New ASEAN-Hong Kong FTA Takes Effect Amid Uncertainty

In June, trade and investment agreements between Hong Kong and several countries of the Association of Southeast Asian Nations (ASEAN) entered into force. The agreements, which came amid protests in Hong Kong and heightened U.S.-China competition, highlighted the ongoing economic interactions that continue to go on between Hong Kong and Southeast Asian states in spite of lingering challenges.

ASEAN, a 10-member regional grouping in Southeast Asia, and Hong Kong, a special administrative region (SAR) in China that is a separate economic entity, have long had an important and complex commercial relationship. In addition to the fact that Hong Kong has served as an important entrepot for trade between mainland China and ASEAN, the relationship is also significant on its own terms as well. Per official data, in 2018, ASEAN was Hong Kong’s second largest trading partner, while ASEAN as a regional grouping collectively constituted the sixth largest source of foreign direct investment into Hong Kong.

One manifestation of ties between Hong Kong and ASEAN was the negotiation of trade and investment agreements between the two sides. After multiple rounds of negotiations, what were officially termed as the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) and the ASEAN-Hong Kong, China Investment Agreement (AHKIA) were signed by the ASEAN economic ministers and Hong Kong’s secretary for commerce and economic development on November 12, 2017 in Pasay City as part of the Philippines’ chairmanship of ASEAN that year.

These agreements were noteworthy. For ASEAN, such agreements are difficult to negotiate, and, indeed, the AHKFTA is just the grouping’s sixth free trade agreement with external partners, after China, South Korea, Japan, India, and Australia-New Zealand. For Hong Kong, it has long recognized the need to negotiate these pacts, not only on its own terms but also because of the reality that the ASEAN-China FTA reached in 2010 excluded Hong Kong, with implications for the city’s role as a connector and hub in regional trading activity.

In June, these agreements came into force for Hong Kong and five select ASEAN member states that had completed their ratification processes – Laos, Myanmar, Singapore, Thailand, and Vietnam – with the other ASEAN member states (Brunei, Cambodia, Indonesia, Malaysia, and the Philippines) expected to complete their sides by the end of this year. The AHKFTA officially came into force on June 11, while the AHKIA officially came into force on June 17.

Reflecting on the significance of these developments, Edward Yau Tang-wah, Hong Kong’s secretary for commerce and economic development, told the South China Morning Post in an exclusive interview in May that the pact would provide an important alternative for Hong Kong companies beyond traditional markets such as the United States and the European Union. Meanwhile, ASEAN Secretary General Lim Jock Hoi said in an ASEAN Secretariat statement that the agreements signaled the commitment of ASEAN and Hong Kong to strengthen trade and investment linkages between them as well as their support for a “rules-based international trade system.”

While Lim and Yau were right to point to the significance of AHKFTA and AHKIA for both ASEAN and Hong Kong as well as for the relationship between them, the agreements are also being forged amid limitations and challenges. Indeed, the fact that the agreement is coming into effect for only half of ASEAN following 10 rounds of negotiations is no coincidence: It reveals the longstanding reality that some countries have found these pacts to be a much more difficult undertaking than others.

The differences in provisions for each of the Southeast Asian states is also testament to this divergence and variety. The extent of free trade varies across countries, with Singapore and Hong Kong having 100 percent of products with zero tariffs and custom duties effective immediately; Brunei, Malaysia, the Philippines, and Thailand will bring tariffs to zero for 85 percent of their products in 10 years, initially; Indonesia and Vietnam are doing so for 75 percent of their products in 10 years, initially; and Cambodia, Laos, and Myanmar are doing so for 65 percent of their products in 15 years.

Beyond economics, the geopolitical situation faced by ASEAN and Hong Kong is also characterized by significant uncertainty. Both are dealing with a contemporary setting characterized by rising great power competition, growing populism, and challenges to the rules-based international order that Lim referenced, which is creating issues for each of them. ASEAN has faced growing questions about whether it can sustain its relevance as an institution in addressing regional issues in the face of problems both within and without; meanwhile Hong Kong has been dealing with the growing stresses of the so-called “one country, two systems” model with a more assertive mainland China under President Xi Jinping.

The environment within which the ASEAN-Hong Kong agreements came into effect in mid-June spoke to this reality. Despite the importance of these pacts for ASEAN’s ties with Hong Kong, there was relatively little media coverage of them, with attention consumed more by domestic political and security events, be it the protests in Hong Kong or Southeast Asian reactions to a Chinese vessel colliding with a Philippine fishing boat, framed as the latest manifestation of Beijing’s maritime assertiveness in the South China Sea.

Of course, these challenges and limitations do not in and of themselves minimize the relevance and significance of the AHKFTA and the AHKIA. Indeed, to some degree, they reinforce the need for the development of relationships such as that between ASEAN and Hong Kong in the interest of diversification and supporting the rules-based international order that is under siege. Nonetheless, they do highlight the limitations and challenges inherent in these efforts irrespective of the opportunities that they afford for both sides.