UK a more, not less, open economy. Whichever country or territory becomes the UK's first such partner is therefore likely to be able to exact more concessions than may be available for latecomers. Hong Kong could well regret coming late to the party if it drops the ball on this one.

Both during and after the referendum campaign, those recommending that the UK leave the EU have promised to sign a free trade area agreement with the Chinese mainland as soon as possible. Given the complexity of the mainland economy, such an agreement will take far longer to conclude than the amateurs who are advising May seem to be capable of understanding.

But Hong Kong is unique in that it can leverage its position as a special administrative region of the People's Republic of China to act as a bridge between the UK and the mainland. The Basic Law has a provision allowing Hong Kong to sign international economic agreements on its own, so there is nothing to stop the SAR agreeing on a treaty with the UK similar to the Closer Economic Partnership Agreement it has already signed with New Zealand, or even a trilateral agreement including the mainland, though the latter might take longer.

CE-designate Carrie Lam Cheng Yuet-ngor could, in addition to addressing major domestic policy concerns, gain support in her first year of office by initiating or exploring negotiations on a trade and investment agreement with the UK that would provide even more opportunities for Hong Kong businesses and individuals to benefit from Brexit. This would be better than waiting for easily foreseeable problems to develop. Seize the day!

(HK Edition 04/24/2017 page1)