With the inking of the E.U.-U.K. Trade and Cooperation Agreement on 30 December, Britain left the European Union. The deal, agreed at the last minute on Christmas Eve after more than four years of sometimes difficult negotiations, put an end to the uncertainty of Britain leaving Europe without a deal. 

In Britain, some problems have arisen in the first few weeks of the new regime, with disruptions in areas including fish exports and shipments to Northern Ireland. Hopefully, these are teething problems that will ease as businesses become familiar with the new rules and regulations. In general, the agreement has brought clarity, and British companies doing business with the E.U. are now able to plan ahead within the framework of the Brexit deal.

A key element of the deal is that goods will continue to flow between the E.U and the U.K. without tariffs or quotas. The picture for services is less clear, as sectors like banking have lost their automatic right to operate in the E.U., and the automatic recognition of professional qualifications has ended. 

But what does Brexit mean for businesses based in Hong Kong? Britain made up a considerable part of Hong Kong’s trade with the E.U., and we also have long cultural and historic relations with the country. 

Will local businesses face more red tape and restrictions when doing business with Britain, or will the country become more attractive to global investors now it has “taken back control” – as pro-Brexit campaigners claimed? And how will Brexit affect Hong Kong’s relationship with the remaining members of the E.U.? 

Lower tariffs

Paul McComb, Director General Trade and Investment for Hong Kong and Macao at the British Consulate, echoed British Prime Minister’s Boris Johnson’s sentiment that leaving the E.U is not an end, but a beginning. 

“We have a strong foundation of trade between Hong Kong and the U.K. on which to build,” he said, adding that total trade between the U.K. and Hong Kong was £22.2 billion (HK$235 billion) to the end of September 2020. 

On the investment side, almost 5% of the U.K.’s total outward FDI stock is based in Hong Kong. And in the other direction, Hong Kong accounts for 1.4% of the U.K.’s total inward FDI stock. So the business ties are already substantial, and McComb anticipates they will continue to grow.

“I look forward to driving this trade and investment even higher, as we both deliver a green recovery from Covid,” he added. 

Now that Britain is no longer part of the E.U., new rules apply for goods arriving in the country. For jurisdictions that do not have a bilateral trade deal with Britain, including Hong Kong, the new U.K. Global Tariff (UKGT) will apply, which replaced the E.U.’s Common External Tariff. This new tariff regime is tailored to the U.K. economy, and reflects the country’s free trade ambitions, McComb explained.

“The new UKGT is good news for Hong Kong exporters to the U.K. It is a simpler, easier to use and lower tariff regime than the E.U.’s Common External Tariff,” he said. “The UKGT almost doubles the number of products that are tariff free, relative to what was previously applied – with just under 50% of products with zero tariffs under the UKGT, compared to 27% in the E.U.’s Common External Tariff.”

Louis Chan, Assistant Principal Economist (Global Research) at the Hong Kong Trade Development Council, also noted the positive impact of the UKGT for local businesses dealing with Britain.

“For Hong Kong-U.K. trade and investment, there is in fact less red tape and restrictions,” he said. In addition to the higher number of tariff-free products, in cases where tariffs still apply, the rates are generally lower, Chan noted, with an average tariff of 5.7%, compared to 7.2% previously.  

So businesses shipping goods to the U.K. in particular are likely to benefit from the impact of the wider range of non-tariff goods and lower tariffs. This may make Britain a more attractive location than in the past and may open the country up to further investment. 

Jonathan Lamport, Managing Director of Lynter International, said that his company will investigate the impact of the change in tax regime.

“Since 2019, I stopped shipping cast iron products from China to the U.K. due to the anti-dumping tax measures from the E.U. Commission,” he said. “So Brexit may have a positive impact on our factory in China if we don’t have to follow the E.U. tariff.”  

Speaking more generally about the impact of Brexit, Lamport said he was optimistic about the prospect for continued warm business ties with Britain, given Hong Kong’s unique role connecting Mainland China with overseas businesses and investors.

Growing ties

The uncertainty in Britain following the shock result of the Brexit referendum in 2016 did not put a damper on the country’s business dealings with Hong Kong. In fact, the opposite happened, with notable growth in trade and investment, as HKTDC’s Chan explained. 

“Hong Kong-U.K. trade increased from US$16.2 billion in 2016 to US$26.1 billion in January to November 2020,” he said, with both imports and exports registering growth.

On the investment side, Hong Kong’s outward direct investment in the U.K. totalled HK$280.5 billion in 2019, up 75% from HK$160.5 billion on 2016.

Figures for 2020 are not available yet, but will probably be bleak as a result of the impact of Covid-19. And going forward, the pandemic will likely continue to affect U.K.-Hong Kong trade as well as the whole global economy, Chan said. “The future prospects depend more on the virus outbreak and recovery than Brexit in the short term.”

However, one aspect of Brexit that could affect Britain’s ties with Hong Kong is that the country’s role as a gateway to Europe for Hong Kong companies may shrink, now that it is no longer part of the bloc, Chan added.  

E.U. perspective

Looking at Brexit and Hong Kong from the European side, the E.U.’s relations with the city will remain unaffected by Britain’s departure, said Thomas Gnocchi, Head of the European Union Office to Hong Kong and Macao.

“The European Union and Hong Kong enjoy strong and wide-ranging relations from culture to business, and from academic exchanges to trade,” he said. 

With 450 million consumers, the E.U. is a huge market, and is Hong Kong’s second largest trading partner in goods – second only to Mainland China. 

“Similarly, there are over 1,500  E.U. companies in Hong Kong, and they are essential to Hong Kong’s economy, including in the banking, finance, trading, logistics, construction, and retail sectors,” Gnocchi said. 

Investment in both directions is also rising, even as the Covid-19 pandemic emerged last year. The most recent data, from the first half of 2020, show an increasing trend, with net FDI inflows from Hong Kong to the E.U.-27 reaching EUR 9.4 billion, a strong increase compared to 2018 (EUR 2.8 billion).

“This indicates strong relations between our businesses with those of Hong Kong,” Gnocchi said. “Even during these challenging times, there are opportunities to grow stronger.” 

The E.U. has just signed a major investment deal with the Mainland – the Comprehensive Agreement on Investment (CAI). Gnocchi noted that more than 60% of FDI in and out of Mainland China goes through Hong Kong, so the CAI will have an impact on business in Hong Kong. 

“China will open up in a number of areas that are important for Hong Kong,” he said, “including financial services, transport, telecommunication, computer and environmental services – while giving more predictability to business in many ways.” 

Chan from HKTDC agrees that the CAI will benefit the city, thanks to Hong Kong’s long history as the bridge between the Mainland and the rest of the world. The CAI, Chan said, “may usher in a new era of opportunities for Hong Kong’s professional service providers facilitating Sino-E.U. investment as the initiative further unfolds.”

Looking forward

It is striking that, even amid the uncertainty over the details of Brexit over the past few years, Hong Kong’s trade and investment with both Britain and the E.U. have been rising. 

Going forward, McComb emphasised that the British Consulate General in Hong Kong was ready to help local companies here to trade and invest in Britain. “My team will work with businesses to connect them with opportunities in or from the U.K., and support businesses affected by our changing trade relationships with the E.U. and other countries.” 

And it seems clear that both the U.K. and the E.U. are keen to deepen their already strong ties with Hong Kong, and are optimistic about the future relationships. For Gnocchi at the E.U., Hong Kong’s experience as a global hub mean it will continue to attract business from across the bloc.

“Despite recent events, Hong Kong’s operational efficiency, pro-business environment and its role as super connector between Europe and Asia, continue to make the city attractive to E.U. firms,” Gnocchi said.

Brexit Deal: Key Points

• No tariffs or quotas on goods traded between the U.K and the E.U.
• New customs and regulatory checks for goods
• A new framework for management of fish stocks 
• No hard border between Northern Ireland and the Republic of Ireland
• Service sectors in Britain lose their automatic right of access to E.U. markets 
• End to automatic recognition in the E.U. of British professional qualifications
• End to automatic access to the E.U.’s key security databases 
• U.K. no longer needs to comply with E.U. standards of data protection