The challenge to Hong Kong that arises from the rapid development and upgrading of the Pearl River Delta region is enormous. If Guangzhou and Shenzhen are to become world cities by 2020 (as planned by Guangdong authorities), the competitive pressure on Hong Kong, (the only world city in the region and in China till now) will be immediate and all-encompassing. Will resources be diverted from Hong Kong to Guangzhou and Shenzhen? Will numerous internationalization measures and investments be duplicated across the three cities? To become world cities, the airports of Guangzhou and Shenzhen will focus more on international linkages. The challenge of the two hitherto provincial/regional airports to the international hub functions of Hong Kong will be formidable, especially because Hong Kong is unable to restrict its hinterland only to its own territory south of the Shenzhen River. International cargo and passenger flights to Hong Kong airport will be substantially reduced, as demand from across the boundary outstrips local sources.

Since the handover, and especially post-SARS, Hong Kong has focused overwhelmingly on support from the Central Government giving its businesses privileged access to the Mainland market. The Closer Economic Partnership Arrangement (CEPA) is one such effort still evolving, with the seventh supplement signed in May this year. As Hong Kong has very little manufacturing capacity remaining and services are not able to be relocated as easily as industrial processing activities, the CEPA has not helped Hong Kong gain more access to the Mainland market. Of course, the massive influx of Mainland tourists is part of the CEPA package. Still, tourist access is not necessarily an essential part of any Free Trade Agreement (FTA) and could well have occurred even without the CEPA. The CEPA is not the only FTA-type agreement into which the mainland has entered. China has entered into numerous FTAs before the CEPA and afterward, including the CEPA with Macao and, more recently, the ECFA with Taiwan. Under the national treatment of the WTO regime principle, Hong Kong will not have any significant advantage over the mainland's other WTO partners. As relocation of services and expansion of service trades are constrained by institutional and local factors (which, based upon international experiences and lessons, will be most difficult to overcome), the CEPA has not helped Hong Kong to integrate more closely with the PRD regional economy or the Chinese national economy in any significant way. The "One Country, Two Systems" policy offers an institutional advantage for Hong Kong in that the city can arbitrage on institutional difference to gain additional competitiveness for the city economy within China. However, to translate the institutional difference into an advantageous linkage for both the mainland and the outside world, much in the way of harmonization is needed. There is one gap between Hong Kong and the mainland and another between Hong Kong and foreign countries. Supplements to the CEPA have been too much concerned with market entry for registered Hong Kong business entities over institutional harmonization.To perform world city functions for the world and China, institutional harmonization is the priority. Unlike commodity trade and industrial processing, there will not be any one-sided institutional transplant. Hong Kong needs to work out 'sector by sector' and 'country/partner by country/partner' specific harmonization measures. One way to start might be to sign CEPA/ Economic Cooperation Framework Agreement (ECFA) type FTAs with Macao and Taiwan with the blessing with the central government.

There are dual purposes for the service-focused FTAs with Macao and Taiwan. First, they would help integrate the non-mainland parts of China into one common market with different but more international institutional settings from the mainland. Like Hong Kong, Macao and Taiwan are open economies under the World Trade Organization (WTO) regime and have long been export-oriented. With institutional settings in the three jurisdictions showing more similarity among them than to mainland institutions, harmonization would not be hindered. Any attempt at institutional harmonization ought to be easier to achieve than with the mainland.

Second, Macao, Taiwan, and Hong Kong all have strong foreign linkages; Hong Kong with the UK and the British Commonwealth, Macao with Portugal and the EU, and Taiwan with the US. Institutional harmonization among the three would definitely involve some degree of harmonization with the foreign countries to which they are closely related. This would serve as a first step to facilitate institutional harmonization of these local economies with foreign countries and the wider global system. In addition, it would introduce new elements into the two CEPAs and ECFA with the mainland, facilitating further evolution of the bilateral relationships along the path of institutional harmonization.

Given the very favorable attitude of Beijing towards the three economies, both politically and economically, and the background of extensive FTA networking at present in the Mainland, a trilateral or two bilateral service-focused FTAs (among the three) should be welcome and even encouraged.

The author is director of the Public Policy Research Institute and head of China Business Centre, The Hong Kong Polytechnic University.

(HK Edition 08/27/2010 page2)