As the US continues to impose additional tariffs on many mainland imports, Hong Kong traders are looking to cushion the impact by actively shifting some of their production or procurement bases to Association of Southeast Asian Nations (ASEAN) countries that benefit from America’s Generalized System of Preferences (GSP).
The Hong Kong Trade Development Council (HKTDC) organised a seminar titled “Sino-US Trade Dispute: How the US GSP Programme Fits in the Supply Chain Strategy” on 16 August at the Hong Kong Convention and Exhibition Centre (HKCEC), with HKTDC Assistant Principal Economist (Global Research) Louis Chan as the moderator.
Sally Peng, Asia Pacific Practice Group Leader at the law firm Sandler, Travis & Rosenberg Ltd, and Henry Fung, a Manager with the firm, provided practical tips to help local companies take advantage of the zero or low tariffs offered to developing countries by the US.
Leanne Ma, Senior Administrative Officer (Industries Support) from the Trade and Industry Department of the Hong Kong Special Administrative Region (HKSAR), introduced enhancement measures for the Dedicated Fund on Branding, Upgrading and Domestics Sales (BUD Fund), while Band Yeung, Assistant General Manager at the Hong Kong Export Credit Insurance Corporation, briefed participants on the special enhanced measures to help local exporters cope with rising credit risks amid the current uncertainties.
More than 100 representatives from local small and medium-sized enterprises (SMEs) joined the seminar.
Optimising supply chain through GSP
ASEAN countries such as Cambodia, Indonesia, Myanmar, the Philippines and Thailand benefit from the GSP. The GSP eligibility of Turkey and India was removed earlier this year while that of Thailand, Indonesia and Kazakhstan is under review.
Ms Peng and Mr Fung explained the GSP mechanism and highlighted how, to cope with the business challenges brought about by the trade dispute, local companies can take GSP possibilities into account when adjusting or optimising their supply chains.|
Mr Fung noted three qualifying requirements for GSP − direct import, “product” of beneficiary developing country (BDC) and a 35% minimum value content. For articles imported directly from a BDC, they must be imported without passing through the territory of any other country. If the shipment is from a BDC to the US through the territory of any other country, the merchandise cannot enter the commerce of any other country while en route to the US. The invoice, bill of lading and other shipping documents should show the US as the final destination.
He went on to elaborate that articles must be grown, produced, or manufactured in a BDC. If articles are made of imported materials, those materials must undergo a Double Substantial Transformation in the BDC for the article to qualify as a “product” of the BDC. Inputs from member countries of the same association of countries will be treated as single-country inputs for the purposes of determining the origin. Imported material must be transformed in the BDC into a new and different material with a new name, character and use.
Using the example of “wet blue” split leather from a non-BDC that is processed into finished leather in a BDC, he pointed out that the finished product cannot be regarded as “originating” from the BDC as it does not constitute a Double Substantial Transformation. However, plastic film roll stock undergoing printing, cutting and lamination before the conversion operation into a finished bag can be regarded as Double Substantial Transformation.
The sum of the cost or value of materials produced in the BDC and the direct costs of processing operations must equal at least 35% of the appraised value of the article. Mr Fung said the value of originating materials includes the manufacturer’s actual cost for materials, freight, insurance, packing and all other costs associated with transport to the manufacturer’s plant and taxes imposed on materials by the BDC and the actual cost of wastage.
Mr Fung reminded exporters to keep records of origin, the cost of direct processing operations and value, such as origin certificates and raw-material purchasing records. They should also ship merchandise into the US “using reasonable care”.
SMEs encouraged to explore ASEAN markets
Ms Ma introduced enhancement measures for the government’s BUD Fund that was set up to help Hong Kong enterprises capture opportunities in mainland and ASEAN markets, as well as other support measures provided by the HKSAR Government.
Ms Ma said the government extended the geographical scope of the BUD Fund from the mainland to ASEAN countries in August 2018, adding that the funding ceiling per enterprise has been increased from HK$500,000 (about US$64,100) to $2 million, including $1 million for the mainland market and $1 million for the ASEAN market.
Ms Ma also presented the SME Export Marketing Fund, advising participants that the cumulative funding ceiling for enterprises under this scheme has been increased from $200,000 to $400,000 with conditions regarding the last $50,000 of grants being removed. Up to 31 July 2019, a total of 48,657 enterprises, including the trade, wholesale and electronics sectors, have benefited from this measure. The SME Loan Guarantee Scheme provides loan guarantees to SMEs to help them secure credit from participating lending institutions for acquiring business installations and equipment or for general working capital, with the maximum guarantee for each SME being $6 million.
At the seminar, Mr Yeung introduced the Hong Kong Export Credit Insurance Corporation’s special enhanced measures, such as the small business policy and Online Micro-Business Policy, that have been introduced to help local exporters cope with rising credit risks amid the current uncertainties.
Assessing the economic impacts of COVID-19 on ASEAN countries
All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent.
Author: Jayant Menon, ISEAS–Yusof Ishak Institute
The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with the pandemic could save lives but are having wide-ranging economic effects and inducing economic contagion.
There are already studies estimating the economic impact of the virus. But greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic impacts are made, concentrating on the ASEAN region.
The effects of COVID-19 are hitting ASEAN economies at a time when other risk factors, such as a global growth slowdown, were already rising.
COVID-19 is disrupting tourism and travel, supply chains and labour supply
Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries, especially airlines and hotels, were the first to be affected. And the conditions are worsening as more countries go into shutdown.
The supply disruptions emanating mostly from China will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.
The negative effects of quarantine arrangements on labour supply could also be high depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity.
All these disruptions will lead to sharp declines in domestic demand. And their impact on economic growth will further propagate these disruptions. This compounding effect can magnify and extend short-run effects into the long run.
The highest economic cost could come from the intangibles
The effects of negative sentiment about growth and general uncertainty — which is already affecting financial markets — will feed into reduced investment, consumption and growth in the long run.
Rolling recessions around the world now appear inevitable, despite the stimulus measures being contemplated. If so, there will be sharp increases in unemployment and poverty. Some degree of decoupling from China, or de-globalisation in general, may also be a permanent reminder of this pandemic.
Among ASEAN countries, Singapore, Malaysia and Thailand are heavily integrated in regional supply chains and will be the most affected by a reduction in demand for the goods produced within them. Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune.
Vietnam is the only new ASEAN member integrated into supply chains with China and is already suffering severe supply disruptions.
Given time, supply-side adjustments will alter trade and investment patterns. The main adjustment will involve relocating certain activities along the supply chain from China to ASEAN countries. Although the pandemic will disrupt the relocation phase, ASEAN countries can benefit from the new investments, mitigating overall negative impacts.
Thailand is probably the most tourism dependent Asean country
All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown in China will affect them the most.
The Philippines and Mekong countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. Others will benefit from lower oil prices, as will the struggling transport sector.
In measuring the impacts of COVID-19, it is important to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is required to reduce the problem.
Even before the outbreak, risks of a global growth slowdown were rising
The restructuring of regional supply chains had started, driven initially by rising wages in China and accelerated by the US–China trade war. While COVID-19 may further hasten the pace and extent of the restructuring, it is only partly responsible for what may happen. It would be misleading to attribute all of the current disruption to COVID-19. Had the trade war not preceded it, COVID-19 may have resulted in greater disruption to supply chains.
Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments. It is difficult to estimate the impacts of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.
Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS–Yusof Ishak Institute, Singapore.
A version of this article first appeared in ISEAS Commentary.
This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.
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