The Closer Economic Partnership Arrangement (CEPA) and its impacts on the export efficiency of Hong Kong and Macao

Abstract

The Closer Economic Partnership Arrangement (CEPA) is a bilateral preferential agreement signed among China, Hong Kong, and Macao which opens up the China market by providing zero tariff after accession. This paper sheds light to the impacts of the CEPA on merchandise trade with an in-depth analysis on export efficiency. Despite that merchandise trade has already been fully liberalized, the estimation results indicate that the efficiency of exports to China has been on the decline since 2000. This implies that the actual value of exports to China has departed from its full potential, and confirms our suspicions on the incapability of the CEPA to boost the exports of Hong Kong and Macao to China. There is also no evidence to support that the CEPA has successfully attracted foreign investment to Hong Kong and Macao for tariff free exports to China.

Keywords:

• Closer Economic Partnership Arrangement
• gravity model
• stochastic frontier approach
• trade efficiency

Notes

1. China FTA Network: http://fta.mofcom.gov.cn/english/fta_qianshu.shtml.

2. Please refer to the Closer Economic Partnership Arrangement (CEPA) of Hong Kong. The Hong Kong SAR Government website. https://www.tid.gov.hk/english/cepa/legaltext/cepa_legaltext.html and the Closer Economic Partnership Arrangement (CEPA) of Macao. The Macao SAR Government website: http://www.cepa.gov.mo/cepaweb/front/eng/itemI_1_1.htm.

3. Please refer to the Closer Economic Partnership Arrangement (CEPA) of Hong Kong. The Hong Kong SAR Government website: https://www.tid.gov.hk/english/cepa/legaltext/cepa_legaltext.html and the Closer Economic Partnership Arrangement (CEPA) of Macao. The Macao SAR Government websitehttp://www.cepa.gov.mo/cepaweb/front/eng/itemI_1_2.htm.

4. Please refer to the Closer Economic Partnership Arrangement (CEPA) of Macao. The Macao SAR Government website : http://www.cepa.gov.mo/cepaweb/front/eng/itemI_1_3.htm.

5. Hong Kong: The Facts, September 2014, 2.

6. Please refer to the Closer Economic Partnership Arrangement (CEPA) of Hong Kong. The Hong Kong SAR Government website: https://www.tid.gov.hk/english/cepa/legaltext/cepa_legaltext.html.

7. Please refer to the Closer Economic Partnership Arrangement (CEPA) of Hong Kong. The Macao SAR Government website http://www.cepa.gov.mo/cepaweb/front/eng/itemI_1_4.htm.

8. Press Release of Hong Kong SAR Government ‘Happy economic returns after 10 years of CEPA.’

9. Please refer to Statistics and Census Service of Macao SAR Government’s website: CEPA in figures: http://www.economia.gov.mo/en_US/web/public/pg_eetr_cepa_s?_refresh=true.

10. Trade intensity index (T_ij) is the share of country i’s exports to country j (X_ij/X_it) relative to the share of world exports to country j (X_wj/X_wt) written as T_ij = (X_ij/X_it)/(X_wj/X_wt). T_ij> 1 indicates a bilateral trade flow that is significant, given the partner country’s importance in world trade and vice-versa.

11. It is the simple average of bilateral trade intensity index with Germany, France, Italy and the U.K.

12. Studies on One Country Two Systems (in Chinese) has published a series of qualitative studies to assess the impacts of CEPA (i.e. Dong (2010) and Kwok (2010)) and most of them have given optimum but ambiguous projections on the impacts of CEPA to Macao. For Hong Kong, the Hong Kong SAR Government has reported a series of contributes from CEPA in its press release “Happy Economic Returns after 10 Years of CEPA”.

13. Similar projection was made in Shaker and Seewald (2004) on Hong Kong. It has stated that after CEPA, there is a chance for Hong Kong to attract investment for manufacturing productions which target the China market.

14. Please see Kang and Fratianni (2006), 6.

15. As explained in Drysdale, Huang, and Kalirajan (2012), it is composed by Fraser Institute in Vancouver ranging from 0 (no freedom) to 10 (complete freedom).

16. Qualitative assessment to divide trade partners into groups by their GDP per capita for the measurement of group average trade efficiency was conducted. The result suggested that efficiency was income dependent as well as time dependent due to the implementation of various regional trade agreements.

17. Please see Kang and Fratianni (2006), 3.

18. The full specification of TE_ij can be found in Battese and Coelli (1995).

19. See note 16.

20. Macao has a direct currency peg with Hong Kong at 1HKD=1.03MOP since 1983. Hong Kong, meanwhile, introduced its currency peg with USD at 1USD = 7.8HKD in 1983. Consequently Macao has an indirect currency peg with USD.

21. The manufacturing industry median income is USD1,833 per month in May–June 2014 for Hong Kong according to the Census and Statistics Department which is 4.6 times the salary level in China at around USD400 per month. (Bloomberg: http://go.bloomberg.com/market-now/2013/03/27/if-u-s-wages-rose-as-fast-as-chinas-factories-would-pay-50-an-hour/, 27 March 2013).

22. The rental cost for industrial unit is around USD15.4 per square meter per month. (Haribest Property: http://www.oneday.com.hk/home/Industrial/en/ 25 August 2015) and it is around USD2.4 in the Pearl River Delta Region (http://www.jinshan888.com/a/xinwenzixun/xingyedongtai/96.html), the difference is around 6.42 times.