A free-trade agreement between Hong Kong and the mainland could antagonise trading partners and undermine the rationale of China's special economic zones, according to a Shanghai-based lawyer. 'If a real free-trade agreement was extended to Hong Kong, it would defeat some of the logic of having some of the free-trade zones,' said Kevin Wong, a partner with international law firm Linklaters & Alliance, which advises on trade. Companies located in China's 15 free-trade zones can import and export goods free of import duties and tariffs. 'It would require some domestic policy readjustment that I don't think China's ready to do right now,' Mr Wong said. However, the deal could be a much weaker arrangement, such as a symbolic gesture to show China's support for Hong Kong. Government officials in the SAR have been sketchy about details of their free-trade proposal to Beijing, with Secretary for Commerce and Industry Brian Chau Tak-hay recently refusing to provide legislators with details. China's Ministry of Foreign Trade and Economic Co-operation has set up a working group to consider a free-trade agreement proposal between the mainland, Hong Kong and Macau. Mr Wong said the openness of Hong Kong's economy meant the agreement could inadvertently 'open the door to China to the rest of the world'. A free-trade agreement could relate only to goods manufactured in both countries. 'Because the Hong Kong economy is so open, it is very hard to distinguish whether goods labelled as manufactured in Hong Kong are really manufactured in Hong Kong or China,' Mr Wong said. 'This would be of great concern to Hong Kong's and China's trading partners - it would have repercussions beyond the Hong Kong-China relationship to the rest of the world.' China's actions as a new member of the World Trade Organisation (WTO) would be under close scrutiny. 'Giving special concessions to Hong Kong is probably going to be negatively perceived. It also makes Hong Kong's position as a separate member of the WTO extremely difficult to maintain,' Mr Wong said. Mr Wong said even though a free-trade agreement would be 'technically' allowable under WTO rules: 'Is it really in the spirit of what China's WTO obligations mean?' He doubted it was possible to speed up market entry for Hong Kong companies and stay within WTO rules, as has been proposed by the Hong Kong General Chamber of Commerce. The chamber has suggested Hong Kong could offer more market access to mainland professionals in return for the deal. Hong Kong's status as a free port means it has little more to offer potential suitors. However, the Federation of Hong Kong Industries has been pushing for the mainland to grant preferential tariff and tax treatment to Hong Kong companies. Nomura International senior economist Pu Yonghau said Hong Kong companies would have to change their negative attitudes towards employing mainland professionals before this could happen. It would take time before Hong Kong professionals would move to the mainland. Mr Pu said apart from a general boost to trade and economic activity on both sides: 'Mainland China is not going to invest enormously in Hong Kong, although it probably wants Hong Kong to invest in China.' However, KPMG consumer markets partner John Zabriskie said if the agreement was done in a similar way to the European Union and the North American Free-Trade Agreement, 'then I don't think people can argue'. 'Why should a Hong Kong company be treated like any other foreign entity when doing business in China? We're part of the People's Republic of China,' Mr Zabriskie said. KPMG certainly had clients operating long-term joint-ventures in China who 'would not appreciate' the increased competition from a sudden lowering of trade barriers to Hong Kong firms. Mr Zabriskie said foreign firms still would be attracted to China's free-trade zones by the business incentives they offered - such as tax rates as low as 7.5 per cent compared with 33 per cent elsewhere. They would benefit further from the general economic boost of a free-trade zone between the mainland and Hong Kong. If a free-trade zone reduced barriers to trade, there would be a corresponding decline in the services of 'the whole chain of middle men, companies dealing with getting product into the PRC who thrive on the existence of barriers and their ability to avoid them'. Removal of these barriers would result in cheaper prices for consumers, the brand owner and manufacturers. 'Certain industries are fairly rife with the avoidance of customs duties, for example, [genuine] luxury goods, and technology based products like mobile phones,' he said. Duties for technology products could reach 70 per cent. 'Smuggling is a fairly broad term . . . there is probably physical movement of goods without declaration, declaration of goods at a lower price to reality or with the handshake of a local official. The level of effort which now goes into avoiding [customs duties] could be injected into your business.' It would be important for any free trade agreement to clearly establish 'terms of presence'. 'Would it be where you do your manufacturing, where you are incorporated, where you are headquartered or could it be via a subsidiary?' he said. Any agreement should address the fact that it was too difficult for talented mainland business people to move to Hong Kong. It was too difficult to call meetings in Hong Kong at short notice with KPMG's mainland colleagues because the required invitation letters and visas caused delays.