On May 25, during the visit of Premier Li Keqiang to Switzerland, the two countries signed a memorandum of understanding at the conclusion of free trade talks and reached consensus on a bilateral free trade agreement (FTA), the first of its kind between China and a major Western economy, lifting cooperation to a new stage.

The FTA negotiations were launched three years ago when Li visited the Alpine nation, and have finally concluded after nine rounds of negotiations. Once signed, the FTA will bring a substantial reduction in tariffs on most export and import goods, and some will even be entitled to zero-tariff treatment. Whether or not the price of Swiss watches will fall significantly arouses the greatest concern. According to Yu Jianhua, assistant to the minister of commerce, if the agreement is successfully signed, the tariffs on Swiss watches imported to China will be reduced by 60 percent over a 10-year period.

Some watch company stocks rose immediately after the news broke. Many mainlanders hold an expectation that the future retail price will also be reduced by 60 percent like the tariff. Some Hong Kong companies worry the agreement will bring major influences to the business of watch corporations, as prices in the two places will be more or less the same, which enables mainlanders to purchase watches in other places.

There is no doubt that the tariff abatement encourages China's import of Swiss goods, but it won't significantly cut the retail price on the mainland. At the moment, the mainland imposes an 11 percent import duty and a 17 percent value-added tax on these watches; furthermore, if a watch is worth more than 10,000 yuan, an extra 20 percent on luxury goods will be imposed. Of these three taxes, the customs accounts for the least proportion, and the other two are not affected by the FTA, and thus not in the abatement range. Therefore, the 60 percent tax reduction does not necessarily imply a corresponding reduction in retail price.

An example will help clarify what I mean. Suppose the import value of an import watch (retail price: 30,000 yuan) is 15,000, according to the current taxation (11 percent), the tax should be 1,650; in the future, when the 60 percent tax reduction is implemented, the saved tax is only 990 yuan. In this case, it's only a 5 percent discount on the original retail price. We should be aware that even allowing for the tax abatement, retail prices wouldn't be greatly marked down for luxurious Swiss watches.

When I discuss this issue with insiders, people in the industry generally think Hong Kong will retain its edge. Mainland tourists wouldn't come specially to purchase a watch worth less than 10,000 yuan. However, if the price is one or two times higher, they are more likely to take into consideration the taxes - on the mainland, the total tax rate is 37 percent, making a 6,000-to-10,000 price disparity between purchasing in two places. As for the top brands worth hundreds of thousands, the gap is even larger, so it's worth taking a flight just to buy the watch.

There is one more important factor in Hong Kong's being a favorite place for luxury shopping - the goodwill. Consumer interests are well protected, so that there is less to worry about compared to the shopping environment on the mainland. Under this circumstance, with or without the FTA between China and Switzerland, Hong Kong will still be the first choice for mainland tourists to buy brand watches.

However, the phenomenon represents the great demand in imported brands and benefits only the agents. If the whole industry wants to move on to the next level, Hong Kong brands desperately need innovation. I think Hong Kong watches should focus on the middle-priced market. The middle-class consumer group is expanding, so if Hong Kong watches are able to access to that market, the future for the industry will be promising.

The author is vice-president of the Chinese Manufacturers' Association of Hong Kong.

(HK Edition 06/21/2013 page9)