TNAG-2469-FCO40-3593-Most-favoured-nation-status-for-China-Hong-Kong-interests-1992 — Page 236

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FROM: P F Ricketts

DATE: 4 November 1992 Go Sir J. Coles.

MFN TREATMENT FOR CHINA AND HONG KONG

Mars 09/2

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1. You asked for my comments on Mr Cooper's interesting minute to you of 28 October.

2.

CRA 15%

Hong Kong are going to need all the ingenuity we and they can muster if they are to minimise the damage to them from a US decision to withdraw MFN treatment from China. So fresh thinking is welcome. But having taken some advice from the experts in DTI on Mr Cooper's specific suggestion, I fear that it is a non-starter for the following reasons.

3. We should perhaps first distinguish between Hong Kong origin goods and Chinse origin goods exported via Hong Kong. The first category will be no problem. Hong Kong is a separate contracting party to the GATT, with its own MFN rights into the US market therefore safeguarded.

4.

The question therefore is how much needs to be done to Chinese goods passing through Hong Kong for them to count as Hong Kong origin goods under the GATT rules. Hong Kong regulations at present require that at least 15% value be added in Hong Kong. I do not have figures, but I suspect that the great bulk of Chinese goods passing through Hong Kong have less value added than that. In many cases, they are simply trans-shipped, with no value added in Hong Kong. If Hong Kong tried to pass off such goods as Hong Kong origin, they would be breaking GATT rules.

5. It must also be doubtful whether the US Congress would be prepared to design legislation which, for the sake of Hong Kong, contained a massive loop-hole allowing Chinese goods to continue to enter the US market simply by virtue of being trans-shipped through Hong Kong. That would vitiate the purpose of withdrawing MFN from China in the first place.

6.

Even if the US Congress were prepared to connive at such opportunities for diversion, it would also leave the US Administration open to lawsuits from US firms. Under US trade law, the US Government can be obliged to take up in the GATT suspected violations of GATT rules.

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