Hong Kong free trade and investment agreement

Deal not done yet

- Bill Rosenberg


Watchdog 96 (April 2001) introduced you to the dangers of a proposed free trade and investment agreement with Hong Kong.The report summarised there proved extraordinarily timely. It was published by the Action, Research and Education Network of Aotearoa (ARENA) at the same time as Helen Clark was announcing the beginning of negotiations in Hong Kong. (It is available from ARENA, Box 2450, Christchurch, arena.nz@clear.net.nz, for $10, or can be seen on CAFCA’s web site.)

Copies of the report were sent to every MP, many trade unions, media, and other interested parties. I spoke (for at least 3 minutes) on Telstra Saturn Business on TV One at 6.30 in the morning (and have heard of only one person who saw it live). I travelled to Wellington in May to speak to development groups, Alliance staff, young activists, the Council of Trade Unions (CTU), and a well attended public lecture. A public meeting was held in Christchurch jointly with Maxine Gay of the former Trade Union Federation and the Clothing Workers Union.

The issue has been taken up by many organisations, with major concerns or opposition from the Christchurch City Council, a number of unions, the CTU itself, and the Royal Forest and Bird Protection Society, among others. The Exporters Institute in Auckland has raised its scepticism at yet another such agreement in the Independent and elsewhere. An excellent article by Matt Philp appeared in the Listener. The Greens in Parliament, and Alliance activists have made their opposition clear.

Tariffs And ROOs

The main initial focus of public debate has been over the effect of the zeroing of tariffs, with its likely devastating effects on the textile, clothing and footwear (TCF) industries. The Government is very much on the defensive on this issue. Trade Minister, Jim Sutton, and Customs Minister, Jim Anderton, issued a joint statement on the Singapore agreement (see Watchdog 95, December 2000, for Bill’s cover story on that Agreement. Ed.) saying that three months data showed that it was a great success with no damage to the TCF industries – the implication being that Singapore had worked; so could Hong Kong. Unfortunately their data was seriously flawed, as the letter to the Listener in the accompanying box outlines. It was followed by a more detailed article in similar vein by Bob Edlin in the Independent, explaining the intricacies of the different statistics. The Ministers’ release used statistics that, for example, included aircraft engines sent to New Zealand for repair. But in any case, three months data shows nothing about an agreement whose long term consequences were our cause for concern. And Singapore has only a relatively small remaining TCF industry, unlike Hong Kong’s huge ($25 billion per year) one.

We were able to show that there are very major concerns about the enforceability of any "rules of origin" (ROOs to those in the know) that determine what is allowed in tariff-free. If they can’t be enforced, then we are effectively zeroing tariffs to China and a score of other countries which Hong Kong traders use to contract out their orders. A simple Web search showed official reports from the US Customs Service and Congress of which our Customs Department was not apparently aware.

In a March 1999 publication by the US Customs Service, "Trade Compliance Risk Management Process" (http://www.customs.gov/imp-exp2/pubform/tradcomp.htm#top), it is stated that it has found:

"Serious problems with textile transshipment through Hong Kong — Cooperative efforts with the Hong Kong Ministry of Trade resulted in 64 transshipment convictions and 15 export license suspensions".

"Transshipment" in this context means illegal re-exports of goods (e.g. from China, pretending they are from Hong Kong).

Every six months, US Customs publishes a list of "Foreign entities violating textile transshipment and country of origin rules". For the six months ended 30 March 2001, it listed 23 companies. All but three were from Hong Kong (the remaining three were from Macau).

The American Textile Manufacturers Institute, in an unsuccessful US Supreme Court writ against two Hong Kong companies it considered had been engaged in such transshipments, stated:

"The transshipment of garments from China to avoid quota limitations is a major problem. The United States Customs Service has estimated that the value of Chinese-made garments declared to be the products of other countries ranged between 6.4 and 10.7 billion (US) dollars in 1992. Unraveling The Mystery: Following the Thread of PRC Apparel Imports, United States Customs Service, December 1994".

Because of this "major problem", US Customs has put considerable effort into enforcement measures including inspections of factories in Hong Kong using "Textile Production Verification Trips (TPVTs)".

A US Congressional Research Service Report for Congress (RL30555: China-US Trade Agreements: Compliance Issues, by Wayne M Morrison, Updated September 1, 2000) stated:

"China is a major source of US textile and apparel imports. Chinese textile and apparel exports to the United States are limited by US quotas established under a bilateral agreement with China. The most current agreement was reached in February 1997 and is effective over four years.

"The US Customs Service has found evidence in the past that China has attempted to circumvent US quotas by transshipping Chinese textile and apparel products through Hong Kong and Macau as well as through a number of countries, to the United States using false country of origin labels and through mis-classification of textile and apparel products.

"In July 1993, then-US Trade Representative (USTR), Mickey Kantor, announced the creation of an interagency task force to fight textile and apparel transshipments. He estimated that such transhipments from China alone totalled $US2 billion annually. During 1993 and 1994, US officials sought to include specific enforcement provisions against transhipments during negotiations to extend the US-China textile and apparel agreement. Under the threat of reduced quota levels, China in January 1994 agreed to a textile agreement allowing US officials to inspect Chinese factories and, if China repeatedly circumvented the agreement by shipping goods through other countries, impose penalties against Chinese quotas equal to three times the amount of the transshipment.

"Evidence of transshipments has led the United States on a number of occasions to reduce China's textile quotas on certain products. Between 1994 and 1996, the United States imposed $80 million in charges against China's textile quotas, including approximately $19 million in punitive triple charges against China's 1996 quota allowance. The 1997 agreement also allowed the United States to impose triple charges if evidence of extensive transshipment was found. On May 5, 1998, the USTR announced that it would impose $5 million in triple charges against China's textile quotas due to persistent Chinese textile transshipments. A USTR official testified in June 1998 that the Chinese government ‘appears to be making progress in preventing transshipment’ (47)".

The US Customs’ 1999 Textile Transhipment Report (http://www.customs.ustreas.gov/quotas/ttr/pg7.htm#Hong Kong) reported:

"Joint observation visits were conducted with Hong Kong officials in late January 1999 and early September 1999. The first visit found 27 of the 55 factories visited suspected of being involved in transshipment, or close to a 50% suspicion rate. The second visit found 24 of the 51 factories visited suspected of being involved in transshipment, again close to a 50% suspicion rate. This count does not include the factories that were referred for a pre-issue check or factory audit check, which would raise the suspicion percentage even higher. This suspicion finding rate has been consistent with previous visits. If the enforcement measures being taken by Hong Kong were having an impact, you would expect to see an improvement in our visits and a lower percentage of companies suspected of transshipment.

"Finally, in 1999 US Customs officials in Hong Kong transmitted the names of an additional 124 factories convicted of transshipment, bringing the total number published on the administrative list since the initiative began in 1997 up to the end of 1999 to 364. Of the 364 factories that appear, 56 have been convicted multiple times for textile transshipment, some as many as four times".

A "Textile Clearinghouse" has been established to collect and monitor data on such cases. For example it monitors the activity of over 600 factories that have been identified as closed, unable to produce production records or illegally transshipping. It analyses and monitors the activity of over 550 foreign entities published in the Federal Register or in administrative notices for a number of reasons such as inclusion in the six-monthly lists mentioned above, or conviction in Hong Kong of false country of origin claims. (see http://www.customs.ustreas.gov/quotas/ttr/pg5.htm)

It is interesting that US Customs sees similar problems with Singapore. The American Textile Manufacturers’ Institute is opposing the Singapore-US Free Trade Agreement (FTA) currently under negotiation, for among other reasons:

"Singapore has one of the world’s worst records in preventing transshipment and working with US Customs. Singapore is one of only two countries in the world that has consistently refused to allow US Customs teams to inspect factories suspected of transshipments (China is the other). In the single visit that Singapore agreed to in December 1999, US Customs officials found that one quarter of the manufacturers had major inaccuracies in their record keeping and that ‘a lot of traffic in finished garments (from Malaysia) is going across the border into Singapore and (is) exported as "Made in Singapore’". It also noted that ‘Singapore Customs Import and Export permits were found to consistently include false statements and omissions with regards to country of origin’. Indeed, US Customs found that most of the plants it visited were incapable of producing the goods that were being exported to the United States as being ‘Made in Singapore’".

Echoing concerns we have expressed, it says:

"An FTA with Singapore would essentially offer Indonesia, one of the world’s largest apparel exporters, to ship apparel duty-free to the United States. With one of the world’s largest ports, Singapore would become a funnel for billions of dollars of duty-free, transshipped textile and apparel exports from Indonesia, China, India and others".

It also complains about the speed with which the negotiations have been rushed into and the lack of US government consultation and says "Because Singapore has virtually no barriers to US exports or investment, there appears little or nothing for the US to gain from an FTA with Singapore".

(Letter to US Trade Representative, 14 December, 2000; submission to United States International Trade Commission, 3 January 2001; "Q&A on a Potential Free Trade Agreement with Singapore". See http://www.atmi.org/EconTradeData/tradeissues.asp.)

Not Only Jobs At Stake

Though tariffs will likely be the continuing focus of debate on the Hong Kong agreement because of their immediate effect on jobs, the effects on services, particularly public services, on our balance of payments, our ability to control capital flows and foreign investment, and the constraints it would add on economic, environmental and social development programmes to those already in place from the World Trade Organisation (WTO), Closer Economic Relations with Australia (CER), and the Singapore agreement, are at least as important.

One of the most frightening effects comes from the Investment Promotion and Protection Agreement (IPPA) already in place with Hong Kong. This allows corporations to demand compensation when Government actions – such as the Accident Compensation Corporation renationalisation or tighter environmental controls – threaten their profits or the value of their assets. Royal Forest and Bird’s submission focused strongly on these concerns. After initial denial, the Ministry of Foreign Affairs and Trade (MFAT) now appears to be conceding that this is indeed a possibility on the evidence we have presented. Whether that leads to action is of course something quite different, though one of their negotiators admitted that he would much rather have had a clean slate than have to negotiate around the IPPA.

No Room For Debate On The Real Issue

Another highly contentious issue is again that of process. While MFAT has hired a journalist, Stephen Harris, to "consult" with those concerned, and the consultations this time are wider than the farcical "don’t call me, we’ll call you" one-way process with the Singapore agreement, there is still much to be concerned about. CAFCA and GATT* Watchdog despite their long and publicly expressed concerns about such agreements were not invited to the Christchurch "consultation". (GATT = General Agreement on Tariffs and Trade, now the WTO).

But even if they had been invited, they would not have gone. Indeed, ARENA, GATT Watchdog and CAFCA put out a letter asking people to boycott the June 2001 Christchurch "consultation", saying: "it is clear to us that this briefing by Mr Harris is a marketing exercise".

"More importantly, he is not coming to consult with people and groups in Christchurch over whether we should begin negotiations on this agreement in the first place. That decision has been made by Cabinet, only the details are left to sort out. And it is ridiculous to suggest that genuine consultation with the public can occur when they have refused to allow anyone to see the text of the agreement being negotiated with Hong Kong before it is signed. In fact the Government has refused to allow the text of any of the free trade agreements they sign up to be released for parliament let alone the public to consider.

"Which brings us to the main point: with whom are we 'consulting'? If what we want is an open and forthright debate on how these agreements conflict with the economic and social development of the country, then we need to have that debate with the Government, not with MFAT officials. The agenda for that debate can’t be set and dominated by one side, who already have made the crucial decisions and are looking for an easy way to tidy up and market them" (14/6/01).

MFAT consistently refuses to contemplate release of drafts of the agreement, without which informed debate is completely hamstrung. It is rather like debating a Parliamentary Bill without being able to read it, and relying on its sponsors to tell you what is in it and what its significance is. MFAT says that it would become too complicated, with the different interests affected complaining if they were put in or taken out. But that is precisely what the democratic process is about. Sorry if it is complicated, but that’s life.

And when we read that John Woods, Deputy Secretary of MFAT has said back on 10 May in a speech to the Wellington Regional Chamber of Commerce that:

"We’re operating to a pretty tight schedule – the Prime Minister herself has set her negotiators a target of the end of the year. We broke the all-comers record in the Singapore negotiations, so if we can do it with Hong Kong by December 2001 that will be both a personal best and another world record".



we have further reason to question how genuine is the intention to listen to – and consider – other views.

One observer of the Christchurch "consultation", a person with considerable first-hand experience of genuine Government consultation, described it as follows:

"I was surprised that this was called consultation. Instead of listening to views they kept on justifying the Government position and argued with participants. When they were finally backed into a corner they started to back out by saying they were only officials (and not necessarily pro the agreement or the Government) – which was not the impression they had given at the beginning or most of the session.

"They were really condescending about non-government organisations’ (NGOs) decision not to be there. When I do consultations if I hear that people are concerned about the process, I attempt to find out how I can improve it – I don’t belittle the people. It really indicated his bias.

"They appeared not to be forthcoming with all the facts – it felt like they tested the group to see if they knew the information. On other occasions I felt they were ill informed and had not done their homework".



MFAT put out a Discussion Paper, "Hong Kong and New Zealand: Initial analysis of the bilateral trade and economic relationship as background to a possible ‘closer economic partnership’ agreement", with submissions due on 25 May (see MFAT’s web site, http://www.mfat.government.nz). In view of the deliberately limited consultation, as described above, Professor Jane Kelsey made her submission direct to the Prime Minister as follows:

"Dear Prime Minister,

"I am writing to you in response to the release by the Ministry of Foreign Affairs and Trade (MFAT) of the document Hong Kong and New Zealand - Initial Analysis of the Bilateral Trade and Economic relationship as Background to a Possible Closer Economic Partnership (CEP) Agreement.

"This document forms the basis of the initial consultation by MFAT on the proposed free trade and investment agreement between the New Zealand and Hong Kong governments. As the document makes clear, the Ministry is only interested in the views of those who are currently trading with Hong Kong. This is not a genuine consultative exercise which seeks the views of workers, communities, consumers and others within specific sectors that will be adversely affected by the proposed agreement. Nor is it seeking broader input from tangata whenua as the Crown’s "Treaty partner" or from ordinary citizens concerned about the impacts of continued free trade and unrestricted investment on their lives - and about the long-term anti-democratic nature of such agreements.

"Consistent with that bias, there is nothing in the document which assesses the potential domestic economic and social impact or the regulatory and policy ramifications of the proposed agreement – aside from a passing reference to the "implications" for the textile, clothing and footwear industry and associated "adjustment" costs. Nor is there any empirically-based analysis to demonstrate the benefits which it alleges have already flowed, and will continue to flow, from such agreements generally, or this agreement in particular.

"This one-sided consultation process is consistent with repeated statements from MFAT officials that their only responsibility in relation to such agreements is the promotion of exports and foreign investment. They insist that it is the responsibility of the Government to promote a broader debate on the relative costs and benefits for the country, including the ramifications for domestic law and policy.

"Hence, this response is directed to you as Prime Minister, not to the Ministry of Foreign Affairs and Trade. You will be aware of the detailed report recently prepared on the proposed Hong Kong-New Zealand agreement by Dr Bill Rosenberg, a copy of which was sent to you last month. This careful analysis illustrates many of the potential costs associated with such an agreement, and of the Investment Protection and Promotion Agreement already in force with Hong Kong. Dr Rosenberg’s report, along with my own submission to the Foreign Affairs Defence and Trade Select Committee on the Singapore free trade and investment agreement (copy enclosed), provide ample evidence of significant potential downsides to New Zealand from entering such an agreement.

"I therefore urge you, as the responsible leader of a responsible Government, to halt the current discussions with Hong Kong and promote an open, balanced, properly resourced public consultation process on the costs and benefits of this and other agreements which are designed to promote and embed free trade and unrestricted investment in New Zealand.

Yours sincerely,

Professor Jane Kelsey

cc. Hon Jim Anderton, Leader of the Alliance".

Helen Clark replied on 19 June with the official line that "the Government is interested in receiving the views of all New Zealanders who wish to have their say on the proposed Agreement, not just the views of those currently trading with Hong Kong as you suggest", but not answering the main point – that a broader debate is needed. The Prime Minister stated that, while "careful note will be taken of the views expressed by Dr Bill Rosenberg of ARENA in his booklet ‘Globalisation by Stealth’, in general terms Dr Rosenberg paints worst case scenarios especially in the area of investment. After nearly six years of the bilateral HK/NZ Investment Promotion and Protection Agreement, the sorts of major investor/State disputes he depicts have not materialised and in my view are unlikely." Obviously no need to give a reason why.

But the crunch: "Be that as it may, that is not a reason for declining to consider a CEP with Hong Kong across all areas of bilateral trade and economic activity". So the negotiations will continue regardless. In fact, "a unanimity of viewpoint across all sections of our community is unlikely to be achievable and indeed, it is unrealistic to believe that such would be possible". But she would reject any suggestion that people are being prevented from having their views considered by the Government (not that anyone suggested they were).

Jane Kelsey replied on 27 June:

"Dear Prime Minister,

I have received your letter of 19 June in response to mine of 25 May regarding the proposed Hong Kong free trade and investment agreement. Your response misses the central point of my letter and the reason for sending it to you as Prime Minister, rather than to the Ministry of Foreign Affairs and Trade.

"The ‘consultation’ being conducted by the Ministry is premised on the negotiation of an agreement to liberalise trade and investment further. It seeks views, primarily from exporters, about what should be further liberalised. While it is open to others to make their views known, these will clearly only be considered if they fall within the pre-determined parameters. That is obvious from the consultation documents themselves, and has been confirmed by officials at various meetings where the agreement has been discussed.

"When this limitation has been raised with officials in the past, they have said (quite correctly) that they have no mandate to conduct a broad based debate on the merits or otherwise of such agreements. Nor is it their responsibility to consider their domestic policy implications and downsides. Their instructions are to promote export opportunities through further liberalisation. Promoting a broader debate is the responsibility of the government. I had hoped that the Rosenberg report and my submission on Singapore would help you grasp the breadth and seriousness of the issues this raises, and the need for such a debate.

"These concerns are not remote or peripheral. Responsible government should seek to avoid problems before they arise, rather than look for ways to escape from unacceptable obligations after the problems have emerged. You have discovered this yourself in relation to the local content broadcast quotas. A sleeping problem with a trade in services agreement surfaced five years after it was signed and confronted your Government with a dilemma - its perfectly sound policy was considered illegal under an international agreement which your Party did not negotiate.

"Experience with the North America Free Trade Agreement (NAFTA) indicates that the growing numbers of controversial cases that have emerged in recent years there were never contemplated at the time the agreement was signed. Within the past year the Canadian Prime Minister has expressed a desire to renegotiate the Chapter 11 provisions*, but his proposal has been rebuffed. Surely we should learn from such experiences.

"Please be very clear that I will not participate in any cosmetic ‘consultation’ exercise conducted by MFAT when they have neither the intention nor the mandate to consider what I have to say. My presence at the recent CTU meeting with MFAT was as the official representative of the Association of University Staff on the CTU International Committee, not in my academic or personal capacity. Indeed, I have been extremely annoyed to learn that officials from MFAT and the Deputy Prime Minister’s Office have claimed that I am among those whom the Ministry has consulted and I expect that to stop.

"I am appealing to you again as the leader of the Government to initiate a full, open and informed debate on trade and investment liberalisation, and on both the risks and benefits of current and proposed agreements, before any further negotiations are entered into". * Chapter 11 of NAFTA gives corporations the right to claim compensation for loss of the value of their investment, or loss of profitability, as a result of government action. It means that any changes in environmental regulations by central or local government which reduces the profitability of an enterprise could result in awards of compensation and perhaps reversal of a change in law or regulation.


The Deal’s Not Done

This deal has roused considerably wider opposition than the Singapore counterpart. The negotiations will be difficult. Short negotiations will indicate a sell-out. Long negotiations may well bog down. Opposition has time to build, and deserves to. The debate has to focus on the real issue: the economic, social and environmental development of Aotearoa, and what that implies about our trade and investment relationships with the rest of the world. Instead, trade and foreign investment are driving our development.

ARENA Submission On MFAT Discussion Paper

1. General

As concluded in the enclosed report, we oppose the negotiation of a Closer Economic Partnership (CEP) with Hong Kong. If there are mutual benefits to be gained from closer relationships with Hong Kong, those should be properly identified, analysed and can be addressed by specialised agreements or other arrangements. The following comments should be read in this light as either substantiation for this position, or palliative if the agreement should be concluded.

The "Preambular Principles" of the Agreement (Annex A) reflect views that are increasingly being discarded in the light of widening income and wealth gaps within societies and between countries, the recurring financial crises, and studies of successful development (most of which have been based on some form of protection, and investment and currency controls). They are at odds with the present Government’s position domestically that the free market cannot be left to determine the nation’s priorities. "Market forces let loose on New Zealand in our recent past did lead to inequality deepening at a faster rate in our country than almost anywhere else in the western world," said Helen Clark in a recent speech (3/4/01, "Achieving Equality in NZ – St Andrew’s on The Terrace Lecture Series").

Yet the Principles include for example:

"Conscious that open, transparent and competitive markets are the key drivers of economic efficiency, innovation, wealth creation and consumer welfare;"


"Mindful that liberalised trade in goods and services will assist the expansion of trade and investment flows, raise the standard of living and create new employment opportunities and improved conditions in their respective economies".

Whether or not the increasing liberalisation of the past two decades has in fact led to net social, environmental and economic benefits to New Zealanders is a matter for inquiry, research and wide consultation rather than basic assumption as the Preamble implies. We submit that such an inquiry should be held before negotiations proceed, given the lack of prima facie evidence to support that proposition.

Though we welcome recognition of:

"their right to regulate, and to introduce new regulations on the supply of services and investment in order to meet government policy objectives of the two economies"

it is at odds with the rest of the stated agenda, and with the pressure to progressively increase liberalisation embodied in the model Singapore CEP such as in services (Article 20):

"As part of the reviews of this Agreement provided for in Article 68, the Parties undertake to review their schedules of commitments at least every two years, but earlier if so agreed, and progressively to expand these initial commitments as well as expand market access and/or national treatment between them in accordance with the Asia Pacific Economic Cooperation (APEC) objective of free and open trade in services by 2010".

and other Preambular Principles such as

"Recognising the importance of ongoing liberalisation of trade in goods and services at the multilateral level"

which imply ongoing reduction in regulation.

In many places in the Discussion Paper, a benefit of a CEP is claimed to be that it would be "taking an important step to reinforce linkages to North Asia and to raise our profile as a business partner within the region" (Summary, p7). Yet other lower cost ways (taking costs in the widest sense including economic, social, environmental and sovereignty considerations) of raising New Zealand’s profile are nowhere discussed. These could include conventional but increased marketing, negotiation of specialised agreements where mutual benefits exist (such as in mutual recognition of qualifications or reducing compliance costs), and cultural exchanges. Because they can be purpose-designed and targeted, such methods are likely to be longer lasting, less intrusive and more effective than a complex, obscure, high-risk, trade and investment agreement.

In several places the Paper addresses requests for comments to exporters, importers and investors. Indeed, at the outset (p5) the Paper states that:

"In order for a CEP with Hong Kong to best serve the needs of New Zealanders, it is important that negotiators have detailed information on the needs and interests of those who are currently trading with Hong Kong. Requests for feedback are made throughout the Discussion Paper".

While acknowledging the right of these sectors to be consulted, it seems no lessons have been learned from the international debate on "globalisation": that these issues far transcend those with direct commercial interests. We trust this does not imply that MFAT will continue its approach in previous negotiations in "consulting" only with those sectors or taking note only of their views.

Finally, as matter of economic development, we are concerned at the attitudes implied in the statement (p15)

"Hong Kong and New Zealand have very different trade profiles. While New Zealand’s major goods exports are primarily agriculture-based, Hong Kong’s are almost entirely based on manufactured products. Hong Kong and New Zealand therefore have largely complementary economies, with a CEP agreement giving each country an opportunity to increase trade in area where it holds a competitive advantage".

If this implies (as it appears) that this agreement is designed to reinforce current specialisation – New Zealand in agriculture, Hong Kong in manufactured products – then it undermines New Zealand’s economic development. While New Zealand must still rely on agriculture, it must also develop rapidly in new areas which will have a substantial added value focus, which inevitably includes manufacturing in the widest sense. As the Prime Minister told Parliament on 13 February 2001:

"Critical to our future is the modernisation and transformation of our economy. For too long New Zealand has been trying to sustain first world living standards on the back of Third World exports…"

She advocated "embracing innovation and technology in everything we do. That way we bring the old economy of commodity-based production into the new economy too".

The Discussion Paper’s statement emphasises one of the problems of relying on free trade: it may lead to increased sales in competitive sectors, but reinforces past patterns of production rather than encouraging new, more productive, industries.

2. Investment

The statement is made in the Executive Summary (p7) that a CEP "would also aim to attract increased flows of productive new investment from Hong Kong to New Zealand industries to assist the Government’s economic development priorities". A similar statement is made in Chapter Six: Investment (p33). Yet no analysis is made of what type of investment Hong Kong has to offer or has made in New Zealand in the recent past, nor is any indication given as to how a CEP would affect that. My analysis provides evidence (which backs up international evidence) that most investment from Hong Kong itself is not in the areas New Zealand needs for the Government’s economic development priorities (to the extent that they are clear). To the extent that desirable investment does comes via Hong Kong, it is mostly from third countries and redirected through Hong Kong for tax minimisation and similar purposes. The Discussion Paper provides no evidence or discussion of why such investment would not continue without a CEP, and why it is desirable for it to be directed through Hong Kong.

Beyond singling out "productive new investment" (which is undefined), the Paper appears to make the assumption that all foreign investment is of benefit to New Zealand. There is no analysis of the effects of foreign investment on New Zealand in the past, or of Hong Kong investment in particular. That would seem to be a fundamental for an "initial analysis" which this Paper claims to be. For example, there is evidence of large-scale short-term Hong Kong investment in New Zealand, and of little (or negative) reinvestment of income from the investment. Is this desirable? What would the effect be on our overseas debt and our chronic deficit in investment income? What is the significance of the huge differences between Hong Kong Census and Statistics Department statistics and Statistics New Zealand statistics in this area?

The Investment Promotion and Protection Agreement between New Zealand and Hong Kong is mentioned, but no analysis of the dangers it presents, nor of how a CEP would interact with it, are presented. What are the potential effects of its expropriation provisions and disputes procedures on central and local governments’ social, environmental and economic programmes? What constraints do the national treatment provisions in both the IPPA and CEP have on economic and regional development initiatives? Is there any evidence that the IPPA or a CEP will have any measurable effect on attracting foreign investment, if that is desirable? "The presence or absence of an investment agreement was a very insignificant factor determining investment decisions of foreign investors" a report on an United Nations Conference on Trade and Development (UNCTAD) meeting concludes for example (see http://www.twnside.org.sg/title/bil-cn.htm). So are the costs worth the gain?

Finally, the chapter on investment requests information only from "businesses and investors on possible barriers to two way investment flows between New Zealand and Hong Kong". Yet the implications of investment flows are society-wide, barriers may be of benefit (for which there is growing international support) as well as of concern, and are not the only aspect of investment that require consultation and deep consideration.

It would be shocking if the Government was proceeding with negotiating this far-reaching agreement based on a complete absence of analysis in this area.

3. Goods Trade

On the effects on New Zealand industry of tariff elimination, the Discussion Paper says only that "A CEP would have implications for New Zealand’s protected industries, including the textiles, clothing, and footwear (TCF) sectors". Yet there is no analysis of how zero tariffs would affect these sectors, even if strict enforcement of rules of origin were possible (which people knowledgeable in the area doubt). How much of the New Zealand industry would be put out of business? How many jobs would it affect? What pressure would it place on wages and working conditions in the remaining industry, and on the viability of high-value TCF production if the skill base is badly eroded? What would need to be done within New Zealand to replace that industry, given the Government’s recognition that the free market will not automatically provide replacements? What effect would it have on provincial communities for which TCF factories are often the sole or main employer? What are the wider costs – tax losses from unemployment and bankrupt firms, and increases in government expenditure from welfare payments; downstream effects on the suppliers of materials and distributors of those firms products; the effect on the current account deficit; and so on?

All that we are given is a bland statement in the Summary that: "Apart from the implications of tariff elimination for protected sectors, the adjustment costs involved for New Zealand, as with the NZ/Singapore CEP Agreement, would appear to be minimal" (p9). Yet those implications for the protected sectors are huge, and the nature of Hong Kong’s "domestic" TCF sector is quite different from Singapore’s.

A further issue is to question what New Zealand gains from eliminating its tariffs to Hong Kong. For good reason, Labour policy is to freeze remaining tariffs at their 2000 levels at least until 2005, or until "key trading partners match those levels". Alliance policy is to increase tariffs other than from Australia. It is stretching the word "key" to describe Hong Kong as a "key" trading partner, being about our 22nd largest source of imports. It is our seventh largest export destination, but some of that is re-exported to third countries. However, according to the Discussion Paper, now "the overall policy is that tariffs would be only removed before then on a reciprocal basis" (p21). Yet Hong Kong has no tariffs at all so there is no reciprocity possible.

The best that can be said is that "While it [Hong Kong] currently grants de facto open access to its market for New Zealand exports, there is no legal obligation on it to maintain completely open access for ‘unbound’ items on a permanent basis" (p22).

In other words our only reciprocal gain is that:

  • Hong Kong might one day completely turn around its long-held policy of a free port, its very reason for existence, and reimpose tariffs on industrial goods (bearing in mind our current interest is mainly in agricultural based exports which would even then remain tariff free); and
  • New Zealand would be exempted from those raised tariffs if for some extraordinary reason Hong Kong (or China) did not insist on renegotiating the CEP with its inconsequential "partner", New Zealand, when it was willing to face the inevitable cries of outrage and derision from major trading economies in the rest of the world.

That this can be considered a matching benefit invites incredulity. It is simply unilateral tariff reduction.

If the benefit is from reduced prices of imports (because of tariff reductions) then we are simply back to the rejected policies of the previous Government – one that does not consider the social and economic costs of the destruction of industries and jobs, and one that assumes that the reduced prices do in fact flow through to the consumer.

Perhaps the gain comes from benefits from other parts of such an agreement. If so, the Discussion Paper’s analysis should have demonstrated that. As our other comments indicate, the opposite is the case: no benefits have been demonstrated, and only a few claimed, but without evidence.

On rules of origin, we reiterate that we share the real concerns of people with experience in both the region and the relevant sectors that any rules of origin will be almost impossible to enforce. On top of that, as my report describes, the nature of Hong Kong "domestic" production is that it is highly internationalised. Even if rules of origin were adhered to, there is still considerable room for Hong Kong traders and manufacturers to carry out minimal manufacturing in Hong Kong and use the zero tariffs to claim their margin and undercut local production. Many TCF manufacturers in New Zealand are permanently on the edge of viability; it will not take a large drop in the price of imports to put them out of business.

This is not only a question of protected domestic industries. High-end clothing manufacturers have demonstrated export potential, yet they depend on a critical mass in the domestic industry for skilled staff and other benefits of scale. Devastation of the domestic industry may well force the exporters to go out of business or leave New Zealand.

Again, the request for comment on these matters is only addressed to "importers, exporters and local manufacturers on rules of origin issues in relation to bilateral trade. We are also interested in receiving information on any difficulties relating to the above that you may have experienced in importing from or exporting to Hong Kong" (p5). Surely workers, unions, local governments and affected communities (among others) also have experiences and viewpoints to contribute to this discussion, and not only on rules of origin?

4. Services

As with the rest of the Discussion Paper, there is minimal consideration given to the negative effects within New Zealand of further opening of our service sectors – and particularly our public services – to overseas competition. Concerns for increasing commercialisation of tertiary education have frequently been stated but are not addressed. There are parallel concerns in health, environmental services (such as waste, water, and parks maintenance), and many others. There is no analysis of the costs and benefits (in the widest sense) of our previous experiences in overseas ownership and commercialisation of our services.

While the Discussion Paper sees education exports as potentially benefiting from a CEP, it is not clear how. New Zealand already has many Hong Kong students studying here, and a CEP on the Singapore model would make no difference to that; Hong Kong (despite a lack of General Agreement on Trade in Services – GATS - commitments) is entirely open to New Zealand institutions setting up there – and as the Paper reveals has in fact invited that. Yet even if the CEP would assist that (how it would is not obvious) the Paper does not address the feasibility of undercapitalised New Zealand institutions setting up in the exceptionally expensive Hong Kong environment, undoubtedly against strong competition from Australia, Canada, the USA, and the UK, among others. It also raises concerns that GATS commitments in education will be extended through this agreement, despite the Government’s public commitment to a "nation-building" role for education.

Similar comments apply to Tourism and Environmental Services as described in the Paper. There are in fact no practical regulatory barriers to New Zealand entry to Hong Kong in these markets; yet the concerns that would be raised by the entry to New Zealand of corporations with a real or paper presence in Hong Kong are not addressed.

As the Paper concedes, "New Zealand’s services market is already open and largely deregulated. Under the WTO our commitments on market access and national treatment are more extensive than Hong Kong’s". Given that, New Zealanders need to know what concessions will be demanded by Hong Kong for apparently skimpy gains to New Zealand. How much more of our already exposed public services will need to be opened? What will be the costs and problems raised for the communities affected?

If there are mutual benefits to be gained from bilateral agreements in the areas of (for example) air transport and mutual recognition of qualifications, the Paper does not canvas the alternative of seeking specialised agreements in those areas, rather than insisting on a full free trade and investment agreement as proposed. That is not to say that reaching such agreements would be problem-free (they would raise a number of concerns) but they would substantially reduce the risks and complexity of the proposed CEP.

Again, as with trade, since in practice Hong Kong is almost completely open to services, the potential practical gains from a CEP are negligible: we can gain only tenuous assurances for an unlikely eventuality of the market being closed at some future date.

And again, we question why the request for comments on this chapter (Five) is addressed only to service suppliers, when all New Zealanders are likely to be affected by further opening of our social and environmental services.

5. Other Issues

In competition policy, it seems most unlikely that we could move Hong Kong on its competition policies by ourselves (should that be desirable), given that changes would affect all countries with relationships with Hong Kong – most countries in the world. In any case, as the Paper acknowledges, "They [monopolies] do not, however, appear to operate in areas in which New Zealand has a direct interest".

The implications of the different tax regimes of the two countries are not spelled out. Overseas corporations frequently have a presence in Hong Kong for tax reasons, and if a CEP does (as claimed) increase Hong Kong’s profile in New Zealand, there is a risk that more New Zealand companies will use it for tax avoidance and other jurisdictional purposes.

The standard exceptions under GATT Article XX are proving insufficient to ensure environmental, health and social concerns are primary over the economic ones of trade and investment. Trade and investment arrangements such as this should be subject to international agreements in the areas of labour, environment, human rights and social standards.

While the Treaty of Waitangi clause raised controversy in the Singapore CEP, it remains inadequate for a number of reasons. In stark contrast to the investor-State disputes provisions of the IPPA and Singapore CEP, Maori have no standing to enforce the provision themselves. It leaves room for Hong Kong to challenge actions which it considers are "arbitrary or unjustified discrimination against [Hong Kong traders and investors etc] or as a disguised restriction on trade in goods and services or investment". The destruction of jobs in the TCF industries by the CEP’s removal of tariffs is likely to particularly affect Maori workers in the TCF industries. There is already Maori concern about the effect of the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement on native plants and animals and their collective "intellectual property". This will be exacerbated by including it in a further agreement, especially that there is no recognition of any right to exercise tino rangatiratanga in the process of making international treaties.

As with the Singapore CEP, we remain concerned about any proposals to relax safeguards and controls on dumping, which may well be exacerbated by the elimination of tariffs. Information is also needed on Hong Kong’s standards in biosecurity, labelling, food standards, etc in order to allay concerns that reduction of non-tariff barriers will undermine our ability to maintain and raise our standards.

6. Labour And Environmental Standards

We have noted above our preference for such standards to be by the primacy of labour, human rights, and environmental international organisations and agreements over trade and investment arrangements. In addition the former need strengthening in most cases. The application of a labour clause to the Hong Kong agreement would be futile given the extensive degree to which production in Hong Kong has been internationalised. It is the nature of internationalised production, bargaining down wages and labour conditions, which is the primary problem, rather than the particular conditions in Hong Kong – even assuming the clause would have any appreciable affect on Hong Kong conditions.



The following letter appeared in the Listener, 9 June 2001.

"Jim Sutton’s defence of the Singapore free trade and investment agreement (letter May 26 and in Matt Philp’s "Made in China", same issue) is a delightful piece of froth. It fits neatly alongside the superbly Orwellian terminology, "Closer Economic Partnership" coined for Singapore, and now Hong Kong. That was presumably because (as Jim told the corporate backers of free trade in March as they gathered to set up yet another business lobby group, the "Free Trade Network"): "I admit that I myself have some difficulties with the phrase ‘free trade’. It conjures up images of the law of the jungle". Just so.

His defence of the Singapore "law of the jungle" agreement is that Customs Service figures for January-March show imports from Singapore rising 11% on the same period in 2000, and exports rose by 27%. Hanging on to onto his credibility (but not his argument) by his fingernails he allows that "it is admittedly early days" to reach any conclusions.

Oh dear. Statistics New Zealand’s figures for the same period for Singapore-New Zealand trade show a very different picture: imports up by 20% (is that something to be proud of?) and exports – yes – down by 11% on the same period last year. Worse, exports were down by 44% for March alone.

In fact the greatest increases in our exports in the period were to China (42%) and Canada (92%), which are noticeable for their paucity of free trade agreements with New Zealand (China doesn’t even have the WTO). The greatest increases in our imports were from oil exporters United Arab Emirates (a whopping 88%) and Oman (83%). Which reminds me – the Singapore government’s release on the success of the agreement did mention that the rise in its exports to New Zealand was largely due to petrochemicals no longer having a 5% tariff. The oil companies aren’t simply redirecting production through Singapore to avoid tariffs are they?

Singapore also mentioned that most of the increase in our exports to them was in dairy products. Unfortunately the rise in exports to Singapore didn’t seem to match the general rise (Statistics New Zealand only has the three months to February available) of 51% in milk powder, butter and cheese.

But of course it is early days, isn’t it Jim. We shouldn’t judge an agreement by just its first three months, should we?".

Bill Rosenberg


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