Just as globalization has brought massive benefits over the past decades by improving production efficiency, lowering costs, increasing consumer choices and promoting innovation, its reversal will be consequential in the undoing of such gains. Of greater concern is the likelihood of the lasting effects with such a trend, which could continue for decades instead of years, George Leung, CEO of the Hong Kong General Chamber of Commerce said in his keynote address at the ACCA Hong Kong annual conference 2022.
Leung said that Hong Kong has to adapt to the rapidly changing business landscape and deglobalization by enhancing its connectivity with Asia – especially the Mainland – to sustain growth and stay competitive.
The 2008 global financial crisis was a watershed event in the history of globalization as international trade slowed from a rate of roughly two times economic output to more or less a similar pace as the latter. At the same time, the ratio of global trade volume to GDP – a proxy for economic integration – fell from its peak of 61% in 2008 to 52% in 2020. Looking back, the onset of “slowbalization“ some 10 years ago presaged an increasingly fraught environment for trade and investment, which is especially troubling for open economies such as Hong Kong and their ability to function effectively as global business hubs.
Collectively, the Sino-U.S. trade conflict, Covid-19 pandemic and war in Ukraine have caused major disruptions to hitherto highly integrated supply chains and impeded globalization. In particular, tensions between the two leading global powers – the U.S. and China – have spilled over from trade into other arenas such as technology and finance.
A recent example of such knock-on effects is the Biden administration‘s recent export controls on the sale of sophisticated semiconductors and advanced chip-making equipment to China, effectively cutting off the latter‘s access to critical technologies.
Developments outside its borders have given rise to questions over some of Hong Kong‘s otherwise key competitive advantages.
“Hong Kong used to have an attractive tax advantage in the 1980s,“ Leung said. “But such a tax advantage is being eroded as other jurisdictions slash their corporate tax rates to attract businesses.“
In addition, an international deal to ensure that the world‘s largest multinationals pay a minimum corporate tax rate of 15% will reduce the effectiveness of tax concessions as a way to boost competitiveness. Under a framework spearheaded by the Organisation for Economic Cooperation and Development (OECD), companies with sales of at least 750 million euros will be subjected to the new tax policy. The consequences to Hong Kong are understandably of considerable concern to the SAR Government, not only because of the impact on Hong Kong‘s reputation as a low-tax regime but also because this coincides with the departure of foreign regional headquarters, with the exception of those from the Mainland.
If there was one positive development arising from the Covid pandemic, that would be the accelerated adoption of digital technology, which offers new opportunities (and some relief) during such a challenging period. “Digital tools are key enablers in the trade of cross-border services, which is less susceptible to supply chain disruptions and an area to which Hong Kong could add value,“ said Leung.
As a matter of fact, global trade in services has since recovered from the effects of Covid. In the second quarter of 2022, it grew by 17% year-on-year following an 18.9% increase in the previous quarter. In contrast, world merchandise trade is expected to continue to experience headwinds with the World Trade Organization predicting that global merchandise trade volumes would only grow by 3.5% and 1% respectively in 2022 and 2023. With such a gloomy outlook, multinational companies should be mindful of not putting all their eggs in one basket and formulate strategies (if they have not done so) to diversify their supply chains in an increasingly polarised world as notions of reshoring and “friend-shoring“ gain currency.
Leung said that as Asia was the epicentre of growth, Hong Kong should waste no time in ensuring that it was well-equipped to tap into the vast opportunities offered by regional markets.
“Sixty-five percent of the global middle class will be concentrated in Asia by 2030. Their increased wealth, spending power and demand for services are something that we cannot afford to ignore,“ he explained. Despite a less globalized world, Asia‘s intra-regional trade remains impressive. Leung suggested that Hong Kong should optimise its status as a trade hub to help strengthen linkages between Mainland China and Asia.
There are several key intrinsic issues, such as underinvestment and manpower shortage, that Hong Kong must address as a matter of priority if it is to remain attractive to multinational corporations looking to establish a presence in the region.
“Investment is an important driver of economic and productivity growth. However, Hong Kong‘s total investment spending only accounts for 18% of its GDP,“ Leung said. This is slightly lower to the OECD average of just over 22%.
In the meantime, Hong Kong‘s workforce is shrinking with the working population peaking at 4 million in 2018 and since declining by 6%.
“While the global business environment has become increasingly complex, the fundamentals to post-Covid recovery remains simple: Continue to invest in people, skills, infrastructure and technology,“ he concluded.