CEPA: The Closer Economic Partnership Agreement
The Closer Economic Partnership Agreement (CEPA), a bilateral free trade agreement between Hong Kong and mainland China, took effect on January 1, 2004. This agreement provides early market access to both local and international companies partnered with qualified Hong Kong-based firms, regardless of their nationality or size. Even after China meets its World Trade Organization (WTO) commitments, many Hong Kong companies will continue to enjoy a sustainable advantage, as CEPA offers concessions beyond those made in China’s WTO accession.
The CEPA encompasses three broad areas: trade in goods, trade in services, and trade and investment facilitation. Companies without a foothold in Hong Kong are encouraged to partner with or acquire eligible Hong Kong-based companies to leverage CEPA and gain a ‘first mover advantage’ in mainland markets.
Trade in Goods
Under CEPA, 273 categories of Hong Kong-made goods can be exported to mainland China free of tariffs. For additional ‘made in Hong Kong’ products, mainland China agreed to implement a zero-import tariff from January 1, 2006, upon application by local manufacturers who comply with CEPA’s rules of origin. The HKSAR also commits to maintaining its existing zero-import tariff regime on goods originating from the mainland and to refraining from imposing restrictive regulations on those goods.
Rules of Origin: A product qualifies as ‘made in Hong Kong’ if it meets CEPA’s rules of origin. Investors from Hong Kong, mainland China, and abroad can establish new manufacturing operations in Hong Kong, allowing products subject to high mainland tariffs to qualify for CEPA origin rules and enjoy zero tariffs in the mainland market. Investors can produce high intellectual property content goods in Hong Kong, benefiting from the region’s legal system and intellectual property protections.
Hong Kong manufacturers must apply for a Certificate of Hong Kong Origin — CEPA and provide this approved certificate to mainland importers. To qualify under CEPA, products must adhere to the rules of origin (ROO) set forth in the agreement. The ROO outlines the criteria and standards required for a product to claim its origin. For the 273 mainland product codes included in the initial phase, the following CEPA origin rules apply:
- 68% (187 products): These products will follow Hong Kong’s existing origin rules, primarily based on where the main production process occurs. This category includes textiles, clothing, jewellery, cosmetics, pharmaceuticals, and paper products.
- 17% (46 products): For certain chemical, metal, and electronic products, a Change in Tariff Heading (CTH) approach will be used as the CEPA origin rules. This approach is commonly employed by most WTO members.
- 30% Value-Added Requirement (15% or 40 products): This requirement applies to specific electronic, optical components, watches, and movements. Under CEPA’s ROO, only raw materials and components sourced from Hong Kong, local labour costs, and product development expenses incurred in Hong Kong contribute to this 30% value-added calculation. This provision is expected to stimulate the development of creative industries and high-value activities in Hong Kong.
Manufacturers can utilize an outward processing arrangement to subcontract work outside their Hong Kong subsidiary or engage in minor finishing processes for goods intended for export to the mainland. After processing, the finished goods must return to Hong Kong for export under CEPA to qualify for zero-import tariff concessions. Semi-finished goods do not qualify under CEPA.
Trade in Services
CEPA’s market access provisions cover 18 service industries, including management consulting, exhibitions and conventions, advertising, accounting, construction and real estate, medical services, distribution, logistics, transport, tourism, audiovisual, legal, banking, securities, and insurance. To qualify for CEPA benefits, service companies must have substantial business operations in Hong Kong and meet the following criteria:
- The company must be incorporated under Hong Kong law.
- The company must pay profits tax in Hong Kong.
- The company must employ at least 50% of its total staff in Hong Kong.
- The minimum duration of the company’s substantial business operations in Hong Kong is three years; however, for construction, real estate, banking, and insurance, the requirement is five years. While specific industry qualifications may vary, assessments will be conducted on a non-discriminatory and objective basis.
Similar to trade in goods, the HKSAR agrees to bind its existing services regime and commit to not introducing new discriminatory measures against services and service suppliers from the mainland for sectors included in CEPA.
Definition of ‘Hong Kong Companies’ for Services: To qualify for the benefits under CEPA, a company must have substantive business operations in Hong Kong, assessed based on criteria such as:
- Incorporation under HKSAR law.
- Payment of profits tax in the HKSAR (or being legally exempt).
- Duration of business operations in the HKSAR.
- Size and nature of the business activity in the HKSAR.
- Proportion of the workforce employed in the HKSAR.
Both parties agree to adopt a ‘sectoral’ approach to consider the unique characteristics of each service sector.
Trade and Investment Facilitation
Both sides have committed to enhancing cooperation in eight areas: customs clearance facilitation, quarantine and inspection of commodities, quality assurance and food safety, support for small and medium-sized enterprises, cooperation in Chinese medicine and medical products, electronic commerce, trade and investment promotion, and transparency in laws and regulations.