Foreign firms are expected to tap the city's pool of skilled labour for high value-added production Local manufacturers expect foreign companies to make use of the city's pool of skilled labour for high value-added production as a result of the free-trade agreement recently signed between China and Hong Kong. The non-nationality-based definition of a 'Hong Kong company' in the closer economic partnership arrangement (Cepa) gives foreign firms leeway on import tariffs, which will remain - although at a reduced level - even after China fully implements its World Trade Organisation (WTO) entry terms by 2005-06. 'Hong Kong will be able to export all of its locally made goods to mainland free of import tariffs by 2006, but other WTO members will not be entitled to this preferential treatment,' Federation of Hong Kong Industries deputy chairman Andrew Leung Kwan-yuen said. The key issue that remains unresolved is whether the definition of 'goods of Hong Kong origin' will be loose enough to accommodate the import of component materials for local assembly. 'The lower the requirement for locally-generated value the better,' said Jeffrey Lam Kin-fung, another deputy chairman of the federation. Government officials have promised to clarify the place-of-origin definition in October. Cepa is intended to encourage development of the so-called high value-added industries, most of which are still fledgling. Hong Kong's high land and labour costs have to be offset by the zero import tariffs and higher mark-up prices to make production profitable. Chow Tai Fook Jewellery said foreign companies would contract more top-of-the-range work to Hong Kong's skilled goldsmiths as a result of the trade agreement. 'The zero import tariffs will make a big difference because the mainland import tariff rate on top-end items is 35 per cent,' director Kent Wong Siu-kee said. He said Hong Kong should attract outsourcing from international firms involved in high-end products because the city had a well-established jewellery-making tradition. 'The skilled labour is comparable to that of Europe but much cheaper,' Mr Wong said. Top-end items account for 20 per cent of Chow Tai Fook's sales, while the remainder comes from middle-market to low-end items, which are mass-produced in the mainland. The company relies heavily on its mainland-based production capacity. However, it said most goldsmiths in China specialised in only one or two procedures, while those in Hong Kong were well versed in the whole work flow. A local pharmaceutical firm said Hong Kong was widely regarded as a better place in terms of copyright protection than the mainland and investors felt safer moving their high value-added production to the city. 'If we produce drugs here, we can market them to the mainland at a high premium because the country is flooded with fake goods, while Hong Kong enjoys a good reputation in quality guarantee,' a company executive said. Foreign businesses have voiced concern about the lack of protection of intellectual property rights in China. Last week, American Chamber of Commerce chairman Jim Thompson asked visiting Premier Wen Jiabao if he could affirm the mainland's commitment to intellectual property protection.