TNAG-2242-FCO40-3223-Most-favoured-nation-status-for-China-impact-on-Hong-Kong-1991 — Page 28

CODE 18-77

Mr T Furness

Hong Kong Department

Reference.

CONFIDENTIAL

M. Stone

th Pant: 13 MAY 99:

MMF393/9151

孟

MFN STATUS FOR CHINA

Mauer 2/5

1. In response to your query any proposal to effectively shield Hong Kong will have the effect of creating a substantial loophole in the regulations. The most effective way of screening Hong Kong from the removal of US MFN status for China would be to exempt Chinese exports routed via Hong Kong to the United States.

2. For the United States this would be a very substantial watering down of removal of MFN status as an estimated 69% of Chinese exports to the US were re-exported via Hong Kong in 1990. Annex A summarises the relevant trade flows for 1989. This shielding would protect the re-exports through Hong Kong of Chinese origin (value ($10.5bn, 1990) as well as the interests of Hong Kong investors in Guangdong exporting to the United States via Hong Kong. Of course any Chinese producer who chose to re-export via Hong Kong would also be shielded. It is likely that Hong Kong would actually gain from this type of protection as China would redirect exports to the United States via Hong Kong.

3.

Insofar as removal of MFN status is a protectionist act shielding Hong Kong will largely defeat the objective of trade reduction. On the assumption that re-exports through Hong Kong are unaltered with protection, 33% of other Chinese exports to the United States are rerouted through Hong Kong and the remainder of Chinese exports to the US are reduced by 40% as a result of higher tariffs (Hong Kong Government moderate assessment), total Chinese export loss is HK$9.6 bn or 8% of total exports to the United

States.

4. However if the US objectives are primarily non-economic eg human rights, MFN removal with Hong Kong protection could be a means of showing US disapproval.

5. Hong Kong protection could be used as leverage with the Chinese authorities if they are convinced that MFN removal is likely. It would reduce the adverse effects on China in addition to insulating Hong Kong.

C Lane

Economic Advisors

WH426b

270 2727

Alim

2 May 1991

A

CONFIDENTIAL