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2. Exchange Rate Policies

The Hong Kong government remains firmly committed to ensuring currency stability through the linked exchange rate to the U.S. dollar. Authority for maintaining the exchange value of the Hong Kong dollar as well as the stability and integrity of the financial and monetary systems rests with the Hong Kong Monetary Author. ity, which was established in April 1993 through the consolidation of the Office of the Exchange Fund and the Commissioner of Banking. There are no multiple exchange rates and no foreign exchange controls of any sort.

Under the linked exchange rate, the overall exchange value of the Hong Kong dollar is influenced predominantly by the movement of the U.S. dollar against other major currencies. The price competitiveness of U.S. exports is affected in part by the value of the U.S. dollar in relation to third country currencies. While the proportion of Hong Kong's imports from the United States. has declined slightly as a percent. age of its total imports in recent years, Hong Kong still consumes more U.S. goods per capita than almost any other economy. U.S. firms have increased exports to Hong Kong by well over US $1 billion each year in the 1990s. 3. Structural Policies

Hong Kong's generally non-interventionist policies have brought rising prosperity and low unemployment to the colony and have created an attractive barrier-free market for U.S. goods exporters and most services providers. There are virtually no controls on trade and industry other than to meet standard obligations associated with health, safety and security. Procurement is conducted on an open basis, although Hong Kong elected this year to remove itself from the GATT Government Procurement Code. While in the past British firms seemed to enjoy an advantage in bidding for major contracts, U.S. firms have more recently been quite successful in both the design and supply stages of major projects. Other factors often cited for Hong Kong's dynamic economic success include a simple, low-rate tax structure, a well-educated and industrious work force, and an extremely efficient transportation and communications infrastructure.

Hong Kong takes justified pride in the efficiency of its port, the world's largest in container throughput, and the airport, the fourth-largest in terms of passenger traffic. But these facilities are under severe strain given robust economic growth in the region and projections for continued strong growth well into the future. Major new infrastructure, including the replacement Chek Lap Kok (CLK) airport and Container Terminal No. 9 (CT-9) are badly needed to ease congestion and ensure Hong Kong's continued competitiveness as a center for trade.

In November, the UK and China reached agreement on a financing package for CLK that sets the overall level of debt and equity in the Provisional Airport Author. ity (PAA) and Mass Transit Railway Corporation (MTRC). The two sides must still reach accord on separate financial support agreements before the PAA and MTRC will be able to borrow on international markets. Once these are resolved, and SinoBritish agreement is reached on the draft airport corporation bill, the PAA will be able to complete tendering, for airport services franchises, such as catering, cargo handling, fuel supply and aircraft maintenance. 4. Debt Management Policies

The Hong Kong government has minuscule public debt. Repeated budget şurpluses have meant that Hong Knog has not had to borrow. To promote the development of Hong Kong's debt market, in March 1990the government launched an exchange fund bills program with the issuance of 91-day bills. Maturities have gradu. ally been extended, and, in October 1993, the Hong Kong Monetary Authority issued five-year notes, with maturities that extend beyond Hong Kong's reversion to Chinese sovereignty. Under the Sino-British Agreed Minute on financing the new air. port and related railway, total borrowings for these projects cannot exceed US $2.95 billion, and such borrowings “will not need to be guaranteed or repaid by the government.” Liability for repayment will rest with the PAA and MTRC. 5. Significant Barriers to U.S. Exports

As noted above, Hong Kong is a duty-free port with no quotas, anti-dumping laws, or other barriers to the import of U.S. goods. Phytosanitary standards are generally compatible with U.S. exports of agricultural products. In fact, according to Commerce Department data, Hong Kong was the lith largest market for U.S. goods in the world last year, recognizing that a significant portion of those exports are actually reexported to China.

Market domination by several firms: Hong Kong does not have anti-trust laws. Certain sectors of its economy are dominated by monopolies or cartels, some but not all of which are regulated by the government. These companies do not necessarily

discriminate against U.S. products. However, many of them actively campaign against foreign competitors, for example in the aviation sector.

The government's policy is to discourage unfair trade practices--see, for example, the Governor's 1992 and 1994 policy addresses. While there are no agencies with anti-trust powers, the Consumer Council is tasked, inter alia, with reporting on anti-competitive behavior in the market. Its reports can spur government action. For example, the government decided to remove the interest cap for time deposits after reviewing the Council's report on banking, although the government chose not to dismantle the interest rate bank cartel itsell.

The Hong Kong government has promised to work more closely with the Consumer Council on its publications of other sector specific study reports on su permarkets (just completed), broadcasting, telecommunications, gas supply and the residential property market. The government has committed to provide funds for the Council to establish a trade practices division with a view to improving competition. And in July 1994, the government ended the prohibition on the Council from inves. tigating several specific entities, including the air cargo handling monopoly, the international basic telecom monopoly, and the hospital authority.

Telecommunications/Basic Voice: Value-added telecom services in Hong Kong are open to competition, as are mobile communications. However, basic public voice services are provided under exclusive franchise. Hong Kong Telecom International (HKTI) has the exclusive license until September 30, 2006, to provide a range of international telephone services. This has constrained at least one U.S. company from offering its full range of services in Hong Kong; however, that company plans to submit an application to Hong Kong regulatory authorities arguing that its serv. ices should rightly be considered "value-added”, and hence not restricted.

Professional Services: Physician services—UK-trained physicians may practice in Hong Kong with pro forma certification, and some Commonwealth nationals receive expedited certification, but other foreign doctors are forbidden from practicing without going through a lengthy testing and retraining program. The special privileges afforded to British and Commonwealth doctors will likely be abolished. There is no indication that other foreign doctors will be any better treated, however.

Lawyers/Law Firms: Foreign law firms have been barred from hiring local lawyers to advise clients on local law—even though Hong Kong firms can hire foreign lawyers to advise clients on foreign law. In amendments passed earlier this year, foreign law firms may now become “local law firms” and hire Hong Kong attorneys, but they must do so on a strict 1:1 ratio with foreign lawyers. In addition, there are restrictions on use of firm names for foreign firms. For foreign firms already in Hong Kong, the situation has improved. However, for new-to-market firms, the playing field is still not level. With respect to qualifying to practice Hong Kong law, the Law Society has been working on a revised exam that should facilitate U.S. attorneys' ability to sit and pass the Hong Kong, bar exam.

Airport Aviation Services: At Hong Kong's present airport, Kai Tak, maintenance, cargo handling, catering and other aviation services are provided by one of two UKaffiliated companies. This has prevented U.S. service providers from competing and has denied U.S. airlines adequate competitive choice and prices. The provisional Airport Authority, overseeing construction of the new airport, has committed to hav. ing multiple service providers. The United States has strongly urged Hong Kong economic policy-makers to follow through on the commitment to expand competition in these areas, notwithstanding the pleas by the duopolists for an extension of their privileged positions.

Civil Aviation Agreement: The U.S. -Along Kong civil aviation market is ruled by the restrictive provisions of the U.S.-UK Bermuda II agreement. Since this agreement will become invalid when sovereignty uver Hong Kong shifts from the UK to the PRC in 1997, U.S. and Hong Kong negotiators met twice in 1994 to seek an independent bilateral agreement. The U.S. is pressing for a substantially more open civair market, including "fifth freedoms” for cargo and more fifth freedoms and additional gateways for passenger carriers.

High Alcohol Taxes: In 1994 Hong Kong amended its alcohol taxation system, moving to a 90/100 percent ad valorem tax on grape wines and spirits respectively. This is an improvement over the prior system from the perspective of most U.S. alcoholic beverage exporters. However, the high tax rate is an impediment to expanding U.S. sales. 6. Export Subsidies Policies

The government neither protects nor directly subsidizes manufacturers, despite calls from some local legislators to do so. However, a number of quasi-governmental organizations do provide substantial indirect support to industry.

The Hong Kong Trade Development Council (HKTDC) engages in export and import promotion activities with a total revenue of US $148 million and a total ex. penditure of US $ 106 million. About half of HKTDC's budget comes from a tax on exports (0.05 percent) and imports (0.035 percent), and the other half from internal operations (trade shows, magazines).

In August 1994, the U.S. Trade Representative's (USTR) office, acting on a Sec. tion 308 petition filed by a Hong Kong publishing company with U.S. financial interests, sought information from the HKTDC with respect to its trade publications. Specifically, the petitioner stated that the HKTDC subsidized its trade magazines, permitting HKTDC's magazines, which are direct competitors with the private sec. tor, to charge advertising rates up to 50 percent below market price. On November 4, the Hong Kong government supplied information to the USTR's questions. In the meantime, Hong Kong also submitted a page of questions of its own to the USTR about similar U.S. promotional activities.

In answer to one of the USTR's questions, the HKTDC acknowledged that it had, in one case, provided US $300,000 in legal defense funds to Hong Kong sweater makers facing dumping duties in the United States. The HKTDC pointed out that U.S. courts subsequently rejected the U.S. government's findings of dumping, thus justifying HKTDC's support of Hong Kong's manufacturers.

Another statutory body, the Hong Kong Industry Technology Center Corporation (HKITCC), established in June 1993, promotes technological innovation and application of new technologies in Hong Kong industry. The government has allocated US $26 million to the center, together with a loan of US $24 million for research and design activities. The loan is interest bearing at seven percent per year. The main programs are incubation, technology transfer and research and design support serv. ices. There are now six pilot projects. These companies enjoy a 70 percent discount on the market rental of the tech center offices, and 45 percent and 25 percent in subsequent years. Any Hong Kong registered company is eligible to apply, provided it is less than three years old and has fewer than 20 employees.

The Hong Kong Productivity Council (HKPC) is financed by annual government allocations and by fees earned from its services. With 500 staff members, HKPC provides a variety of training programs, industrial and management consultancies, and technical support services. HKPC invites local companies to join consortia to share the design and development cost of new products.

The Hong Kong Export Credit and Insurance Corporation (ECIC), a statutory body set up in 1966, provides insurance protection to exporters. 7. Protection of U.S. Intellectual Property

Hong Kong's intellectual property laws and their enforcement are among the best in the world. However, with a massive increase in pirate production in China over the last twelve months, especially in music and software compact discs, the Hong Kong market has suffered.

Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern International Copyright Convention, and the Geneva and Paris Universal Copyright Conventions. Hong Kong has enacted laws covering trademarks, copyright for trade descriptions (including counterfeiting), industrial designs, maskworks, and patents.

Inasmuch as Hong Kong's intellectual property statutes are based chiefly on laws of the United Kingdom, they will have to be “localized” for post-1997 application. Drafts of the laws indicate that, if anything, the process of localization will be used by the Hong Kong government to strengthen existing laws.

Enforcement: The Customs and Excise Department is responsible for enforcing the criminal aspects of intellectual property rights. The department has a special IPR unit with over 100 employees; in addition to conducting raids on local establishments and street vendors, this unit works closely with the anti-smuggling task force to combat suspected smuggling operations. In the first eight months of 1993, there were 298 seizures of copyright infringing products with a total value of US $2.5 mil. lion and 614 seizures of goods violating trademarks and trade descriptions with a total value of US $50 million.

Most of the pirate manufacturers have been driven out of Hong Kong in the last several years. However, many have established operations across the border in south China. One U.S. music company has seen its sales in Hong Kong fall 40 per. cent in the last six months. Hong Kong judges have handed down penalties that seemed at times too light to be a deterrent, although recent cases indicate sentences may be getting tougher. However, attacking pirate production at its source will be the most

effective remedy for Hong Kong's market.

8. Worker Rights

Protection afforded under Hong Kong ordinances extends to both local and foreign workers in all sectors. Injuries and occupational diseases qualifying for compensa. tion, while normally not specified by industry, cover injuries resulting from use of industrial machinery as well as disease caused by exposure to physical, biological or chemical agents.

a. The Right of Association. The right of association and the right of workers to establish and join organizations of their own choosing are provided for under local law. Unions are defined as corporate bodies and enjoy immunity from civil suits arising from breaking of contingent contracts or interference with trade by work stoppages on the part of their members. The Hong Kong government does not discourage or impede union formation or discriminate against union members. Workers who allege anti-union discrimination have the right to have their cases heard by a government labor relations body.

b. The Right to Organize and Bargain Collectively. The right to organize and bargain collectively is guaranteed under local law. However, the latter is not widely practiced and there are no mechanisms to specifically encourage it. Instead, a dispute settlement system administered by the government is generally resorted to in the case of disagreements. In the case of a labor dispute, should initial conciliation efforts prove unsuccessful, the matter may be referred to arbitration with the consent of the parties or a board of inquiry may be established to investigate and make suitable recommendations.

c. Prohibition of Forced or Compulsory Labor.-Compulsory labor is prohibited under existing legislation.

d. Minimum Age of Employment of Children.—Under regulations governing the minimum age for employment of children, minors are allowed to do limited parttime work beginning at age 13 and to engage in full-time work at age 15. Employ. ment of females under age 18 in establishments subject to liquor regulations is prohibited. The Labor Inspectorate conducts work place inspections to ensure that these regulations are being honored.

e. Acceptable Conditions of Work.-Wage rates are determined by supply and demand. There is no legislated minimum wage. Hours and conditions of ork for women and young persons aged 15 to 17 in industry are regulated. There are no legal restrictions on hours of work for men. Overtime is restricted in the case of women and prohibited for all persons under age 18 in industrial establishments. In extending basic protection to its work force, the Hong Kong government has enacted industrial safety and compensation legislation. The Hong Kong Labor Department carries out inspections to enforce legislated standards and also carries out environ. mental testing and conducts medical examinations for complaints related to occupational hazards.

f. Rights in Sectors with U.S. Investment.-U.S. direct investment in manufacturing is concentrated in the electronics and electrical products industries. Aside from hazards common to such operations, working conditions do not differ materially from those in other sectors of the economy. Labor market tightness and high job turnover in the manufacturing sector have spurred continuing improvements in working conditions as employers compete for available workers.

Extent of U.S. Investment in Selected Industries.-U.S. Direct
Investment Position Abroad on an Historical Cost Basis-1993

(Millions of U.S. dollars)

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Petroleum
Total Manufacturing

Food & Kindred Products
Chemicals and Allied Products
Metals, Primary & Fabricated
Machinery, except Electrical
Electric & Electronic Equipment
Transportation Equipment

Other Manufacturing
Wholesale Trade
Banking
Finance Insurance Real Estate

-1
149
(1)
302
1,559

(1)
531

3,624 1,079 1,562

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993—Continued

(Millions of U.S. dollars)

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Income, Production and Employment:

Real GDP (1983 prices)
Real GDP Growth (pct.)
GDP (at current prices)
By Sector:

Agriculture
Mining
Manufacturing
Electricity/Gas Water
Construction
Retail Trade and Hotels
Transportation/Comm.
Banking/Finance
Real Estate
Government

Other Services
Real Per Capita GDP
Labor Force (millions)
Unemployment Rate (pct.)

Underemployment Rate (pct.)
Money and Prices (annual percentage growth):

Money Supply (pct. rise)
Interest Rate 1
National Savings (pct. GDP)
CPI (pct. change)
WPI (pct. change)

Exchange Rate (Rp/USD)2
Balance of Payments and Trade:
Total Exports

Exports to U.S. Total Imports

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Imports from U.S.
Aid from U.S.
Aid from All Sources
Foreign Debt (official private)
Debt Service Ratio
Foreign Exchange Reserves
Trade Balance
Trade Balance with U.S.

..........

........

4,332 27,279 2,777

155 4,948 72,927

32.1 11,161 6,687 1,555

5,439 28,587 2,770

94 5,110 85,837

30.0 12,352 8,872 2,669

5,999 31,446 3,254

90 5,202 89,858

31.2 13,140 9,865 2,745

N/A-Not available.

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