The long tradition of trade ties between the Chinese mainland and the Hong Kong Special Administrative Region (SAR) would be dramatically boosted with several revisions to the current stipulations in the Closer Economic Partnership Arrangement (CEPA).

China's only portal to the world market before its opening-up, Hong Kong has a unique position in China's foreign trade development. After China launched its economic reform in the late 1970s, a considerable portion of commodities were exported to Hong Kong, then re-exported to the US and Europe.

As more ports on the mainland developed, direct trade between China and other countries increased. As a result, Hong Kong is no longer the mainland's biggest trading partner.

However, Hong Kong is still seeing substantial growth in trade volume with the mainland. The mainland customs statistics indicate that trade with Hong Kong rocketed to $166.2 billion in 2006, from $56 billion in 2001, a 197 percent rise.

Hong Kong SAR customs recorded that imports from the mainland reached HK$1,193 billion ($152.7 billion) in 2006, up from HK$682 billion ($87.3 billion) in 2001. Among all the goods re-exported from Hong Kong, 48 percent were from the mainland in 2006 with a total value of HK$1,115.9 billion ($142.8 billion).

The ties between the mainland and Hong Kong are intensifying with the assistance of CEPA. The Closer Economic Partnership Arrangement was signed in 2003 to promote free trade between a sovereign country and a free port within it. For the foreseeable future, this trade should maintain or even increase its momentum.

However, while both sides are enjoying huge benefits from the trade ties, potential problems are brewing. As CEPA is, to some degree, regarded as a yardstick for China's free trade arrangements with other partners, there are even more reasons for the authorities to identify the potential problems and work out solutions.

Illegal trade is the issue of most concern in possible threats to sound trade between Hong Kong and the mainland.

Under the stipulations of CEPA, Hong Kong and the mainland have formed a free trade area. This makes it both more convenient and profitable to use Hong Kong as a base to traffic illegal commodities into the mainland.

Theoretically, it is unlikely that commodities manufactured in Hong Kong would hurt the mainland market because of the relatively high manufacturing costs in Hong Kong.

However, the mainland has promised to gradually eliminate tariffs on commodities of Hong Kong origin in CEPA. This leaves room for the traffickers to wrongly tag commodities as made in Hong Kong then export them to the mainland without tariffs.

To prevent such manipulation, it is necessary to stress the concept of "substantial transformation" here. In many cases, those traffickers make minor changes in the commodities in Hong Kong to qualify for the origin certificate.

At the same time, an accounting standard accepted by both the mainland and Hong Kong should be adopted. The uniform principle will help estimate the trade taxes and, more importantly, prevent trade conflicts.

Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) are two sets of accounting standards accepted around the world. The shortcomings in GAAP, which is generally in practice in North America, have been disclosed through a series of business scandals since 2001. IAS will hopefully become a global standard for accounting.

As trade ties grow, it is necessary to be more specific about the accounting standards to avoid possible disputes.

Of course, it should be open to negotiation whether IAS or the China Accounting Standards affiliated with IAS are the standard.

Social clauses should also be added to CEPA. It is an indication of social progress for trade agreements to include clauses on workers' welfare, environmental protection and other social issues.

China sees a pressing need to deal with environmental and labor concerns. With its huge trade volume with the mainland, Hong Kong can accomplish a lot by joining with the mainland to protect labor and curb pollution.

More efforts should be made to promote the development of small- and medium-sized enterprises on the mainland and Hong Kong. This would stimulate the economy in both regions and spread the benefits from the partnership among different social groups.

As a free trade agreement, CEPA aims at mutual benefits for the mainland and Hong Kong. Hong Kong residents and businesses now have virtually no impediments to entering the mainland and its market, but mainland residents and businesses do not have equal opportunity in Hong Kong.

Hong Kong has done a lot to eliminate discrimination toward mainland residents in professional qualifications and employment, but people have reason to expect more.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation affiliated with the Ministry of Commerce

(China Daily 07/04/2007 page10)