By Charles Pym

As late as May 2013, the Australian government was bluntly ignoring requests from the government of Hong Kong to explore possibilities of a free trade agreement (FTA) and dual taxation agreement (DTA) between the two regions. Since taking the reins of a new government, Tony Abbott has been enthusiastically flagging an FTA with the People’s Republic of China as a key foreign policy initiative. There is little guidance, however, as to whether these talks will take place alongside similar negotiations with Hong Kong. There is a strong case for ensuring that they do.

Australia and Hong Kong share deep economic and cultural connections. There are 90,000 Australian citizens in Hong Kong,^[1] and 88,500 Hong Kong-born people living in Australia.^[2] A more telling statistic is the fact that there are 252,000 Cantonese speakers in Australia, accounting for subsequent generations with a potential cultural connection to Hong Kong and nearby provinces.^[3] A not-dissimilar legal system descended from British roots, and shared economic values further cement the strength of relations between the two. Both regions value liberalised trade and economic freedom, and seek to position themselves as world leaders in international trade policy.

Hong Kong’s legal and historical attributes shape a unique relationship with Australia, so direct comparisons with other bilateral relationships are difficult. Hong Kong could be characterised as a fellow colony of Britain, or as an “Asian tiger” in the same vein as South Korea or our ASEAN neighbours. Our experience with Singapore, a comparable major finance hub, may be a fair approximation.

Another view (that taken by former Foreign Minister Alexander Downer) portrays the region as a gateway to China, an important province within a larger entity, similar to California or Western Australia. In any case, Hong Kong is our sixth-largest source of inbound investment, and maintaining this relationship is crucial to future growth. Merchandise and services trade with Hong Kong contains significant opportunities for Australian businesses, and should not be taken lightly.

Why are these agreements necessary?

Some variables suggest that this Special Administrative Region (SAR) ought to be a higher priority than mainland China. Investment flows between Australia and Hong Kong are massive but tend to be combined into a single figure with mainland investment. Investment between Australia and Hong Kong is actually two-thirds larger^[4] than that with China (excluding the SARs) and many Chinese firms conduct trade with Australia through Hong Kong subsidiaries to take advantage of better trade conditions.

Dual taxation agreements (DTAs) prevent the double recovery of taxation revenue for entities operating in foreign jurisdictions and are regarded as an important addition to most FTAs.  Hong Kong has expressed interest in negotiating both an FTA and DTA.

Free trade agreements enable and safeguard international trade. They mitigate the avoidable risk that arises from differences in jurisdiction, and encourages local businesses to look overseas for new opportunities. DFAT recognises the emphatic success of free trade agreements, citing “greater certainty for Australian service suppliers and investors, including through certain legal protections for investment” and the provision of “a platform for ongoing economic engagement with [other signatories] through a range of built-in agendas, economic cooperation projects and business outreach activities” as key results of the ASEAN-Australia-New Zealand Free Trade Agreement.^[5]

The presence of the Chinese diaspora in Australia further reinforces the case for liberalised trade with both China and Hong Kong. A critical mass of foreign-born citizens above a certain income level is said to foster trade connections with their home country.  This is reportedly a feature of the New Zealand experience.

Australia is signatory to six bilateral free trade agreements, covering important trade partners such as the United States and Singapore. As the only multilateral agreement, the ASEAN-Australia-New Zealand pact bucks the trend, and represents $112.9 billion of Australian trade alone.^[6]

The ASEAN-Australia-New Zealand exception aside, the world is heading in the direction of bilaterally negotiated free trade agreements rather than free trade zones, as governments increasingly recognise the hidden costs of protectionism. While debating the costs of implementing each free trade agreement, policymakers must acknowledge the alternative – being left behind as second-priority trade partner. Australia’s economy must already overcome geographical distance, high taxation and an expensive labour force to promote its goods and services overseas. As regional competition intensifies with growth and further trade liberalisation, it would be foolish not to seek out potential areas of improvement.

Why is there reluctance on the Australian side?

As sovereign wealth funds and other sources of foreign capital diversify into wider interests and multinationals begin to wield more influence than states, questions about the appropriate level of foreign control of domestic commerce arise. Australians have little to fear while they retain full control over a robust domestic legal system that is not undermined by the graft that plagues some of our trading partners. Liberalised trade does not bring the same risks as less restrictive foreign investment regimes, and should not be treated as such.

Legitimate concerns about the undermining of sovereignty aside, the electorate may fear risks flowing from foreign-owned companies operating in Australia. Though this argument might find less traction among economists, it nonetheless must find its way into the political calculus for leaders of Australian government. In liberalising trade, the market influence of Chinese firms operating in Australia increases. Attaining the benefits of such an agreement would require Australian voters to overcome any lingering distaste for Chinese owned firms, and the goods and services they provide.

The composition of the Hong Kong economy means that Australia will see greater opportunities through access to services than it will lose through competition. In any case, protectionist sentiment is rapidly disappearing from political rhetoric. A key justification for the Hong Kong-New Zealand FTA was increased certainty “of access to Hong Kong’s services market, [ensuring] that New Zealand services providers will benefit from future liberalisation by Hong Kong in particular sectors”. What previously might have been viewed as adversarial competition was acknowledged to be a source of opportunity. The New Zealand government noted that its FTAs with other nations meant that domestic industries were becoming increasingly able to deal with foreign competition anyway. As with any FTA, both states parties to an Australia-Hong Kong FTA would necessarily lose trade excise as a source of income but stand to gain from increased economic activity. Modelling from 2005 suggests that Australia could see over $1 billion added to domestic GDP figures from an Australia-China FTA.^[7] Hong Kong’s role as a gateway to the region, as well as being a commercial hub in its own right, indicate that significant growth gains would make reform worthwhile.

Seccombe identifies a risk that, depending on the content of any FTA, such an agreement could mean that Australian businesses are more vulnerable to international lawsuits. International dispute settlement mechanisms are important features of the legal environment in many trade-friendly jurisdictions, though Australian governments have displayed varying degrees of hesitation when considering them.^[8] Allowing the legitimate recovery of losses incurred is a necessary aspect of maturing to a global economy and increases commercial certainty.^[9]

Finally, there is the chance that any gains will undershoot expected levels. Though lower-than-anticipated returns do not necessarily mitigate the benefits of trade liberalisation, policymakers should be cautious with forecasts. The Hong Kong- China FTA (Closer Economic Partnership Agreement) is one such agreement that has not provided benefits to the extent anticipated when it was signed.^[10]

Implementation

The implementation of any such treaty must be in such a manner that does not compromise Australia’s relationship with China or nearby trade partners. As China is conscious of Australia’s ambitions as a global trade leader, and is no stranger to FTAs itself, this should not be an issue. To the contrary, the previous approach of blunt refusal to negotiate with Hong Kong while liberalising trade with China could have ramifications of its own. The Mainland has shown willingness to sign multilateral treaties covering Hong Kong and a third state,^[11] so perhaps this model would be the optimal way to proceed.

Economic concerns have not necessarily been the driver behind the signing of FTAs across the Pacific Rim.^[12] Alongside growth and trade benefits, nations have signed preferential FTAs to galvanise strategic relationships. The link between increased trade liberalisation, deeper economic linkages and the reduction of the possibility of war is well-explored.^[13] Capling investigated motivations for the negotiation of such agreements beyond this simplistic safeguard, suggesting that the consequences can be far more complex.^[14] It is unlikely that relations with Hong Kong (given its status as a Special Administrative Region) could create the same strategic benefits and tensions as negotiations with larger Asian neighbours. The shadow of the proposed China-Australia FTA, particularly in an environment of increased trade liberalisation, is likely to negate any perceived security risks flowing from a Hong Kong agreement.

The New Zealand Experience

The strongest assurance of success of a proposed agreement is the result of the Hong Kong-New Zealand agreement. Journalists note the economic benefit that has flowed to New Zealand following the conclusion of the agreement, and highlight the benefits of the agreement working in tandem with agreements with the Mainland and Taiwan.^[15]  Cross-border trade has not only increased, but accelerated, and continues to grow. The Hong Kong-China-New Zealand Closer Economic Partnership Agreement entered into force on 1 January 2011 and complements the bilateral agreements already signed by New Zealand and Hong Kong with the Mainland.

The average annual growth rate in bilateral trade between Hong Kong and New Zealand was 4% in the five years up to 2012. Bilateral trade volume increased by 7% in 2012, an indication of the effectiveness of this form of co-operation. There is nothing to suggest that Australia would not experience every benefit that unshackled trade with Hong Kong brought to New Zealand.

Conclusion

The new Australian government has many priorities. As impressive and ambitious statements are made about the prospect of an Australia-China FTA, Hong Kong should not be relegated to an afterthought.

Charles Pym is a student of Law and Economics at the University of Western Australia.