I. COMMERCIAL OVERVIEW A. Overview of Import Market Brief Import Figures Hong Kong ranks eighth among the world's top trading economies. Imports amounted to US$139 billion in 1993, up 13 percent compared to 1992. China was the largest supplier, with 37 percent of the total, followed by Japan (17 percent), Taiwan (9 percent) and the U.S. (7 percent). On a per capita basis, Hong Kong spent an average of almost US$1,845 in 1993 on American imports. Hong Kong as a Re-export Center Hong Kong has increasingly become a transit and shipping point for goods manufactured or consumed in rapidly growing Southern China. Goods made in foreign countries (China being the largest supplier), which officially enter Hong Kong's customs territory for shipment onward to other countries are classified as re-exports. The structural shift in Hong Kong's exports -- from domestic exports to re-exports -- has continued unabated as Hong Kong-owned manufacturing has shifted to southern China. In 1993, re-exports grew by 20 percent over 1992, and accounted for 79 percent of Hong Kong's total exports, up from about 25 percent in 1978. Domestic exports in 1993 declined by 4 percent over the year-earlier figure. China, in addition to being the most important supplier for goods re- exported through Hong Kong to western countries (56 percent of the total, or USD31 billion), is also the territory's main re-export destination, accounting for 35 percent (vice 30) of Hong Kong's total re-exports in 1993. The United States was second, accounting for 21 percent. B. Brief Synopsis of Commercial Environment Hong Kong's economy registered real GDP growth of 5.9 percent in 1993, based on revised HKG estimates released in August 1994. The unemployment rate for the year approximated 2% while the rate of inflation dipped to 8.5 percent. Despite its persistently high inflation, Hong Kong has remained competitive in tradeable goods. According to the World Competitiveness Report, Hong Kong was ranked as having the world's fourth most competitive economy, behind the U.S., Singapore and Japan. Geographic proximity, cultural and linguistic ties, particularly with prosperous Guangdong province, excellent infrastructure and a well developed services sector have accelerated Hong Kong's economic integration with China. Chinese companies are utilizing Hong Kong's highly developed financial, transportation and marketing capabilities while Hong Kong's manufacturers continue to shift production to lower-cost facilities in south China. Manufacturing now accounts for only about 14 percent of Hong Kong's GDP, employing about 21 percent of the territory's private work force. Apparel making remains the largest manufacturing industry. Services account for 75 percent of GDP and employ two-thirds of the work force. Tourism is the largest foreign exchange earner next to textiles and apparel. Having an economy heavily dependent on international commerce, Hong Kong has consistently supported an open multilateral trading system. The HKG was a firm proponent of the recent Uruguay Round of trade talks in the GATT and looks forward to participating in the new World Trade Organization. Hong Kong maintains no dumping laws, countervailing duty laws nor import quotas or tariffs. Hong Kong would like to see textile quotas lifted by major trading partners and supports more open trading in services. It has also pressed for a tightening of anti-dumping rules, which have been used by developed economies in recent years to impose duties on Hong Kong manufactured goods. The Hong Kong dollar is linked to the U.S. dollar at the rate of HKD7.8 = USD1. This link was established in 1983 to encourage stability and investor confidence in the run-up to Hong Kong's reversion to Chinese sovereignty in 1997. The Hong Kong Government remains firmly committed to ensuring currency stability through the linked rate as the cornerstone of its monetary policy. Under the linked rate, the exchange value of the Hong Kong Dollar is influenced primarily by the movement of the U.S. dollar against other major currencies. The Hong Kong dollar is freely convertible and there are no exchange controls. C. Host Country Business Attitudes Toward the U.S. Hong Kong is a very hospitable place for U.S. business. Nearly 30,000 Americans currently live in the territory and over 900 U.S. companies belong to the American Chamber of Commerce in Hong Kong. Americans encounter few, if any cultural problems when conducting business in Hong Kong. The vast majority of business contacts will have very positive feelings about the U.S. and many will have family living in America. Large numbers of Hong Kong business executives are either U.S. educated or have their children educated in schools in the United States. In fact, American companies have been selling to Hong Kong and through Hong Kong to China at a brisk rate. US&FCS Hong Kong is receiving between 30-50 inquiries each day from Hong Kong companies wanting to buy American products. President Clinton's decision to delink China's most favored nation trade status from human rights will continue to have a positive impact on commercial activities between Hong Kong, China and the U.S. D. Major Business Opportunities Hong Kong's bright economic prospects, its open economy, focus on infrastructure development and its educated and sophisticated bilingual consumer population translate into outstanding opportunities for U.S. business to sell everything from high value food products to franchises to airport equipment. U.S. companies also have good opportunities to provide technical expertise, supplies and equipment to Hong Kong firms developing projects in China. Generally, the model for commercial activities between the United States, Hong Kong and China is as follows: Demand exists in China for various products and services. Much of this demand is for infrastructure, to support China's rapidly growing industry. Hong Kong developers, who are generally highly flexible through their diverse operations, have cash to support projects in China and the connections to make them happen, but often lack the technical expertise. The American partner thus provides technical expertise and equipment. Details are given in Section II. E. Major Roadblocks to Doing Business Hong Kong is one of the most open and competitive markets in the world. Government policies are rooted in an abiding belief in the private sector and small government. There are a minimum of market access barriers and complete freedom of capital movement. One barrier for new-to-market firms is the oligopolistic nature of Hong Kong business. Hong Kong's absence of any anti-trust law or enforcement agency has enabled large conglomerates to dominate certain sectors. These companies not only have broad commercial businesses and holdings, but can also integrate their industries. Many companies attempting to enter the market for the first time may find channels blocked by existing relationships. This system is not as clearly defined as in some other Asian countries, however, and can be more easily overcome. Loyalties are not particularly strong, and keen price competition is often enough to break through any unseen barriers. F. Nature of Local and Third-Country Competition Hong Kong has only 400 square miles of territory to support its six million people. With no natural resources, everything needed to support the people of Hong Kong must be imported. The industries which do exist here -- shoes, textiles and electronics -- are highly competitive in world markets. In addition to China, Japan and the United Kingdom provide the principal competition. Historically, UK firms have perhaps the closest and strongest ties to Hong Kong and they have received the largest share of the contracts awarded to date for the USD21 billion Chek Lap Kok Airport.