Starting January 1, 2004, made-in-Hongkong goods falling under one of 273 product codes will be able to enter the Mainland tariff free under the Closer Economic Partnership Arrangement, or CEPA. The prospects of exporting goods to China tariff free has raised suggestions that some producers of high-end products might consider relocating their factories to Hong Kong to take advantage of the tariff savings.

Given that the average tariffs for goods going into China is around 11 percent, rent and labour costs, which run around ten times higher here than the Mainland, would quickly eat up any savings on import duties. But some industries might be able to benefit more than others.

For the pharmaceutical industry, zero tariff does not present many opportunities, says the Executive Director of the Hong Kong Association of Pharmaceutical Industry, Robert Siu.

"The import duty for pharmaceuticals in China ranges from 4 to 6 percent, so the zero tariff has very little effect on pharmaceuticals," he said.

Hong Kong presently has no multinational pharmaceutical company involved in research and development of new drugs, but around 15 companies produce generic drugs here -- drugs that can be copied because the original patent has expired.

Will the zero-tariff carrot be enough to make multinationals consider establishing a production base here?

"No," says Mr Siu. "Most have already established joint ventures in the Mainland in the last 10-15 years, so there is no point for them to come here to try and save 5 to 6 percent in tariffs," he said at the Chamber's CEPA workshop on July 24.

For generic drug producers, the fact that they are copiers means that price is their critical factor, and China's huge pool of cheap labour means the Mainland is a more attractive proposition to them than Hong Kong. Moreover, pharmaceuticals are strictly controlled in the Mainland. Before a product can be imported, it must undergo a long, tedious process to get a license, even for generic drugs.

He does see one or two opportunities for Hong Kong, however. Multinational drug firms that still do not have a presence in China might consider partnering with generic drug makers here to produce patented drugs at the high-end of the import duty list. Antibiotics, for example, which usually have 6 percent import duty into China, could be produced in generics' production facilities, which could create other co-operation projects between generic producers and multinationals.

Oscar Chow, Business Development Executive, The Chevalier Group, which produces electro mechanical products in China through joint ventures, as well as products in Japan, Europe and the U.S., said the cost of establishing a factory in Hong Kong to produce these products would be too high given the current tariff savings.

"If tariffs were higher, about 25 percent for example, then that would be a different story," he said.

Joint venture factories in China can produce up to 90 percent of components needed for most products. But certain niche products that could be produced in Hong Kong, if they are not too labour intensive, do offer possibilities worth exploring, he said.

"For example, there is increasing demand for water filtration systems in China," Mr Chow explained. "Some components can be sourced locally, but the reliability of their quality is questionable. So if we could assemble these products in Hong Kong with components from abroad, and these products qualified as made in Hong Kong products, we would be able to benefit from the tariff and sell the finished product at a premium as an imported product in China."

However, he pointed out that China will soon be able to produce these so-called niche products itself.

"So Hong Kong should be focusing on providing value in the production chain, such as doing design and research," Mr Chow said. "Moreover, if the definition of Hong Kong origin were to consider these intangible assets, more companies would set up here."

B K Chow, General Manager, Hong Kong Jewellery Manufacturers' Association, also feels that research and especially design should be factored into the definition of a Hong Kong product.

If 25 percent of the added-value process done in Hong Kong is set to be the criteria for qualifying as a made-in-Hongkong product, only a few jewellery companies will be able to meet this requirement, he said.

"So if the jewellery manufacturer wants to qualify for zero tariff, they need to arrange for more of the production processes to be done in Hong Kong," he said.

Under China's WTO commitments, after 2006 any country wishing to import precious metal jewellery into China will have to pay between 20 and 35 percent import duty. But starting next year, about 16 made-in-Hongkong items will enjoy zero tariff.

He expects this will help Hong Kong's jewellery sector regain some of its luster after years of tough times. In 2001, Mr Chow estimates that the industry employed 5,240 people in Hong Kong. "Last year, the number was about 20 percent less, but I think this will pick up starting next year," he said.

Of the 16 jewellery items that qualify for zero tariff, about six are what Mr Chow calls "very hot" export items for the Mainland market.

For local firms to get around China's law that only Mainland citizens can apply for a gold import license from the People's Bank of China, he suggests local jewellers co-operate with a Mainland partner holding a licence. He also suggests that if Hong Kong jewellers are serious about expanding into the Mainland market, then they should more aggressively promote their products by participating in more trade shows by using the ATA Carnet.

"The ATA Carnet is a very powerful tool for jewellers to use to visit their clients all over the world, and the HKGCC is the only organisation in Hong Kong authorised to issue the ATA Carnet," he said.

Peter Liu, President, Burlington Worldwide Ltd, reckons that a lot of garment makers in Hong Kong producing high fashions under the outward processing agreement might consider turning around some of their production to export their products into China tariff free.

"At the moment, these high fashions are not for sale in China, due to the high duty and the relatively small market," he said. "But CEPA could be the key that unlocks the market."

He sees other possibilities in the value-added clothing and textile sector, such as special protective products, lamination or panel knitted garments.

One issue he touched on, however, was that opportunities under CEPA are not going to come knocking on companies' doors. Business owners will need to dig deep into their entrepreneurial skills to mine the opportunities, which raises another issue: "Most of Hong Kong's investment is very export focused and doing quite well," he said. "So some businesses may not even want to change that, or they may be too busy focusing on the day-to-day operations of their business that they do not have the time to look into opportunities created under CEPA."

For more details, visit the Chamber's CEPA Web page at, www.chamber.org.hk/cepa.