How joining the RCEP can revive Hong Kong’s role as a regional ‘super connector’

As a member of the mega trade partnership, Hong Kong could serve as a bridge between regional economies – a role it knows well
Helping to expand trade links across Asia would strengthen the region’s supply chain resilience, while also restoring our city’s ‘international‘ status

Wai-Hong TangandNeville Lai

Published: 10:15am, 28 Aug 2022

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It is no secret that Hong Kong faces an unprecedented, all-round challenge to its role as a global “super connector”. Just two weeks ago, it was reported that four international exhibitions that were previously hosted by the Hong Kong Convention and Exhibition Centre will relocate to Singapore and Dubai.

The public has pointed to the city’s rigid quarantine regime as the cause of our disconnection from the world – and rightfully so. Yet, Hong Kong’s struggles not only stem from the pandemic, but from seismic shifts in the global geopolitical landscape.

The intensifying rivalry between the United States and China has undermined Hong Kong’s geoeconomic standing. In 2020, Washington revoked the city’s special trade status, ending almost three decades of preferential treatment.

If continued, the “great decoupling” of the US and China is likely to further weaken Hong Kong’s ability to act as a bridge between mainland China and the rest of the world. Moreover, as an international financial centre and one of the world’s most open economies, Hong Kong has been sensitive to the crises emerging in the West.

Pedestrians pass closed shops in Causeway Bay on August 1. The city has slipped into a recession after the economy shrank by 1.4 per cent in the second quarter of the year. Photo: Nora Tam

Other than repeated calls for the city to leverage the opportunities provided by mainland China’s development, there has been a dearth of ideas about how we should reconnect with a drastically changed world.

There is one area that offers hope for the city’s future. The government’s decision to apply for formal accession to the Regional Comprehensive Economic Partnership (RCEP), right after it came into force in January, will be a critical starting point for Hong Kong to reimagine its role as a “super connector” in East Asia. Like any other free trade agreement, the RCEP will benefit Hong Kong by broadening market access and cutting transaction costs.

What is more important, however, is that the mega trade deal creates a new geoeconomic space which will, on the one hand, reduce Hong Kong’s exposure to global risks and, on the other, enable the city to act as a facilitator in the restructuring of transnational supply chains and in the distribution of goods, capital, services and knowledge across East Asia.

The role of facilitator is certainly not unfamiliar to Hong Kong; the city has historically been a key entrepot for trade between mainland China and the world, accounting for 89.5 per cent of our total re-export trade value. But this role is and will increasingly be important at a time when the crisis of globalisation is driving businesses, capital and talent to seek refuge or new opportunities worldwide.

Disruptions in global logistics since 2021 have underscored the importance of regional connectivity to supply chain resilience. As the world’s largest free trade agreement, the RCEP counts among its members diverse economies at different stages of development and with different comparative advantages, from emerging economies like Vietnam and the Philippines, to global leaders in innovation like South Korea and Singapore.

If successfully implemented, the mega trade deal will be conducive to the growth of a new and resilient regional economic ecosystem.

One advantage of the RCEP is its rules of origin. According to the agreement, if the various stages of production of an item all occur within member states, the final producer or processor can factor in all the previous material values from those states when calculating the raw material value of the product.

This will substantially enhance preference utilisation rates, cut operational costs for companies at different stages of value chains and, in the long term, reduce East Asia’s dependence on the West by promoting the growth of regional supply chain networks. As a RCEP member, Hong Kong could facilitate the restructuring and expansion of regional networks of production and investment.

Shipping containers and cranes at the Kwai Tsing container terminals on March 14. The transport and logistics industry is integral to Hong Kong’s economy. Photo: Bloomberg

The geoeconomic reordering of East Asia under the RCEP could also be the catalyst for Hong Kong’s re-industrialisation. The new ecosystem emerging from the mega regional economic space will strengthen the resilience of Hong Kong’s economy, as our businesses can shift production capacities or supply chains to the emerging economies in Southeast Asia, or deepen collaboration with hi-tech sectors in Japan, South Korea and Singapore.

This will not only benefit Hong Kong, but also promote industrial upgrade in the Guangdong-Hong Kong-Macau Greater Bay Area and contribute to its development as a national and potentially international innovation hub.

Politically, RCEP membership will help “relaunch” and “rebrand” Hong Kong by restoring international confidence in the city as a unique customs territory under the framework of “one country, two systems”, which allows us to negotiate, conclude and implement free trade agreements with other economies.

It’s time to go from zero-Covid to zero Covid restrictions

Certainly, Hong Kong is still in dire need of a better scenario planning and a proper exit strategy to the pandemic. Finding a sensible balance between containing Covid-19 and minimising the strain on our healthcare system, and protecting business interests and opportunities, is key.

Yet in due time, and with careful planning, Hong Kong can safely return to being a free and open international city, and will be able to enjoy the benefits the RCEP can offer.

Wai-Hong Tang is an independent researcher on the international political economy of East and Central Asia. He has a PhD in politics and international studies from the University of Warwick

Neville Lai is an independent researcher on global affairs. He completed his bachelor’s degree in philosophy, politics and economics from the University of Warwick and SciencesPo Paris-Reims