What’s the Deal with ASEAN?

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Far away from the headlines, Hong Kong negotiates an FTA with one of our biggest trading bloc partners – ASEAN. Sheldon Hunt and Brendan Warren tell us why this FTA is different for Hong Kong.

July 10th marked the first round of Hong Kong-ASEAN free trade negotiations with a two day summit. The Secretary for Commerce and Economic Development Mr Gregory So, concluded with enthusiasm that an eventual agreement will “boost the economic growth of the two sides, and at the same time further enhance Hong Kong’s role as a regional trading hub, and as a gateway for trade and investment between ASEAN and the Mainland.” At present, Hong Kong is not included in the China-ASEAN FTA which entered into force in 2010.

ASEAN Matters

With a population of over 600 million, the Association of Southeast Asian Nations (ASEAN) – a regional bloc made up of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – is Hong Kong’s second biggest trading partner for goods and fourth largest with respect to services. Hong Kong’s largest trading partner, Mainland China, for reference, accounts for 51% of the SAR’s total trade. Additionally, ASEAN currently stands as the fifth largest destination for foreign direct investment (FDI) originating in Hong Kong as well as the sixth largest source of inbound FDI to the SAR. It is also worth noting that ASEAN incorporates two of Hong Kong’s largest sources of foreign labour: the Philippines and Indonesia, which in 2010 accounted for 48% and 49.4% respectively of the 284,901 foreign domestic helpers in the territory.

The proposed AHKFTA (ASEAN-Hong Kong Free Trade Agreement) is expected to include issues of intellectual property, investment protection and promotion, rules of origin, the elimination or reduction of tariffs, and the liberalization of trade in services. It would be the fourth such agreement signed by Hong Kong with a foreign economic entity. A domestic agreement, the first phase of the ‘Mainland and Hong Kong Closer Economic Partnership Arrangement,’ was signed in 2003. Other currently free trade agreements entered into force are with the Member States of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), New Zealand, and Hong Kong’s recently signed FTA with Chile.

Enter the Heavy Hitter

These previously inked FTAs with relatively peripheral entities to the SAR would seem to matter little to the balance of trade. Only landlocked and financially dynamic Switzerland, currently Hong Kong’s 12th largest trading partner, accounts for much high-value exchange. Thus the potential of an FTA with the behemoth that is ASEAN should be a tantalizing prospect despite the lack of fanfare in the local media. Other pressing political issues both locally and internationally have eclipsed this deal.

Some may be concerned that Hong Kong’s status as a regional hub across various sectors could be in jeopardy if the SAR becomes marginalized as China secures FTAs that omit Hong Kong. The obvious case is the China-ASEAN FTA. For example, industry insiders complain that it is often cheaper to trans-ship from Australia to China through Singapore, rather than Hong Kong, a result of the absence of a highly specific tax agreement. Some even think that Singapore may be a source of opposition to Hong Kong’s participation in an ASEAN deal as its most comparable competitor among the ASEAN nations. Here, one expects the proposed AHKFTA should have myriad cheerleaders throughout this city who seek to ensure Hong Kong is the regional hub and is not disadvantaged with this important regional trade group..

The Elephant in the Room

While the raison d’être of free trade agreement negotiations is the reduction or elimination of barriers to trade, Hong Kong does not seem to be opting for across-the-board liberalization. Rather, the announced focus is narrowly on economic and politically safe issues. The movement of peoples, i.e. human capital, is almost universally controlled by contemporary statutes between trading partners. As such, the question of labour mobility to and from Hong Kong (mostly to) would be expected to be in some way addressed in any future accord.

The flow of human capital is a lightning rod issue with debate over the quota of mainlanders given a one-way permit to the city as well as foreign domestic workers’ struggle for better living and working conditions. However, the current trade talks provide an opportunity for the Hong Kong government to hash out labour mobility issues that would otherwise raise eyebrows within the local populace. For example, according to the Hong Kong government and other market players, the city faces a deficit of construction workers – an assertion contested by local labour unions. Moreover, a large percentage of the current labour pool of construction workers are rapidly approaching retirement age, not to mention the current low unemployment and underemployment figures for Hong Kong. These issues and more could in theory be addressed in the details of a robust FTA.

FTAs cover different industry sectors and contain different provisions, depending on the parties involved. But any comprehensive FTA the Hong Kong government negotiates ought to include labour mobility as part of a broader liberalisation.

A Safe Harbour

Earlier in May of this year Gregory So commented that “with the Chinese Government’s policy of helping enterprises in both the Mainland and Hong Kong to ‘go global’ together, the potential investment from the Mainland to ASEAN through Hong Kong would be enormous.” For those member-states of ASEAN who currently have a “strained” political relationship with Beijing, the prospect of better trade relations with Mainland Chineselinked – but politically neutral – HK is alluring.

As a seemingly safe political and economic entity, as well as the host of massive amounts of Chinese capital, Hong Kong could allow ASEAN states – such as Vietnam and the Philippines – the ability to conduct high-level, indirect and discrete business with mainland China via the SAR middleman. The reverse investment flows could also apply.

Moving Ahead

The negotiations preparing the ground for the proposed AHKFTA are more than likely cheered on by Beijing from the sidelines. If Beijing did encourage (or simply instruct) Hong Kong to pursue closer and more open economic relations with ASEAN, many observers may well see this proposed treaty as playing into Beijing’s plan of greater regional integration – bordering on economic hegemony – with the rest of East Asia.

Closer to home, Hong Kong’s potential agreement with ASEAN could, according to some, reaffirm the SAR’s status as a regional trading hub as it leverages its strategic position between China and ASEAN. Optimistically any agreement between Hong Kong and its ASEAN counterparts will likely be months away. This negotiation seems to be underway without the fanfare of CEPA, but could have a major impact on Hong Kong’s economy and as a conduit between inbound and outbound investment between China and ASEAN. This deal is walking softly, but some day may carry a large economic stick.

Brendan Warren is a graduate of Queen’s University (PoliSci) holds a master’s degree from the Norman Paterson School of International Affairs in Ottawa (Specialization: Intelligence and National Security). He has held positions in the then-Canadian International Development Agency and the Consulate General of Peru in Hong Kong. Email: brendan.i.warren@gmail.com

Sheldon R. Hunt is a graduate of the University of Toronto, specializing in History, Asia Pacific Studies and Political Science. He has lived, worked and studied in Vietnam, Thailand, Laos, Cambodia, Burma, Japan, South Korea, mainland China and Hong Kong. His most recent tenure was in the Foreign Policy and Diplomacy Services at the Consulate General of Canada for Hong Kong and Macao. Email:hunt.sheldon@gmail.com