The Free-trade Accord: Short-term Pain for Long-term Gain

Lau Nai-keung (Chinese People's Political Consultative Conference delegate)

(This article originally appeared in the June 19, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)

Lately, we have heard a lot of good things about the Closer Economic Partnership Arrangement (Cepa) between Hong Kong and the mainland. Chief Executive Tung Chee-hwa has confirmed that the central government has agreed to cut to zero tariffs on Hong Kong goods entering the mainland. Unrestricted travel to Hong Kong is set to be granted to mainlanders holding Guangdong identification cards.

Such favours will cost the mainland hundreds of millions of dollars a year in revenue from customs duties and will provide a huge boost to Hong Kong's tourism industry - a generous gift to a Hong Kong that is struggling to revive its flagging economy.

Before our hopes get too high, let me point out that in the long run, economic laws dictate that the free flow of resources will benefit both parties. In the short term, however, it will hasten the adjustment of price levels between Hong Kong and Guangdong. Most of us have friends and relatives in Guangdong, and they will be able to visit any time they wish. When they do, they will certainly help us with our chores. As is customary, we will give them money. Very soon, the 240,000 non-Chinese foreign domestic helpers will practically disappear. It may be difficult to prove that mainland visitors have turned to domestic work as a source of income. But no one will really care - except the foreign domestic helpers' unions - as long as Hong Kong does not lose jobs.

But this is the problem. We will lose jobs. Take the travel industry, for example. Incoming mainland tourists will be accompanied by mainland tour guides, dispensing with the relatively expensive services of Hong Kong guides. Mainland guides will also be able to freely enter Hong Kong and escort tourists across the border.

While such arrangements are perfectly legal and natural, illegal workers will become an ever more serious issue. In a few years, we will have to give up the special restrictions on unskilled labour from the mainland and issue work permits to them, just like workers from other parts of the world. By that time, the wage-price differential between Hong Kong and the mainland will have been levelled, for all practical purposes. Market forces will have completed their course, and Hong Kong may have regained its competitiveness.

In other words, Cepa will accelerate the process of wage and price adjustments. From the experience of the past six years, this could be painful in the extreme. Things will definitely get much worse before getting better. We will lose tens of thousands of jobs to mainlanders, causing inevitable hardship, with some families breaking up.

We might agree this is necessary. Hong Kong will regain its vitality, and following the upward spiral of the mainland, will ultimately become a super-Manhattan. On the other hand, we also need to consider the feelings of those who will have to bear the brunt of the economic transition.

To cut their cost of living, Hongkongers will be forced to live across the border. Hong Kong's internal market will suffer. Worst hit will be the retail and restaurant trade, as the whole city is quickly hollowed out. People will either live outside Hong Kong, or shop and eat outside Hong Kong. Only a small portion of this void can be filled by outside visitors.

Many people, and Mr Tung is one of them, still think it is possible to use the property market to shore up the economy. With fewer people living in Hong Kong, there will be no way to stabilise the property market, even at its current level, much less push it higher.

Hong Kong will end up as a residence for the very rich - those who can afford the high prices and are not affected by deflation - and the very poor, who cannot afford to move. Meanwhile, Hong Kong's middle class will be located in Shenzhen.