A former British territory handed over to China in 1997, but still preserving a fairly autonomous and independent economy (according to the formula, "one country, two systems"), and one of the principal export-led growth Asian economies, the small Hong Kong SAR (special administrative region) has a central place in the East Asian production and distribution channels as one of the leading RDCs (regional distribution centers) together with Shanghai, Shenzhen and Singapore. Hong Kong is the world's 10th largest trading economy, the sec- ond in Asia as recipient of FDIs after China and often the first port of call for Western companies approaching Asian markets, both to export and for sourcing. A very sophisticated service economy more than anything else - services account for more than 90 percent in terms of contribution-Hong Kong's GDP is based on four main sec- tors, trading and logistics (25.5 percent of GDP in 2011), tourism (4.5 percent), financial services (16.1 percent), and professional services of various kinds (12.4 percent). What makes Hong Kong so attractive? History aside, there are many important factors which are of key relevance when a company decides to get global and enter Asian markets, now acknowledged as the engines of world growth. First of all, Hong Kong is a free trade zone, in the sense that all products, with the exception of specific items, like tobacco and spirits, enjoy zero taxes in imports and exports. This has allowed a series of advantages, such as the offshoring of manufacturing to the neighbor- ing Guangdong province in China since the 1970s, and then import- ing outputs to Hong Kong for packaging, advertising and further re-exports. A rapid look at the Hong Kong Trade and Development Centre's trade statistics will show that the majority of the HK SAR's exports is actually re-exports of imported products, from China and abroad. In fact, total exports of Hong Kong were about U.S. $490 billion in 2012, where re-exports account for U.S. $432 billion. China, unsur- prisingly, is the main supplier of imports, even if many countries take benefit of the free-trade regime. In the specific case of China, this has been made even easier since the signature of CEPA, Closer Economic Partnership Arrangement. The CEPA Treaty, signed in 2004 and first ever between the two entities, is now a building block of the progres- sively closer integration of Hong Kong's economy with the Chinese mainland, not only in the traditional manufacturing and logistics sectors, but in services too, which are generally off-limits to foreign companies. Thanks to CEPA's provisions, Hong Kong suppliers are enjoying preferential treatment when entering into the mainland mar- ket in various service areas, and can also have professional titles and qualifications recognized in China. Infrastructures account for a lot of Hong Kong's success in inter- national trade and investments. First, it has an impressive network for exhibitions and conven- tions. It is considered one of the most efficient and organized in the world, with locations like the Hong Kong Convention and Exhibition Centre (HKCEC) in the main business district, the AsiaWorld-Expo near the international airport and the Hong Kong International Trade and Exhibition Centre in Kowloon area. According to government's statistics, the exhibition business contributed around U.S. $4.6 billion to Hong Kong's economy in 2010, i.e., 2.1 percent of Hong Kong's GDP, and it keeps growing steadily. Almost 60,000 companies exhib- ited in 2012 in one of Hong Kong's numerous trade fairs, with the number of visitors reaching 1.7 million (around one-fifth of the whole Hong Kong population, to give a fair idea); the sector also provides employment for about 60,000 full-time workers. All these factors contribute to creating a very positive environment for external trade logistics, which is where Hong Kong's specialty lies. A veritable trade hub, Hong Kong is now a key component in the Asian supply chains, and its deepwater port is one of the world's most competitive. Namely, it ranks as the world's busiest airport for international cargoes, and the third busiest container port, after Shanghai and Singapore, with 23.10 million TEU in 2012. Hong Kong International Airport (HKIA) at Chek Lap Kok is the busiest cargo gateway and one of the 10 passenger airports in the world. The world's most important for container traffic from 1987 to 1989, from 1992 to 1997, and from 1999 to 2004, the deepwater port operates nine container terminals in three locations - Kwai Chung, Stonecutters Island and the recently completed Tsing Yi. There are many important operators, like Modern Terminal (by Wharf and Swire), Hongkong International Terminals (owned by Hutchison Whanpoa) and COSCO (a Mainland China government-owned ship- ping company). Many Western companies have started using Hong Kong not only as a hub, but also as a location to showcase brands to be sold later in Chinese markets, since it is known that in the fashion business espe- cially, Hong Kong is the city of references for mainland customers who increasingly visit the SAR on shopping sprees (more than 48 million visitors have been recorded in 2012, with Mainland Chinese account- ing for 72 percent of the total). Nevertheless, there are challenges awaiting Hong Kong. The SAR is a late starter, compared to, say, Singapore or Taiwan, when it comes to RTA-partnerships, which are progressively becoming a fundamental tool in international trade. Unlike others, Hong Kong only has four of these agreements - CEPA; the one with the four-member European Free Trade Association (EFTA), i.e., Iceland, Liechtenstein, Norway and Switzerland; Chile; and New Zealand. One with the ASEAN bloc is only at its inception. Furthermore, given its free port status, Hong Kong has less to offer in terms of tariff cuts. However, given its privileged status with China, and its strengths in financial and legal services, odds are that the Hong Kong SAR will maintain its position as one of the world leading trading economies. Discussion Questions What are the elements that make Hong Kong so successful in terms of external trade? Analyze the role of exhibition industry in Hong Kong. Using the sources provided and with the help of online re- search, illustrate the main features of Hong Kong as a logis- tics hub, especially regarding its deepwater port. Why do Western companies increasingly use Hong Kong to showcase their products? What are the main challenges awaiting Hong Kong in its efforts to remain the world's 10th largest trading economy?