The Hong Kong-Australia Free Trade Agreement: Highlights and Implications

Hong Kong and Australia signed a Free Trade Agreement (FTA) and an Investment Agreement on 26 March 2019, which will enter into force after the two governments complete their respective internal procedures. The two bilateral agreements will provide Hong Kong companies with legal certainty of market access and national treatment for a comprehensive range of services in the Australian market, and allow Hong Kong to have better access to the pool of Australia’s talents, adding to the city’s strength as a services platform.

All tariffs on goods originating from Hong Kong and Australia will be eliminated, while the harmonisation of the technical requirements for food product and wine trade is set to make Hong Kong a trading and distribution hub for Australian products. Other benefits of the FTA include easier arrangements for business travel, as well as provisions to access each other's government procurement markets, effective protection of intellectual property rights and promotion of competition.

Trade in Goods Commitments Facilitating Hong Kong’s Role as a Trading Hub

Hong Kong and Australia have agreed to eliminate all tariffs on goods originating from each other once the FTA comes into force, which generally requires a change in tariff classification or a regional value content (RVC) requirement of 40%. The procedure for claiming tariff-free treatment is simple, only requiring a declaration of origin form completed either by the producer, exporter or importer.

As a major services economy, Hong Kong has very little local production. In 2018, Hong Kong’s domestic exports to Australia amounted to HK$671 million, only 1.9% of its total exports to the country. Currently, Australia’s applied duties average 2.5%, while some consumer products such as textiles, clothing and leather goods are subject to a maximum 5% duty. According to Hong Kong’s Trade and Industry Department, Australia’s commitments will result in an annual tariff savings for Hong Kong of about HK$16 million.

In fact, Hong Kong exporters, which mostly have production bases in mainland China, have benefited from Australia’s FTA with China (ChAFTA) which entered into force in 2015. After progressive tariffs cuts, all Chinese exports to Australia have been duty-free since 1 January 2019. ChAFTA has taken modern trading practices into account and allows the use of transport and distribution hubs in third party locations (such as Hong Kong) for the consignment of goods. Exporters who ship products through a third country/territory will enjoy tariff-free treatment, as long as a range of conditions are met.

China aside, Australia has entered into FTAs with New Zealand, Singapore, the United States, Thailand, Chile, ASEAN, Malaysia, Korea, and Japan. Australia is also one of the 11 signatories to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Hong Kong does not currently apply any tariffs to goods imported from Australia. In order to facilitate imports of Australian goods, however, the two governments have harmonised the technical requirements for food products and wine, the two major product groups exported from Australia to Hong Kong. Specifically, the two governments have standardised wine labelling requirements, which will reduce uncertainty for wine producers and exporters. With regard to food products, the two governments have agreed to establish a mechanism to facilitate speedy resolution should consignments of perishable goods be delayed at the border. These agreements on non-tariff barriers are set to strengthen Australian exporters’ confidence in the use of Hong Kong as a trading and distribution hub and a channel for satisfying the growing demand in the Greater Bay Area region.

Liberalisation of the Full Range of Arbitration Services

Both Hong Kong and Australia are service-based economies. In 2017, Australia was Hong Kong’s seventh largest services trading partner, with total services trade amounting to HK$44 billion. The key utilised service sectors are transport, professional, financial services, personal and business/education-related travel.

The FTA commitments in services trade encompass some 140 sub-sectors, including those under professional services, business services, transport services, financial services, and telecommunications services. In the designated sectors, Hong Kong service providers will enjoy market access, including the right to establish businesses in Australia, treatment no less favourable than local service providers in similar circumstances and any additional liberalisation measures that Australia offers to other economies under the terms of any future FTAs. Accompanying the FTA are a number of side letters committing the two governments to work on mutual recognition of professional qualifications and registration.

Compared with its commitments under WTO, Australia has opened 40% more services sectors to Hong Kong. These include R&D services in natural sciences and engineering, technical testing and analysis services, services incidental to manufacturing, a number of environmental services, and in particular, the full range of arbitration, conciliation and mediation services and certain rail transport services, which Australia has not offered to its other FTA partners, except New Zealand.

Hong Kong’s commitments to Australia likewise cover a wide range of services, with WTO-plus commitments in various sectors. These commitments will not only provide certainty to Hong Kong service suppliers as they enter the Australian market, but also allow Hong Kong to have better access to Australia’s talent pool, which is crucial for the city as a services platform in the region.

E-commerce Commitments Promoting Certainty over Digital Trade

With regard to e-commerce, the FTA sees Hong Kong and Australia agree not to impose customs duties on electronic transmissions, including content transmitted electronically. As WTO members, they have only agreed to a temporary moratorium on customs duties on electronic transmissions without a well-defined scope. There are also provisions to facilitate electronic commerce, including electronic signatures and paperless trading, the supply of electronic payment services for cross-border transactions, protection of personal information, and freedom in the location of computing facilities. These commitments will provide legal certainty for businesses in both economies involving digital trade amid lingering global protectionism.

Thresholds for Investment Screening Raised

Hong Kong and Australia have also signed an Investment Agreement, which supersedes an earlier one signed in 1993. Under its terms, Australia has committed to raising the monetary thresholds for screening of investments by Hong Kong investors, from AUD266 million (US$188 million) to AUD1,154 million (US$817 million), which will provide a level playing field between Hong Kong and other foreign investors investing in Australia. Investors from both economies will also benefit from modern provisions on treatment and protection under the new Investment Agreement.

As of the end of 2017, Australia was ranked eighth among Hong Kong's destinations for outward direct investment, with stock of HK$134 billion, and was ranked 17th among Hong Kong's sources of inward direct investment, with stock of HK$33 billion.