Vietnam and the ASEAN-Hong Kong Free Trade Agreement

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VB- AHKFTA- What it Means for Vietnam-01

By: Dezan Shira & Associates
Editor: Koushan Das

After three years of negotiations, ASEAN members and the Hong Kong Special Administrative Region (SAR) of China finally signed a Free Trade Agreement (FTA) on 12 November to increase economic cooperation between the two regions. Agreements signed included the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA), and the ASEAN-Hong Kong Investment Agreement (AHKIA). The agreements will come into force on January 1, 2019.

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ASEAN HK FTA

Hong Kong is among the world’s freest and most open economies, and with its liberal tariff regime, the FTA aims in increasing the flow of goods and services from Hong Kong to the ASEAN countries. The agreement covers four major areas, namely tariff reduction for goods traded, reducing restrictions for trade in services, longer stay for business travelers, and better investment protection. With respect to trade reduction, most ASEAN states will eliminate or reduce custom duties on goods from Hong Kong.

On reducing trade restrictions, both parties have agreed to remove restrictions on foreign capital participation and the number of people employed. Thailand, Vietnam, and Philippines will also allow Hong Kong firms to take 50 percent or full ownership of firms.

On the issue of business travel, Hong Kong business visitors will be able to stay in an ASEAN country for 90 days. As of now, seven of the ASEAN member states allow Hong Kong travelers to stay for 14 to 30 days without a visa.

Hong Kong will be providing tariff-free access to all products from ASEAN countries when the FTA enters into force, while for goods originating from Hong Kong, individual member states have made the following commitments on tariff reduction:

  • Singapore will reduce customs duties to zero, from the date on which the FTA enters into force for Singapore;
  • Brunei, Malaysia, Philippines, and Thailand will eliminate customs duties of about 85 percent of their tariff lines within 10 years and reduce customs duties of about another 10 percent of their tariff lines within 14 years;
  • Indonesia and Vietnam will eliminate customs duties of about 75 percent of their tariff lines within 10 years and reduce another 10 percent of their tariff lines within 14 years; and
  • Cambodia, Laos, and Myanmar will eliminate customs duties of about 65 percent of their tariff lines within 15 years and reduce another 20 percent of their tariff lines within 20 years.

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Hong Kong – ASEAN bilateral relations 

As of 2016, ASEAN is Hong Kong’s second largest trading partner in merchandise trade and the fourth largest in services trade. Total merchandise trade in 2016 reached HK$833 billion (US$ 106.5billion), while trade in services amounted to HK$121 billion (US$ 15.5 billion). In 2016, 12 percent of trade between ASEAN and the Mainland China, amounting to over US$54 billion was routed through Hong Kong, highlighting its importance as a trading hub.

Amongst the ASEAN member states, Singapore, Thailand, and Vietnam were Hong Kong’s top three trading partners accounting for 38.8 percent, 15.7 percent, and 15.2 percent of Hong Kong’s total merchandise trade with ASEAN respectively.

Effect of ASEAN China FTA

Since 2010, when the ASEAN China FTA came into force, which excluded Hong Kong, direct cargo shipments to Mainland China increased drastically, reducing the need for Hong Kong as a trading hub.

This was mainly due to the rules of origin conditions in the FTA that only allowed goods originating from ASEAN member states or China to take advantage of the FTA. Once the world’s busiest port, Hong Kong is currently the fifth largest container port in the world, with Shanghai leading the group.

ASEAN HK FTA – advantage Hong Kong

With its liberal tariff regime, its position as a financial hub, a strong legal system, and excellent infrastructure, Hong Kong is an ideal location for Southeast Asian corporations.

Hong Kong itself has a Closer Economic Partnership Arrangement (CEPA) with China, which allows preferential market access to Hong Kong service providers and tariff-free treatment for products originating in Hong Kong. Utilizing the CEPA, ASEAN China FTA, and ASEAN Hong Kong FTA, Hong Kong has the potential to facilitate and increase investments and trade in the region.

Hong Kong also gives access to the Pearl River Delta Metropolitan Region (PRD), an economic hub in China, and with the signing of the Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Bay Area in July 2017, regional cooperation will continue to increase. The focus is on increasing infrastructure connectivity, enhancing market integration, developing innovation hubs, building modern industries, and increasing international cooperation.

Hong Kong will continue to be a stepping-stone for Mainland Chinese firms expanding in the region and a major destination of Chinese outward investments, attracting almost 60 percent of the total Chinese outward FDI. In addition, Hong Kong will increase its presence as Beijing’s “One Belt, One Road” development initiative goes forward.

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Hong Kong and Singapore – economic hubs

In 2016, Singapore led amongst the ASEAN countries in terms of trade in goods with Hong Kong and was its fifth largest trading partner, third largest market for domestic exports, the eighth largest market for re-exports, and third largest source of imports. Hong Kong, on the other hand, is Singapore’s fifth largest trading partner and second largest export market.

After the ASEAN China FTA, goods traded between China and ASEAN gave Singapore an upper hand. With the ASEAN Hong Kong FTA, Hong Kong can reclaim some of its lost market share as a China-related trading hub.

Both Singapore and Hong Kong, are in competition in key sectors such as financial services, banking, logistics, and shipping. However, in the recent 2017 World Talent Ranking, Hong Kong overtakes Singapore in talent development and retention in the region.

Both economic hubs have a similar business environment, and hence the decisive factor to pick one of the hubs will be proximity to markets or clients. Southeast Asia focused firms may still go for Singapore, but firms looking to enter the Chinese market will prefer Hong Kong, now that the ASEAN Hong Kong FTA is in place.

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Vietnam vis-à-vis Hong Kong and Singapore

Vietnam is Hong Kong’s third largest trade partner and biggest export market in ASEAN. In the first nine months of this year, two-way trade exceeded US$ 13 billion, up 12 percent year-on-year. In the case of Singapore, the country is Vietnam’s sixth largest trading partner in the world and second largest in ASEAN, while Vietnam is Singapore’s 11th largest trading partner.

Hong Kong’s importance as an entrepôt for trade between Mainland China and Vietnam will continue to grow at a much faster pace, once the FTA comes into force. Re-exports of goods of ASEAN origin through Hong Kong to China have been growing at an annual average rate of 6.4 percent since 2012. On the other hand, re-exports of Mainland China’s origin goods to ASEAN through Hong Kong have been growing at an annual average rate of 3.7 percent since 2012. Vietnam in particular, was the sixth largest destination for Hong Kong’s exports in 2016, with 60 percent being re-exports originating from the Chinese mainland. Also with ASEAN custom duties reduced or eliminated, Hong Kong’s domestic goods will become more competitive in the region.  

In addition to an increase in traded goods, the FTA and the Investment Agreement will encourage the service sector in the ASEAN countries to take advantage of Hong Kong’s professional, financial, commercial, and legal services. The region will also benefit from increased investment flows, especially in the real estate, manufacturing, and service industry.   

With an increased access to Hong Kong’s network, its proximity to the Mainland China, and China’s Belt and Road Initiative, foreign and domestic firms should be prepared to take full advantage of the FTA, once it is in effect.


About
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Vietnam Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEANChinaIndiaIndonesiaRussia & the Silk Road. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. We maintain offices in Hanoi and Ho Chi Minh City, as well as throughout China, South-East Asia, India, and Russia. For assistance with investments into Vietnam please contact us at vietnam@dezshira.com or visit us at www.dezshira.com

 

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