A potential Australia-Hong Kong Free Trade Agreement: Excellent news for exporters, investors and service providers

It has recently been announced that negotiations on an Australia-Hong Kong Free Trade Agreement (A-HKFTA) have been launched, with talks set to continue in Canberra later this month. While this process is in its preliminary stages, the outcomes sought by the Australian Government indicate positive changes for Australian businesses involved, or considering involvement, in Hong Kong, so they should position themselves accordingly.

The Australia-Hong Kong trade relationship and why an A-HKFTA is needed

Hong Kong is an important trading partner, as Australia's fifth largest source of foreign investment and sixth largest services trading partner. Further, before the A-HKFTA discussions commenced, Hong Kong was the largest trading partner (apart from the EU) which Australia had not commenced free trade negotiations with.

A snapshot of the current trade relationship reveals:

• Australia's goods exports were valued at A$8.9 billion last year, and have grown significantly over the past five years;
• Australia's services exports to Hong Kong are valued at A$2.4 billion last year, with 13.2% year on year growth; and
• Hong Kong investors represent Australia's fifth largest source of foreign investment, with over A$100.9 billion invested in Australia as of last year.

Despite this flourishing relationship, an A-HKFTA is needed because the trade relationship is currently governed by Hong Kong's obligations under the World Trade Organisation Agreement, which are less open than the current position. This means there is a possibility that Hong Kong could adopt more restrictive positions in the future, should it choose to do so. An A-HKFTA would provide certainty that the current liberal trade positions would remain, as well as open up opportunities, particularly in the services sector.

Opening up access for services providers will be a focus of these negotiations, as Australian services providers are currently underrepresented in international trade. Despite making up 80% of the Australian economy, services only represent slightly over 20% of Australia's exports.

Opportunities an A-HKFTA with Hong Kong presents for Australia

Generally, we can look to the Hong Kong-China-New Zealand Closer Economic Partnership Agreement, entered into in January 2011, for an example of the opportunities an A-HKFTA might provide. That agreement has given New Zealand certainty of access and the future-proofing of trade rules, with bilateral trade volumes increasing year on year.

Although import tariffs on Australian goods do not currently apply on exports to Hong Kong, an A-HKFTA will provide certainty through a commitment that the zero-tariff regime will be maintained. There is also potential for improvements to reduce red tape and streamline non-tariff measures, such as customs procedures, and an improved trading environment to facilitate the ease of doing business. Investment rules could also be updated through changes to the regulatory environment that could result in stability and certainty for investors, while balancing these with public needs.

As mentioned earlier, the most significant opportunity for improvement appears to be in the services sector, where Australian exports have been growing rapidly over the past few years. Services have been responsible for the vast bulk of newly created jobs in Australia over the past decade and this growth is expected to continue. Reports state that the Australian Government will be seeking to secure non-discriminatory access to the Hong Kong market and create greater regulatory certainty. This would facilitate the expansion of Australia's service sector in Hong Kong, and allow businesses to showcase Australia's capabilities to mainland China and across the region.

In addition to services, it is envisaged the negotiations will also discuss:

• elimination or reduction of tariffs;
• reduction of non-tariff barriers;
• preferential rules of origin;
• customs facilitation procedures;
• promotion and protection of investment; and
• legal and institutional arrangements, including a dispute settlement mechanism for the A-HKFTA.

Additionally, there has been some speculation that additional commitments in relation to intellectual property rights, government procurement and competition will also be raised in the negotiations.

How Australian businesses should react

The Government has invited stakeholders to make submissions on the impediments to trade and investment that should be addressed in the A-HKFTA. Although the consultation process has just begun and the conclusion of negotiations could take some time, it is worthwhile considering how these changes might impact your business and the opportunities that will likely arise.

It has been highlighted that improving access for Australian service providers will be a focus of the negotiations. Service providers in various industries - including legal, accounting, financial services, education and transport - should take note of the growing demand for Australian services in this region. These providers should consider how they might position themselves to benefit from using Hong Kong as a gateway to mainland China and, more broadly, the rapid economic development in the region.

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