Proposal

This paper summarises submissions to date in response to the discussion paper released in April on a possible Closer Economic Partnership with Hong Kong, and highlights consistent themes to emerge from initial consultation meetings around the country.

Executive Summary

2. Of the substantive submissions received to date on the CEP discussion paper, 15 oppose the initiative, 15 support it, while 7 take a neutral stance, but highlight issues for particular attention. Business is broadly in favour of a CEP, while manufacturers in sensitive sectors that might lose tariff protection on competing Hong Kong products focus on the controls needed to prevent an influx of duty-free products from neighbouring countries. Unions also identify this as a challenge, but have reserved their position on the CEP overall. A number of submitters have indicated a wish to make further comment in light of actual progress in the negotiations. Submissions supporting the initiative have generally emphasised the CEP's role in boosting New Zealand's profile in Hong Kong for investment and tourism, securing continued access for goods exports and expanding opportunities for services exports throughout North Asia. Major issues raised to date include:-
   • the effect of tariff removal on imports from Hong Kong on New Zealand clothing, footwear and textiles manufacturing;

   • the perceived vulnerability of central and local government to compensation claims by Hong Kong investors if environmental safeguards are applied;

   • the possibility New Zealand might have to open 'sensitive' public services to competition from Hong Kong providers;

   • the scope and timeframe of the consultation process, and whether it will influence New Zealand's negotiating position.

Background

3. On 17 April, New Zealand and Hong Kong announced their decision to commence formal negotiations for a possible bilateral CEP. To coincide with that announcement, the Government released 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." A copy was also placed on the MFAT website. It invited submissions by May 25, a deadline since extended by several weeks. This report provides an overview of the comments received to date. A summary of the submissions is attached at Annex A. A compilation of the all submissions received to date is available from Cabinet Office.

4. In addition to the release of the discussion paper, officials have been conducting an extensive nationwide consultation process, involving business, unions, local government, NGOs, Maori and interested public. This consultation process will continue throughout the period of negotiation with Hong Kong and further periodic reports will be submitted to Cabinet.

Comment

5. Business is broadly in favour of a CEP, citing both specific opportunities in some sectors and a CEP's contribution towards building momentum for regional and global trade liberalisation. Retailers highlight the benefits to consumers of cheaper products from a major source of imports. Much of the support for a CEP is grounded on the perceived strategic gains of securing an economic beachhead in North Asia and stimulating momentum towards global trade liberalisation. The most significant increases in market returns are seen to be in professional services. Manufacturers in the tariff-protected clothing, footwear and textiles sectors identify the need for robust criteria for duty-free entry and policing of those criteria as crucial to their future. They are working constructively with officials on possible measures to achieve this. Unions have voiced a range of concerns but overall the CTU has reserved its position, and says the credibility of rules of origin and the treatment of labour standards alongside a CEP will influence their stance. Others, including the Green Party of Aotearoa New Zealand, and a number of prominent academics, researchers and university groups, have voiced outright or strong opposition. Concern has focused on the adjustment costs to factories and services that might face greater competition under a CEP, and on the perceived vulnerability of regulators to compensation claims by investors. Much of the opposition to the CEP has been a philosophical objection to further trade liberalisation without, it is claimed, substantial and obvious immediate reciprocal gains to the New Zealand economy.

6. Initial consultations have been held in the five main centres with a wide cross section of the public, including representatives from affected industries/parties (business, including the textiles, clothing and footwear industries, unions, Maori and concerned NGOs including environmental groups and education sector representatives). This - and the commitment to regular updates on the negotiations - has helped to elicit extensive practical input on finding solutions to some key issues, and has also been welcomed by most as a demonstration of openness and a sincere effort to keep stakeholders informed. This programme of consultations is continuing in step with the bilateral negotiations, and is making a material contribution to the development of New Zealand's negotiating position. Doubts have been expressed in some quarters about whether the consultations are a genuinely open process that could help shape an eventual CEP or even lead to its being abandoned, if the likely overall outcome were judged unfavourable to New Zealand.

Substantive Issues:

Rules of Origin

7. Several submissions queried the benefits of a CEP with an economy that already has zero tariffs. They maintained that New Zealand can only lose by opening the door to duty-free competition in sectors that are still protected by significant tariffs. The likely removal of remaining duties on imports from Hong Kong under a CEP is seen by some submitters as a breach of the Government's commitment to freeze tariffs until at least 2005 (the element of 'reciprocity' in tariff elimination is overlooked). In three sectors with remaining significant tariff protection, textiles, clothing and footwear (TCF), duty free entry for competing products from Hong Kong is seen to impinge on their continued viability and threaten jobs, particularly if robust rules of origin are not devised and enforced.

8. Both these sectors and commercial interests who favour further trade liberalisation with Hong Kong agree it will be crucial to devise a robust formula to ensure products claiming Hong Kong preference are genuinely of 'Hong Kong origin. They seek a very tight definition of the term to ensure Hong Kong doesn't become a channel of convenience for products from third countries - particularly China - to circumvent New Zealand tariffs. The submissions stress these rules must be practical, easy to understand and credible. They should not only reflect Hong Kong's unique relationship with China, but also should provide a template rules of origin regime that will be consistent with emerging global practice.

9. Key submissions suggest a mixture of New Zealand's minimum added value approach and Hong Kong's substantial transformation test should be considered. The result, some suggest, might include variable regimes for different aspects of TCF and/or recourse to the immediate, temporary suspension of duty-free entry of TCF items claiming Hong Kong preference if imports exceed a certain volume. Similarly on trade remedies, all submissions that mention anti-dumping action say recourse to this should be retained under a CEP. Some submissions also emphasise the importance of New Zealand's biosecurity regime. They say maintaining its integrity and adequately policing this and the rules of origin is likely to require extra resources.