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Dodging import tariffs imposed by the US : Look before you leap

Manufacturers planning a factory move should tally the operating costs and consider whether it is economically viable.

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One option when faced with high import tariffs imposed by the United States is to return high-value manufacturing to Hong Kong, delegates at the Hong Kong Trade Development Council’s research seminar “Sino-US Trade Dispute − Relocation and Domestic Sales” heard.

Arthur Lee CEO, Hong Kong X’tals Limited – Kolinker Group, told delegates that the Sino-US trade dispute had led to goods made in the mainland being taxed in stages and categories, prompting many manufacturers to seek “tax avoidance” schemes, which included taking production facilities out of the mainland.

Giving his company as an example, he said vehicle air bags are high-end electronic components. The firm has sited its factory in Hong Kong.

The company’s business fell about 40% year-on-year this year.

“There is little direct relationship with the Sino-US trade war, the fall was mainly caused by short-term economic fluctuations, Brexit and other events, and the global oversupply, which has caused the market to shrink,”

Arthur Lee CEO, Hong Kong X’tals Limited – Kolinker Group

Manufacturers planning a factory move should tally the operating costs and consider whether it is economically viable.

Mr Lee said some of his colleagues had moved to Vietnam, where they had to contend with the cost of land leases to foreign-owned factories. Wages in Vietnam are about HK$2,000 but are rising rapidly and the increases are expected to continue.

Arthur Lee
Arthur Lee CEO, Hong Kong X’tals Limited – Kolinker Group

Local government policies affect other costs such as management accommodation and transport. Policies in developing countries often change and manufacturers should avoid being short sighted.

Referring to his company, Mr Lee said airbags are relatively light and customers need quick delivery, making airfreight desirable. “So I finally decided to leave the production line in Hong Kong,” he said.

“In the high-cost environment, we first automated more processes to reduce the wage bill.” Another consideration was that customers in the European and North American markets sought high quality.

The third factor is that a Hong Kong presence allowed the firm to develop products incorporating new technologies, such as high-end vehicle navigation parts. “Hong Kong manufacturing comes with a brand advantage.”

Mr Lee said the company plans to produce a small number of high-end products for the 5G and automotive markets in Hong Kong. The small number of employees involved meant that, even if the wages are higher than the mainland, it is still attractive because it can save tariffs.

Certificate of origin

Winnie Sheh, Chief Trade Officer, Factory Registration and Origin Certification Branch, of the Trade and Industry Department (TID) said that manufacturers planning to move a factory back to Hong Kong should register with the TID and seek government-issued source certificates.

Winnie Sheh
Winnie Sheh, Chief Trade Officer, Factory Registration and Origin Certification Branch, of the Trade and Industry Department

The Hong Kong General Chamber of Commerce, the Federation of Hong Kong Industries, the Chinese Chamber of Commerce in Hong Kong, the Chinese Manufacturers’ Association of Hong Kong and the Hong Kong Indian Chamber of Commerce can help manufacturers apply for Hong Kong Certificate of Origin, bringing exemption from customs duties. Hong Kong businesses can find out more on the TID website. For example, the origin source standards for different products (numbered according to the Hong Kong Harmonized System) and related major manufacturing processes.

She said Hong Kong has signed free trade agreements with several countries, including New Zealand, Georgia and Association of Southeast Asian Nations (ASEAN) member states. If Hong Kong companies export products to these countries, they need to apply for a “Promotional Certificate of Origin” to apply for preferential tariff treatment.

Eyes wide open

Danny Yick, Vice President, CMS Business, Computime Ltd (main picture), advised businesses to do their homework before relocating to Southeast Asia. Lawyers familiar with US legislation and summarised four responses to tariffs – applying for exemption (Exclusion), “tariff engineering”, outsource production and the first sale principle.

Mr Yick said experience showed the chance of successfully applying for exemption duties was very low; just 1% to 2% of applications were successful. “Unless the buyer hires a large team of lawyers in the US, the number of wins is not big.”

“Tariff engineering” – seeking another classification of the product, from making minor modifications to switch the product into a tariff-free category also held little promise of success.

To apply the first-sale principle, he said it is necessary to bypass the intermediary and directly engage with the importer to reduce the duty-paid, thereby reducing the need to pay customs duties, but consider the sales efficiency involved.

Mr Yick said transferring production by changing the source of a component or moving the process to another country is relatively feasible. A toothbrush has two components, the handle and bristles, he said. These can be disassembled and imported. Electronic products assembled outside the mainland offer a chance to avoid tariffs since the production site has changed.

Setting up production lines abroad to avoid high production costs in the mainland is a long-term strategy, he said. He recommended finding a partner to outsource or sub-lease the production lines, who understood the local business environment. Mr Yick said wages in Southeast Asian countries are still low but productivity is not as high as that in the mainland.

Productivity must be upgraded through training. He advised manufacturers to note the government’s preferential policies for foreign merchants. The Malaysian government has an industrial park where local manufacturers produce computers.

Mr Yick said manufacturers should consider relocation plans from an investment perspective and consider investment risk, management culture, talent training when they measure investment costs and long-term returns of the factory relocation, rather than simply consider evading US tariffs.

Electronic product certification

Jason Ho
Jason Ho, Vice President, Electrical and Network Assurance, Intertek

Jason Ho, Vice President, Electrical and Network Assurance, Intertek, pointed out that if Hong Kong businesses move factories to ASEAN countries and sell their products in the region, the products need to be certified to meet the product safety standards of different countries. The 10 ASEAN countries have different testing and certification requirements and Hong Kong companies need to consider this when planning to move factories, and should understand relevant regulations, he said.

ASEAN members’ electronic-product regulations focus mainly on such issues as product safety, electromagnetic frequency, labelling, energy efficiency, environmental protection, and personal data privacy.

Watch out for changes, consider long-term development

Louis Chan, Assistant Principal Economist (Global Research) of the Hong Kong Trade Development Council, concluded that Hong Kong companies which have factories in the mainland may consider moving some high value-added and small-batch production to Hong Kong. The government has encouraged science and technology investment in recent years, and Hong Kong companies are returning to high value-added production, which is expected to be supported by relevant research funds, he pointed out.

Louis Chan
Louis Chan, Assistant Principal Economist (Global Research), Hong Kong Trade Development Council

Before deciding to move production lines, Hong Kong businesses should first understand the origin of the goods requirements under the US’ “Article 301”.

“They might be able to meet the requirements without moving,” he said. Businesses consider production moves as investments. He suggested Hong Kong companies refer to the information resources provided by the HKTDC and participate in its activities – such as seminars and study tours.

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Asean

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.

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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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Asean

Coronavirus’ economic impact in East and Southeast Asia

The ASEAN+3 Macroeconomic Research Office (AMRO) estimates that the COVID-19 epidemic could deduct as much as half a percentage point from the economic growth of some regional economies in 2020.

East Asia Forum

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As the number of coronavirus cases continues to rise around the world, there are deep concerns over the potential economic impact of the virus.

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Asean

Trade War Incentive Schemes flourishing in ASEAN

Countries such as Thailand, the Philippines, Malaysia, and Indonesia have unveiled an array of incentive packages to entice businesses affected by the US-China trade war.

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Governments across ASEAN have been unveiling an array of incentive packages to entice businesses affected by the US-China trade war.

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