The Closer Economic Partnership Arrangement (CEPA), China's first free trade agreement, is a major step forward in rationalising Hong Kong's business with the rest of China. While travel, trade and investment within the Pearl River Delta (PRD) is well established, the flow of investment funds and merchandise has been largely one way: money in, goods out. As a result, Hong Kong people have prospered as investors, producers and traders, but the division between our services and the PRD's manufacturing has moved a significant portion of our tax base to the other side of the boundary. Under CEPA, there are now good reasons why some of the next wave of investment may take place within the HKSAR.

CEPA's two direct measures, eliminating tariffs on goods and increasing investment opportunities in the services sector, will greatly enhance Hong Kong companies' ability to operate efficiency in China. At a minimum, a wide range of goods made in Hong Kong will more easily move across the boundary to customers in China, regardless of whether their ultimate destination is Chongqing or Chicago.

As a result, CEPA is likely to have a positive impact on both domestic and foreign investment in Hong Kong. Although our local production for export is very small compared to the volume of trade flowing through the port, it is already deeply integrated with production elsewhere in China. Simplifying the movement of semi-finished goods and components up and down the Pearl River can only improve the prospects for profit.

Over two decades, the PRD has emerged as the world's fastest growing manufacturing hub, combining Hong Kong's global connections, international standards of finance and other business services with the highly productive labour force and relatively inexpensive land further up the Pearl River. The progress to date has not been without cost, however. The number of people working in manufacturing in Hong Kong dropped by nearly 80 percent from 1980 to 2002, as shown in the first graph. Still, the sector employs about 180,000 people and generates some 4.5 percent of GDP. That makes it a larger employer than the transport and shipping sector. Although the share of manufacturing in GDP has shrunk (graph 2), the value-added per employee nearly matches that of the wholesale, retail hotels and restaurants sector (graph 3).

Our largest group of manufacturing workers is in the printing and publishing sector, accounting for 21.7 percent of the total, or some 43,000 people. The main products are pamphlets, brochures, labels and books, and the industry's standards are among the best in the world, and combine with quick delivery times, competitive pricing and rapid response to new orders. For high the quality publishing market, this is one sector that may benefit from CEPA.

A second sector that will find new opportunities is that of textile and apparel, which together are the manufacturing sector's biggest employers at some 55,000 people, or over 26 percent of all production workers. The capital-intensive textile sector is closely integrated to the more labour-intensive apparel industry elsewhere in the PRD. Easier movement of prototypes, samples and other related materials will be the main benefits in this sector.

The textile industry employs some 14,000 manufacturing workers producing HK$11 billion worth of products and HK$8 billion in domestic exports. These in-puts will be critical in determining Hong Kong origin for zero tariff sales into the rest of China. While the tariff reduction advantages are small, they may be sufficient to prevent further shrinkage.

Among the products that will benefit from the largest tariff reductions as of next year are gold, silver and other precious metal jewellery. Duties will fall from a range of 26.7 percent to 35 percent now, to zero in January. Hong Kong is the world's leading exporter of costume jewellery, and the third largest producer of fine jewellery. The HK$6 billion industry employs some 4,600 people, and should be in a strong position to capitalise on the growing wealth in China's coastal cities.

Other industries that will need to take a proactive approach to maximising the benefits on offer including our world-class watches and clocks producers, electric and electronic components manufacturers (particularly those in the audio and video area and makers of small motors for toys and similar products), and the plastics industry.