The signing of the Closer Economic Partnership Arrangement, or CEPA, between Hong Kong and the Mainland on June 29, will accelerate closer economic integration between the two areas and increase the SAR's attractiveness to investors, the architects of the free trade agreement said on June 3.

Speaking at a joint-chambers luncheon, An Min, Vice Minister, Ministry of Commerce of the PRC, and Antony Leung, then Financial Secretary of the HKSAR Government, said the agreement focuses on the development and opening up of goods and services for Hong Kong and Mainland firms. But they warned that it is not a panacea for the territory's economic woes.

"CEPA is not a panacea. Hong Kong will have to enhance itself and upgrade itself to get through the restructuring that its economy is going through," Mr An said.

Mr Leung added that the agreement provides the impetus for Hong Kong's transition.

"A lot of people ask me if there is any policy or panacea that could solve Hong Kong's problems," he said. "But you have to remember that Hong Kong is not going through an economic down cycle; its problems are structural. Therefore, we have to change our culture, and our views, and we cannot rely on one policy or silver bullet to solve our problems."

"Both parties are drafting the principles, but in summary, for goods to be eligible for zero tariff they have to be manufactured in Hong Kong, or have a significant value added to them in Hong Kong," Mr An said. "They also need to provide proof of country of origin."

The prospects of exporting goods to China tariff free is expected to encourage some manufacturers to set up or re-establish production facilities here. But even with zero tariff, some members of the audience questioned how Hong Kong's high salaries and rental costs could compete with the Mainland.

Mr Leung said the type of industries that might be interested in returning to manufacture in Hong Kong were value-added or branded product companies, not the low-value, labour-intensive products.

"In speaking with manufacturers, they say that rental costs for factories in Hong Kong are actually quite cheap, but that salaries are their highest cost," he said. "But in the high, value-added industries, the salaries component may not take up such a high consideration in their production costs, so there are still advantages for companies in some areas."

Besides the manufacturing sector benefiting from CEPA, Minster An said up to 17 service sectors will, starting January 1, 2004, enjoy part of China's WTO pledges prior to other WTO member countries.

"For Hong Kong corporations, we have significantly lowered the entry requirements, and certain privileges not available to other WTO members have been made accessible to Hong Kong," he said. "For the definition of a Hong Kong service company, we have drawn reference from the WTO services trade general agreement in drafting the definition."

He added that includes any company registered in Hong Kong, that has conducted actual business in Hong Kong for a certain period of time, that 50 percent of its workforce are Hong Kong citizens, and that the company pays taxes to the Hong Kong Government.

Both speakers said that CEPA is an open agreement which leaves room for further amendments and additions to be included and massaged following suggestions by both sides even after it is implemented.

"To put it simply, the benefits of CEPA are bilateral," Mr An said, "and to a certain extent there are still some gaps which need to be worked on."

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