The SAR community is finally waking up to China's WTO and remains eager to enter into the Closer Economic Partnership Agreement (CEPA) with the Mainland. Most of us believe that something crucial will happen and we need to react correctly and promptly. However, the question is, "what should we do immediately to get ourselves ready for this event and do we really have enough time to do so?" To answer this question, we need to know what exactly the WTO is all about to China first.
The vision of the WTO is to foster international fair trade. How can this be done? Well, WTO members should first provide the Most Favoured Nation (MFN) Treatment to all WTO members and remove trade barriers, namely high tariff rates, import quota restrictions and license requirements. China is committed to reducing its average tariff rate to 8.9% for industrial products and to 15% for agricultural products by the year 2005; the first and the most significant drop in tariff rates happened on 1 January 2002.
Then there will be reduction in tariff rates on every 1 January in the following years until they reach the bound rates. Further, the import license requirements and quota restrictions for many products were lifted immediately upon accession. Other products will receive an increase in quota of 15% per year and an elimination of it altogether by 2005 the latest. For most products, tariffs will then be the only permissible means to restrict importation.
No doubt, more imported goods would enter into the China market with the lower tariffs and elimination of quotas. Moreover, these imported goods should receive treatment equal to their domestic counterparts in order that their distribution within China is not hindered purposely. This is called National Treatment.
This encompasses the principle of nondiscrimination between domestically produced products and imported goods in respect of laws, regulations and other measures applying to internal sale, offering for sale, purchase, transportation, distribution or use. For example, there will be unification of licensing requirements so that one single license would authorize the sale of all goods, irrespective of their country of origin. Restrictions could be retained, but only if they are applied equally to domestic products as well.
MFN Treatment and National Treatment also apply to trade-related services, inter alia, trading and distribution, freight forwarding and logistics, telecommunication, banking, insurance imported from other WTO members. Under the Agreement of Trade-Related Investment Measures (TRIMs), China would have to open up these industry sectors to WTO members over a period of 3 to 6 years.
By that time, imported services will receive the minimum limitations in foreign equity ownership, business scope and geographical coverage. For example, WTO members will be granted trading (import and export) rights within 3 years after China's accession to the WTO. Wholesaling and retailing joint ventures (JVs) with minority foreign interest will be allowed in some cities in the first year. More cities will be opened for majority foreign owned JVs in the second year. In the third year (ie 2004), wholly foreign owned enterprises will be allowed anywhere in China for this particular sector.
Hong Kong SAR, being a WTO member, will benefit from MFN Treatment and National Treatment without question. SMEs have been an important sector of the SAR economy and they will be the first ones to taste the sweet because of their indisputable strength in cross-border trading and logistic services. China's accession to the WTO will enable them to sell more goods to China and to provide services to their principals with fewer restrictions.
MNCs here whose interest is in telecommunications, banking, insurance, and other trade-related services will also be in a better position than those in other locations because most of them have already established different forms of business presence in China, albeit these industries are highly regulated at present. However, should Hong Kong companies wait patiently for the WTO benefits to crystallize according to the prescribed market accession timetable?
An obvious reason to reject this proposition is that the WTO market accession is not tailored-made for any particular company or country exclusively. On the contrary, it would apply to all companies that come from any one of the 149 WTO members, including your rivals. Certainly, they would strive for a bigger market share at the soonest possible moment. Hong Kong companies should hence ensure that they are ahead of rather than lag behind their competitors.
What should be done and when should it be done depends very much on the particular nature of the change that is brought about by the WTO. Certain WTO impacts would have an immediate effect; as regards the elimination of trade barriers, for example, the tariff rate of many IT products was reduced to 1% on 1 January 2002. At that time, many importers deferred their shipment schedule after 1 January 2002 and revised the price in order to benefit from the lower tariff rate.
Similar things will happen again as China has committed to reduce its tariff rates on every 1 January in the following years. Some WTO changes will materialize over time and can be predicted with certainty, for example, the market accession timetable for wholesaling and retailing sector has been fixed and cannot be altered. The SAR investors would have to consider adopting some interim solutions with sufficient flexibility to migrate to a WTO-compliant structure.
It is advisable to kick off their interim measures to capture bigger market share as soon as possible. Some other WTO changes are foreseeable but unfortunately cannot be predicted with certainty. For example, China's tax regime will be reformed radically in compliance with the National Treatment principle. However, the details of which cannot be affirmed until the new tax laws are promulgated.
In light of this, Hong Kong companies would have to factor the possible tax changes into their investment projections. Some people suggest creating investment structures in China whatsoever no later than the beginning of the year 2004 when the new Unified Income Tax Law is expected to take effect with a view to enjoying any grand-fathering preferential tax treatments that may be granted.
However, any long-term investment plan in China should be well thought out after taking into consideration all other factors pertinent to its success. Finally, there are changes that should arise from China's accession to the WTO but are really difficult to foretell. For example, the unrestricted convertibility of the Renminbi is only a matter of time as it is considered to be the most critical factor for China's full accession to the global economy. However, the Chinese Government has repeatedly dismissed any likelihood that it will happen anytime soon. However, no one would underestimate its impact.
All in all, Hong Kong companies should seriously look at the possible impact of China's accession to the WTO that is specific to their own industry and business. They should be determined to take the appropriate actions at the right time in order to survive in the highly competitive post-WTO arena.
Danny Po, Partner, China Tax Division, PricewaterhouseCoopers
Email: [email protected]
