The mainland and Hong Kong concluded on Sunday a broad free-trade agreement providing greater access to the Chinese market for Hong Kong businesses. It is said the new trade pact goes beyond the market opening that Beijing pledged when it joined the World Trade Organization in November 2001.

China's Vice Minister of Commerce An Min (R) and Hong Kong's Finance Secretary Antony Leung exchange documents as China's Premier Wen Jiabao (C) looks on after the signing of the Closer Economic Partnership Arrangement (CEPA) in Hong Kong June 29, 2003. [Reuters]

According to the pact, the mainland is going to throw open its markets to Hong Kong's highly competitive shipping, logistics and moviemaking industries; eliminate most tariffs on imports from Hong Kong's manufacturing sector; and allow Hong Kong's banks, management consultants and lawyers greater privileges in the mainland than their rivals from elsewhere in the world.

The new agreement, called the "Mainland and Hong Kong Closer Economic Partnership Arrangement"(CEPA), is widely considered a gift from the central government of Beijing to help solve some chronic economic problems in the former British colony.

Over the last two weeks, officials in Beijing and Hong Kong cited the trade agreement repeatedly to contend that the central government is helping Hong Kong, now a special administrative region of China.

"This goes to show our motherland continues to open up" its economy, and that Beijing's policy toward Hong Kong of "one country, two systems" is working, said Antony Leung, Hong Kong's financial secretary, at a news conference on Sunday.

Henry Tang, the secretary for commerce, industry and technology, said that the main economic effects would be felt in the long term.

Hong Kong is now crippled by a queue of economic problems. Unemployment stands at a record 8.3 percent and is still rising.

Mr. Leung, however, predicted that residents "will see the effect almost immediately" as businesses around the world take a careful look at whether it makes sense to base more of their operations in Hong Kong to as to make use of the pact's provisions.

Premier Wen Jiabao arrives at the Hong Kong International Airport on June 29, 2003. [newsphoto.com.cn]

Hong Kong made few trade concessions to China because it already does not collect any tariffs and allows companies of any nationality to set up subsidiaries to offer services.

In the agreement, Hong Kong pledged not to begin collecting tariffs on exports from the mainland or to restrict its service industries.

A big issue from the start of the negotiations lay in how the pact would define what qualifies as a Hong Kong company. Some local business leaders had suggested a fairly restrictive definition that might narrowly limit the agreement to businesses owned by local residents.

But Mr. Tang said that Hong Kong had decided to comply with its obligations to the World Trade Organization by not discriminating against companies based on their nationality. The agreement nonetheless contains provisions designed to prevent multinationals not already active in Hong Kong from quickly opening shell companies as a way to perform an end run around Chinese trade rules.

Most of the concessions for service industries require companies to have been doing business in HK for at least three to five years, depending on the industry.

In addition, negotiators must still work out whether goods assembled in Hong Kong from imported parts - as is common for most of Hong Kong's modest manufacturing sector - would qualify for duty-free treatment.

The agreement referred to an annex for the rules that would determine what qualifies as goods manufactured in Hong Kong, but the annex itself, in the packet of papers released by the government, was a single sheet of paper pledging to reach an understanding by the end of the year.

The so-called rules of origin are relevant because Hong Kong's modest manufacturing sector relies heavily on producing products that include many imported components.

Mr. Tang said that the agreement would reduce tariffs to zero on January 1 for 67 percent of Hong Kong's exports to the mainland, and that the mainland's previous commitments to the WTO would reduce tariffs to zero for an additional 23 percent of Hong Kong's exports.

But Mr. Tang acknowledged that these calculations assumed that Hong Kong could work out rules of origin that would allow most of Hong Kong's current exports to count as locally produced.

Much more important in commercial terms for Hong Kong were the agreement's provisions regarding services.

The most surprising mainland concession was to allow unlimited shipments to the mainland of movies that are produced by Hong Kong companies, including by the local subsidiaries of Hollywood studios.

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