As the US-China trade war bites, Hong Kong’s economic survival rests on its liberal values

Hong Kong needs to trim its dependence on the services sector, accelerate research and development, and open up new growth paths — and key to its economic survival are its fundamental values of personal and judicial freedoms

Janet Pau

Published: 2:00pm, 18 Jun 2019

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Hong Kong’s economy is facing an existential challenge, as the liberal economic order in which it has historically thrived is under siege.

Even if China and the United States called a temporary truce in their trade and technology conflict, future bilateral relations will be marked by more competition and less cooperation. Nativist and protectionist sentiments are on the rise in the US, with growing bipartisan support for a tougher stance on China and broad-based dissatisfaction with globalisation. China has doubled down on industrial policy and technological self-reliance.

The pendulum will not swing back any time soon. An economic order that favours national champions and technological sovereignty over global interdependency and cooperation is taking hold. This will be the “new normal” in which Hong Kong operates. Trade-related services sectors will stagnate.

Overseas businesses looking to retreat from or reduce operations in China are likely to have to move investments out of Hong Kong. Even Hong Kong’s special trade status under the US-Hong Kong Policy Act may be on shaky ground if the city becomes a pawn in the US-China conflict.

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While Hong Kong has little control over its external circumstances, it can pursue a more diversified growth path. First, it should continue to accelerate research and development, building on the government’s HK$20 billion (US$2.56 billion) injection into the Research Endowment Fund, while also expanding prototyping and pilot production as part of its transition to becoming a more innovation-driven economy.

Hong Kong can attract foreign companies hesitant to put high-value activities in China, or those reducing investment in China due to the trade war. Hong Kong can also appeal to Chinese companies looking to expand overseas. Co-locating prototyping activities can accelerate research and development and enable more rapid experimentation and customisation for different markets.

Direct links of these activities with university research in the disciplines of science, technology, engineering and mathematics can help develop local talent and attract entrepreneurs and returnees, enabling collaboration to rapidly turn ideas into reality.

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Hong Kong’s unique culture is that its people are fast-paced, questioning, organised, and resourceful, especially amid complex and uncertain circumstances. Hongkongers are also avid users and adopters of technologies and apps from all around the world. These characteristics should be valuable for businesses and recruiters.

Hong Kong’s overdependence on services makes it vulnerable as its top two trade partners seek to decouple. While a manufacturing renaissance in Hong Kong is unrealistic due to land constraints, the city needs to have a more vibrant industrial sector, akin to small, high-income European countries such as Ireland, in medical devices, Switzerland, in pharmaceuticals, and Sweden, in aerospace parts. These high-value sectors help the smaller economies play useful roles in the European and global supply chains and enable job creation.

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Second, as China’s most international city, Hong Kong has always played to many sides and been friendly with other economies. Asia now represents nearly half of the world’s gross domestic product in purchasing power parity terms, and is driving global trade and investment.

Hong Kong should actively participate in trade agreements, including the Regional Comprehensive Economic Partnership, which will foster broader intraregional trade, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which contains high-standard trade rules but does not include China.

Hong Kong can also become a crucial conduit of soft power for China on the global stage, where Beijing wants to take greater leadership in areas such as environmental sustainability, economic integration and infrastructure building.

These new growth paths are contingent on Hong Kong defending its fundamental values. At the moment, Hong Kong’s claims that it is becoming an innovative, knowledge-based, culturally diverse economy is met with scepticism from overseas investors and observers.

Hong Kong needs to promote trust, but its trustworthiness is tarnished by perceptions that freedoms are being eroded, and that it is just another Chinese city that has high costs but is not an attractive environment to live and do business in.

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Perceptions are powerful. No matter whether Hong Kong wants to emphasise its strengths as an innovation or trade hub, the preservation of its openness, defence of the rule of law and judicial independence, and the space to express diverse opinions, are crucial in creating trust from others. Hong Kong needs to prove to investors, businesses and talent that it is indeed a special place.

It is time for government decision-makers to recognise that science and technology policies do not occur in a vacuum, but are intertwined with Hong Kong’s fundamental values. To ensure its economic survival, Hong Kong must find common ground that prioritises policies that solidify international trust, diversify the economy and create good jobs, while preserving friendly trade ties with many economies.

In doing so, Hong Kong can better weather the volatile and uncertain times to come.

Janet Pau is programme director of the Asia Business Council

This article appeared in the South China Morning Post print edition as: In defence of our values

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