The influx of parallel traders who buy their stock tax-free in Hong Kong to resell it in mainland China at a profit is causing growing unrest. Residents of Sheung Shui, a town close to China's border, say the increase in parallel importers has pushed up retail prices and causes a general nuisance. Importers argue that their trade benefits the Hong Kong economy.
Cross-border limit on baby milk may breach trade rules
Legal expert warns that planned two-can limit on cross-border business could breach the World Trade Organisation's rules
Eric Ng and Amy Nip
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A cap on the amount of milk formula travellers can take out of Hong Kong could breach World Trade Organisation rules.
The government announced this month it planned to limit the number of cans people can take across the border to two.
The move was aimed at preventing parallel traders from buying formula in the city and reselling it in Shenzhen at higher prices, creating a shortage.
They can escape mainland tax by claiming the formula is for their own use and costs less than 5,000 yuan (HK$6,159) in total.
Eugene Lim, a Hong Kong tax partner of international law firm Baker & McKenzie, said the two-can quota could contravene the General Agreement on Tariffs and Trade (GATT). The agreement prohibits any quantitative import or export restrictions between WTO members.
But Lim, co-head of the firm's Asia Pacific Regional Customs and International Trade Steering Committee, said: "The quota appears to be aimed at preventing hand-carried exports for parallel trading and the limitation to two [cans] is to ensure it is limited to personal use."
He said that in practical terms, there was little chance the measure would be challenged as China was unlikely to invoke WTO dispute proceedings against Hong Kong. Other countries were unlikely to have sufficient interest to do so, Lim added.
Chinese University law professor Bryan Mercurio said the GATT legislation was not expressly limited solely to commercial shipments, but that was implicit in the entire agreement.
He said: "Despite the fact the individuals crossing the border with the goods are doing so for the purposes of trading, they are not engaging in the export or import of goods within the meaning of the GATT - they are merely individuals crossing a border."
His first impression was that the proposed change - being a limit on a specific item that individuals could take across the border for personal use - would not violate WTO rules.
But he said a grey area that could emerge was what would happen if the parallel traders offered to pay import tax to the mainland authorities.
If they made known their "commercial" intent, setting a limit on the number of cans that could be taken out of the city could be problematic.
The WTO said it could act to determine whether legislation passed by a member complied with its rules only after another member complained.
The Food and Health Bureau is working out details of the proposed amendment to the Import and Export Ordinance in consultation with the Trade and Industry Department.
A department spokesman said: "The government will ensure the compliance of the proposal with World Trade Organisation requirements."
Meanwhile, free-market opponents of the proposal say a limit on milk formula is wrong for another reason - that people are being criminalised for the simple act of trading that made Hong Kong great.