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Economic Update

2020/08/31

Navigating Trade Headwinds

As the coronavirus continues to weigh on the global economy, Hong Kong’s external trade remains sluggish. In July 2020, the values of total exports and imports of goods dropped by 3% and 3.4% respectively. For the first seven months of the year, exports and imports fell by 6.3% and 8.5% respectively.

Some local manufacturers are increasingly worried about the trade relations between Hong Kong and the United States, after U.S. President Donald Trump signed an executive order in July to end preferential economic treatment for the city.

On 11 August, Washington announced that imported goods produced in Hong Kong could no longer be marked to indicate “Hong Kong” and must be relabelled to indicate “China.” Goods entered or withdrawn from warehouse for consumption in the U.S. must be marked according to this new requirement, starting from 9 November after an extended transition period.

As the change in marking requirements does not affect country of origin determinations, Hong Kong goods can continue to enjoy exemption from the additional tariffs imposed on those from Mainland China. However, local manufacturers will need to relabel their products to be exported to the U.S., and this generates additional costs. Failure to comply with the requirements will also result in the levy of a duty of 10% of the value of the goods.

Given that Hong Kong’s economy is dominated by the services sector, which accounts for 93% of GDP, the direct impact of the new requirement is limited. In 2019, Hong Kong exported HK$3,676 million worth of made-in-Hong-Kong goods to the U.S., accounting for only 0.1% of the city’s total exports. Half of those were jewellery.

That being said, local manufacturers targeting the U.S. as a major market are still likely to be badly affected. Uncertainty arising from the new requirement and the possibility of additional tariffs in the future might force them to accelerate their plans for market diversification and/or moving their manufacturing base away from Hong Kong. This would not only be costly for the businesses concerned, but would also hurt the city’s efforts to reindustrialize and diminish the uniqueness of the Hong Kong brand, which is seen as a mark of quality around the world.

Interestingly, Hong Kong’s domestic exports to the U.S. rose significantly in June and July (Figure 2), after the announcement of ending preferential treatment for Hong Kong in trade and travel. This could be due to front-loading activity by exporters, who wanted to avoid any potential higher tariffs.

The coronavirus crisis threatens to reverse globalization, putting more pressure on the multilateral trading system in which Hong Kong has played its role connecting East and West so well, and for so long. So it is time for the city to explore new markets and new opportunities. The road ahead is likely to be bumpy but better preparation should help reduce the disturbance.

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