THE PROPOSED HONG KONG – NEW ZEALAND

FREE TRADE AND INVESTMENT AGREEMENT

THE EFFECT OF FREE TRADE IN GOODS

Little manufacturing takes place in Hong Kong. Instead Hong Kong is a transit point for exports:

• 88.5% of Hong Kong’s exports are re-exports, mainly from China.
• One third of re-exports go back to China, after limited value is added.

Hong Kong is an attractive transit point because:

• middlemen have contacts and access to markets
• low taxes encourage transnational corporations (TNCs) to mark up the price of goods in Hong Kong (TNCs account for over 40% of China’s exports)
• some trade agreements limit textile and clothing imports from some countries.

Hong Kong traders mainly

• organize production by sourcing materials from Asia, India, Middle East and West Africa quickly and cheaply,
• then arrange making of garments in China and
• re-export the finished products from HK.

For example, Li & Fung specialises in trading, distribution and retailing:

• In 1998 it had global sales of $2 billion and offices in 20 countries.
• Sometimes it matches sources with production and controls quality
• Or it oversees the whole production process through the 7500 independent plants with which it subcontracts.

External production is mainly in Guangdong province of China

• About 50,000 HK companies have production facilities, mainly in the Guangdong export zone, employing about 5 million workers.
• Wages in Guangdong are US$50-100 a month including overtime and bonuses. Reports say workers work 10-16 hour days, 6 days a week, unsafe working and living conditions, etc.

NZ’s main imports from Hong Kong at present are:

· radios and broadcast equipment;

· printed material; machine parts and accessories;

· data processing machines; and

· fabrics and clothing.

Free trade with Hong Kong means

· zero tariffs on all goods

· removal of tariffs on textiles clothing and footwear

· no reintroduction of tariffs on any goods (even though the WTO would allow this to a certain level)

· restrictions on safeguard and anti-dumping rules that allow action where unfair trade practices occur and damage local industry.

This will hit the textile, clothing and footwear (TCF) industry hardest

• 58% of Hong Kong’s domestic exports are apparel, clothing and textiles
• These must involve some change to the permanent shape, nature, form or utility of the basic materials used in manufacture.

· But use of sub-contractors in China means local content can be minimal and rules of origin are very hard to police.

Zero tariffs on TCF will mean

· a significant increase in imports from Hong Kong/China

· closure of more factories and loss of more jobs, especially for Maori and Pacific Islands women workers in the regions

· the likely death of the industry

· the government’s freeze on TCF tariffs becomes meaningless.

A labour clause would only apply to labour conditions in Hong Kong, not the major source of goods in China. Hong Kong’s labour conditions are

• Union membership in Hong Kong was 674,433 from 3.3 million labour force in 1999. There were three work stoppages that year.
• Per capita GDP in 1999 was $NZ45,624.
• Wealth distribution is very unequal.
• There is no legal minimum wage.
• The average daily wage for production workers in 2000 is NZ$104.
• Hong Kong has ratified a number of ILO conventions including:

No. 87-- Freedom of Association and Protection of the Right to Organise 1948

No 98 – Right to Organise and Collective Bargaining 1949

No 105 - Abolition of Forced Labour 1957

No 138 – Minimum Age 1973

No 144 – Tripartite Consultation (International Labour Standards) 1976

These do not apply to its factories in China.

Prepared by ARENA: PO Box 2450 Christchurch; arena.nz@clear.net.nz. Thanks to Bill Rosenberg & Jane Kelsey

THE PROPOSED HONG KONG – NEW ZEALAND

FREE TRADE AND INVESTMENT AGREEMENT

THE EFFECT OF UNRESTRICTED INVESTMENT

New Zealand already has an Investment Promotion and Protection Agreement with Hong Kong, signed in 1995. It is a mini-MAI (Multilateral Agreement on Investment). Each country has promised

• to give each other’s investors at least as good treatment as they give to investors from any other country

• encourage and create favourable conditions for making investments

• not to tighten restrictions on foreign investors (in 1995 only foreign investments above NZ$10 million and 25% of total value of an asset or company required approval, except for some land and fishing quotas)

• not to take any measures that have the effect of an expropriation - that means regulations, laws or policies that lower the investment’s value or profitability.

Any breach of these promises can be taken to international arbitration and damages awarded against the government.

The agreement applies for a minimum 15 years. If the government later withdraws, it still applies to existing investments for a further 15 years.

The rules apply to

• local government as well as central government
• investments that are legally present in Hong Kong, but not Hong Kong owned
• Hong Kong-owned companies that are based in third countries.

Hong Kong is a port of convenience for such investment. In 2000 it hosted

• 2000 mainland China companies with an asset value US$200 billion
• around 840 regional headquarters and 1650 regional offices for transnationals

Most were investment holding, real estate and business services companies

The top 4 investment sources and destinations other than China were tax-havens.

Judging by the NZ-Singapore agreement, a new agreement is likely to:

• Provide more effective enforcement powers
• Guarantee Hong Kong investments that the NZ government won’t tighten the current exemption from vetting for foreign investments under NZ$50 million
• prevent any more rigorous vetting process and a real national interest test.

Hong Kong already has major investments in NZ. These include:

• Jardine Group (Woolworths, Big Fresh, Price Chopper)
• Paul Y-ITC (Downer Group, Works Civil Construction, Works Geothermal)
• SEA Holdings Group (Trans Tasman Property Group)
• Great Eagle Holdings (Auckland Sheraton)
• HSBC Bank (part Hong Kong owned)
• Togen Ltd (Wenita Forests, China-owned)

• Such investors have consistently failed to reinvest their earnings back in NZ:
• In 1998 and 1999 they took NZ$67 million more out of NZ than they earned
• In 2000 they took NZ$43 million more out than they earned.

• In theory, big NZ investors could gain similar benefits from an agreement. In practice, there is a huge imbalance of investments between Hong Kong and NZ:
• Official NZ figures put Hong Kong investment in NZ at NZ$1.067 billion. This has fallen since 1996.
• But Hong Kong says the figure is NZ$9.2 billion.
• Hong Kong authorities say the difference of $8 billion is probably money parked in NZ short-term at the end of the year to gain "tax advantages".

By contrast, NZ investment in Hong Kong is negative NZ$583 million. That probably means that NZ-based (not necessarily NZ-owned) companies with subsidiaries in Hong Kong have borrowed more than they invested there.

A likely big contributor to that until it left NZ in 1999 was BIL.

The 1995 mini-MAI already makes it difficult to control future investment from Hong Kong. It could also stop the central and local government making laws and policies that meet Treaty of Waitangi, social, environmental, health, employment, or affordability goals, if they might affect the value or profitability of Hong Kong investments – unless it pays massive compensation. Other countries could use Hong Kong as a backdoor to gain that benefit.

Similar rules under NAFTA have seen investors successfully challenge government measures that address health, environment, safety and public service needs, but which undermine their profitability.

Any extension of the 1995 agreement will guarantee investors using a Hong Kong cover the right to continue strip mining our economy, jobs and communities in pursuit of short term profits with no long term responsibilities.

Prepared by ARENA: PO Box 2450 Christchurch; arena.nz@clear.net.nz. Thanks to Bill Rosenberg & Jane Kelsey

THE PROPOSED HONG KONG – NEW ZEALAND

FREE TRADE AND INVESTMENT AGREEMENT

FREE TRADE IN SERVICES & PROCUREMENT

Both NZ and Hong Kong have commitments to free trade in services under the General Agreement on Trade in Services (GATS) at the World Trade Organisation (WTO).

These promise to

• give each other’s service providers at least as good treatment as they give to providers from any other country
• give each other’s service providers at least as good treatment as they give to their own providers
• not structure their market in ways that limit access for foreign service suppliers.

The agreement applies to services that are provided

• Across the border (eg by internet)
• By people travelling abroad to consume them (eg tourists or students)
• By setting up a commercial presence in the host country (eg branches)
• By sending specialist personnel to the host country (eg consultants).

GATS treats every service as a tradeable commodity. It does not recognise that services have any legitimate social, public service, employment, regional development, cultural or other goal, if that would interfere with ‘free trade’.

At present these rules only apply to services that a country has agreed to have covered – although negotiations are currently underway to extend them.

Services, especially trading, finance, insurance, real estate, restaurants and hotels, are Hong Kong’s major growth area. It takes a relatively unrestricted approach to foreign providers. Despite this, Hong Kong has fewer services covered by the GATS than NZ. It has also kept more restrictions on services like banking, insurance, the stock market and telecommunications and made few promises of equal treatment for services provided across its border.

A NZ-Hong Kong free trade and investment agreement is likely to extend NZ’s commitments to include other services provided by companies based in Hong Kong. Services on which NZ has made commitments either under GATS or the Singapore agreement (which is likely to provide the base for the Hong Kong Agreement), and on which Hong Kong has made no such commitment are:

• Education
• Research and development
• ambulance services
• residential health facilities services other than hospital services

· dental services

· archive services (except Public Archives as defined in the Archives Act)

· environmental services (as yet undefined but may include waste management, water services and sewage disposal)

· technical testing and analysis

· management consulting, market research and public opinion polling

· services incidental to manufacturing; personnel placement and supply;

· investigation and security services;

· scientific and technical consulting;

· maintenance and repair of equipment;

· packaging;

· printing;

· convention;

· interior design, exhibition management;

· courier services;

· some port services;

· distribution services extended to include franchising.

The NZ government will claim there are big benefits if it can increase NZ’s guaranteed access to Hong Kong’s services market, especially for NZ’s education market in Hong Kong (and China) – more than 1330 fee paying Hong Kong students are currently studying at NZ schools and universities.

But the Singapore deal showed that new commitments are likely to be one-sided. Treating services as commodities also leaves no room to balance other goals or consider the long-term effects of foreign control of key services.

A new agreement is also likely to include new rules on ‘government procurement’ of both goods and services. The Singapore deal prevents central and local government from adopting a ‘Buy NZ’ approach when it puts out tenders for services and goods worth NZ$125,000 or more.

Extending this to Hong Kong (and China) would mean their exporters and service suppliers could demand equal treatment and prevent any strategic reinvestment of taxpayer and ratepayer funds back into the local economy by government purchasing policies. At the same time, the funding and infrastructure support that Hong Kong gives to ‘companies incorporated in Hong Kong and that have a substantial connection with Hong Kong’ are not likely to be extended to New Zealanders.

Prepared by ARENA: PO Box 2450 Christchurch; arena.nz@clear.net.nz. Thanks to Bill Rosenberg & Jane Kelsey