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possible to make an approximate estimate of the values of the respective items and the following broad results emerge. One-third of the imports into Hong Kong is of goods intended for retention in Hong Kong, coming from Chinese and non-Chinese countries in the proportions of one to three; and a tenth or less of the exports is of goods originating in Hong Kong (e.g., refined sugar, rubber shoes). Re-exports constitute two-thirds of the imports and nine-tenths of the exports. Of them some 10 per cent. consists of "Chinese coastal trade," 20 to 25 per cent. consists of non-Chinese entrepôt trade and the remainder, nearly 70 per cent. is made up of goods passing between China and the rest of the world via Hong Kong.
4. Perhaps the most interesting thing in these proportions is the comparative importance of the Chinese coastal trade and the non-Chinese entrepôt trade. It is common to speak of Hong Kong's trade as being almost wholly concerned with China, but the figures make it quite clear that such a part of it as is concerned with China alone is less important than that which is not concerned with China at all. The latter consists of such items as the trade in rice from Siam and Indo-China to Japan and the Philippines, the trade in wheat flour from North America to Siam, and the trade in Japanese manufactured articles to Indo-China, Siam, Malaya and the Netherlands East Indies.
5 A detailed analysis has not been possible, but so far as the figures indicate, the proportions do not seem to have varied substantially over the last five years, except that the purely non-Chinese trade appears to have decreased in relative importance, while the flow of goods into China has diminished more than the flow of goods out of China, which is characteristic of the general trade position in that country.
Probable Effects on Trade of a Customs Union.
6-(a) That part of Hong Kong's trade which is concerned with the external trade of China might be expected to be little affected, as it makes little difference whether such trade passes the Customs barrier between Hong Kong and China or between Hong Kong and the third country concerned. Probably some goods which are at present attracted to Hong Kong by its position as a free port and ultimately exported to China would no longer touch Hong Kong at all, but would go straight to their ultimate destination.
(b) Hong Kong's own imports, the next largest single item of trade, would presumably have to pay the Chinese rates of Customs duty. The reactions of this are further considered below.
(c) Hong Kong's own exports of manufactured goods to China would be substantially assisted, and there might, in fact, be a very considerable increase of manufacturing production in the Colony.
(d) The Chinese coastal trade would be assisted in so far as Chinese goods at present passing through Hong Kong lose their national status and have to pay duty again on re-entry into China. (In this connexion, however, see paragraph 13 below.)
(e) The non-Chinese entrepôt trade would be definitely hindered, although the damage might be mitigated if a part of the harbour could be set aside as a free port.
7. The economic advantages to be gained from a Customs union consist, therefore, in the benefits in respect of the Chinese coastal trade and Hong Kong's domestic manufactures. The first could probably be secured almost as fully without a Customs union by an agreement with the Chinese Government to allow Chinese goods to retain their national status when shipped via Hong Kong. The other is unlikely to be obtained by any special agreement without a Customs union, because such an agreement would arouse strong opposition by other foreign countries, particularly the Japanese, who could probably prevent it by the invocation of most-favoured-nation rights, and probably equally firm opposition from Chinese manufacturers in Shanghai and South China. But a full Customs union would arouse opposition from exactly the same quarters, and it is in fact improbable that a Customs union agreement could be concluded in face of such opposition.
8. On the other hand, there are two important disadvantages in a Customs union first, the loss of the Free Port status, which might involve great damage to the non-Chinese entrepôt trade; and, second, the inevitable increase in the cost of imported goods which must result from the application of the Chinese tariff to Hong Kong's own imports. It must be remembered that three-quarters of these imports come from foreign countries, and they consist largely of food-stuffs and necessaries none of which can be produced in Hong Kong. There must, therefore, be some increase in the cost of living. That might have various repercussions. It would do something to reduce Iong Kong's powers of competition with Shanghai in such matters as shipping repairs and port services generally, for which there is always keen competition. It would also reduce the competitive powers of Hong Kong's manufacturing industries, both in China and still more in foreign countries. by raising the cost of certain raw materials, and would thereby to some extent counteract the advantage referred to at the beginning of paragraph 7.
Other Implications of a Customs Union.
9. Politically, a Customs Union must mean some loss of sovereignty and must strengthen the tendency of Chinese politicians to assimilate the position of Hong Kong to that of a treaty port, and to look forward to an eventual time when Hong Kong as well as the treaty ports will revert to the control of China.
10. It has been assumed that purely administrative difficulties, although considerable, could, with goodwill, be surmounted; but an extremely difficult politico-financial problem would arise. On what basis would the revenue collected in Hong Kong be divided between the Colony and China? That might be theoretically capable of solution, but it is certain that the position would give rise to endless wrangling, as it is impossible to say precisely how much of Hong Kong's imports are intended for consumption in the Colony.
11. Moreover, it must be borne in mind that the Hong Kong dollar is a separate currency from the Chinese dollar, and is of a different value in relation to sterling. Although in recent months the two currencies have been kept in fairly stable relation to each other, difficulties might arise if this situation were no longer maintained.
The Alternative of a Customs Agreement.
12. On balance, therefore, it seems improbable that a full Customs union would be in the Colony's interests, and, even if it were thought to be desirable, there are grave doubts whether it could be effected. The two things Hong Kong wants from China are free entry for Hong Kong manufactured goods and increased facilities for the conduct of Chinese coastal trade through Hong Kong, The first is not likely to be conceded except at an extortionate price; the second might well be obtained as part of an agreement on the lines of the 1930 draft Customs Agreement discussed below.
Customs Agreement.
13. A draft Agreement was negotiated in 1929-30 whereby the Chinese Maritime Customs were to be enabled to operate in Hong Kong in collaboration with the Colonial Government's Imports and Exports Department, and to collect in Hong Kong the Chinese customs dues on goods destined for China. This draft Agreement failed to secure ratification only through the last-minute factious opposition on the part of representatives of the late régime in Canton. Rumour alleged this opposition to be due to personal interests in that régime in the smuggling trade, which the draft Agreement was designed to check.
14. In return the draft Agreement provided for the retention of Chinese national status as regards customs by goods shipped from one Treaty Port to another via Hong Kong. There is, in fact, an administrative order of the Chinese Maritime Customs already in operation on this subject, but it is uncertain
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