10 Jan 2020
European Union: Market Profile
Major Economic Indicators
- Croatia acceded to the EU on 1 July 2013, signifying the latest enlargement of the Union after the entry of Bulgaria and Romania on 1 January 2007. Now, the EU is a trading bloc of 28 countries. However, in the European Commission’s latest Western Balkans strategy, Serbia and Montenegro have been given a tentative date for possible accession to the bloc by 2025.
- On the other hand, the UK voted to leave the EU in a historic referendum held on 23 June 2016 and triggered the formal exit process on 29 March 2017. This, together with the snap general election held on 8 June 2017 and the resignation of then-Prime Minister Theresa May, has not only spawned instant repercussions across the global financial market, but also unleashed ambiguities over the future arrangements for Brexit, including the failure to forge consensus around potential Brexit options in the UK parliament.
- All EU member states adopt common external trade policy and measures, which affect their trade relations with Hong Kong and mainland China. Meanwhile, following Lithuania’s embracement of the euro as their new legal tender on 1 January 2015, 19 EU members have adopted the euro as their legal tender.
- Hong Kong’s total exports to the EU grew by 2% to US$27.3 billion in the first seven months of 2019, while its imports from the EU rose by 3% to US$23.3 billion.
- As one of the most popular investment destinations, the inflows of foreign direct investment (FDI) to the EU amounted to US$163 billion in 2017. As of the end of 2017, China’s total stock of FDI in the EU exceeded US$86 billion, up from US$3.2 billion in 2008. Accounting for 3% of EU’s inward FDI stock, China, including Hong Kong, was the 8th-largest non-EU FDI investor (after the US, Switzerland, Bermuda, Jersey, Cayman Islands, Canada and Japan) in the bloc in 2017.
- To overcome the low investor confidence and therefore weak investment, the European Council and the Parliament has endorsed the Investment Plan for Europe, including the decision to set up a European Fund for Strategic Investments (EFSI) which has become operational since mid-2015. Encouraged by a higher-than-targeted €424 billion public and private investment approved, the EFSI has been extended to end-2020 with the updated target of €500 billion. More information on the investment plan and the relevant regulations can be found at the European Investment Bank.
- To accommodate greater synergies, 16 of the 28 EU member states have signed Double Taxation Agreements (DTAs) with Hong Kong, including Austria, Belgium, the Czech Republic, Finland, France, Hungary, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Romania, Spain and the UK, while negotiations with Cyprus, Estonia and Germany are in progress.
- Moreover, Hong Kong has signed Investment Promotion and Protection Agreements (IPPAs) with Austria, the Belgo-Luxembourg Economic Union (consisting of Belgium and Luxembourg), Denmark, Finland, France, Germany, Italy, the Netherlands, Sweden and the UK.
The EU, before 1 May 2004, consisted of 15 developed countries in Western Europe, namely Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.
On 1 May 2004, the EU enlarged into Central and Eastern Europe and the Mediterranean, and 10 countries in the region, including Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, joined the EU as its member states.
Croatia acceded to the EU on 1 July 2013, signifying the latest enlargement of the Union after the entry of Bulgaria and Romania on 1 January 2007. Yet the UK notified the EU of its decision to quit the EU on 29 March 2017, while Serbia and Montenegro have been given a tentative accession date by 2025. For now, the EU is a trading bloc of 28 countries, with Germany, France, the UK and Italy remaining the four biggest economies, which together account for more than 60% of the total EU output.
Current Economic Situation
Following seven consecutive quarters of vigorous GDP growth, the EU economy moderated but still ended 2018 with 2% GDP growth, thanks to a number of factors such as escalated trade tensions with the US, political uncertainty in some Member States, as well as slowing manufacturing and export activities in major EU economies such as Germany, France, the UK and Italy. To cope with the downside risks, the European Central Bank (ECB) would keep elements of its exceptionally loose monetary policy fundamentals after ending its quantitative easing program last year. In addition to the reinvestments from the previous asset purchase programme (APP), there will be a new series of APP at a monthly pace of EUR20 billion starting from 1 November 2019 and quarterly targeted longer-term refinancing operations (TLTRO-III) starting September 2019 till March 2021.
Overall, both the eurozone and EU are set to continue expanding in 2019, albeit at a slower pace than 2018 and 2017 when growth soared to a decade high. With the near-term growth prospects weakening, the European Commission expected the EU and the eurozone to post a slower growth of 1.2-1.4% for 2019 and 1.4-1.6% for 2020.
All EU member states adopt common external trade policy and measures. Meanwhile, 19 EU members, including Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain, have adopted the euro as their legal tender.
No quotas are imposed on textiles and clothing exports, as well as non-textile products exports from Hong Kong and mainland China at present.
Scheme of Generalised Tariff Preferences
The EU’s new scheme on generalised system of preferences (“GSP”) entered into effect on 1 January 2014. The new GSP focuses preferences exclusively on those countries that do need them. The number of GSP beneficiaries has been reduced from 178 to 92 compared to the previous scheme. Mainland China has graduated from the EU’s GSP since 1 January 2015, while Hong Kong has been fully excluded from the scheme since 1 May 1998.
The EU is legally required under World Trade Organization (WTO) rules to start treating mainland China as an industrialised “market economy” before the end of 2016, meaning it is no longer permitted to apply the tougher trade measures against mainland China by reason of its classification as a “non-market economy”. In response to the deadline of 11 December 2016 and the filing of a WTO case against the EU by mainland China on 12 December 2016, the EU reached breakthrough on the reform of EU Trade Defence Instruments (TDIs) abolishing the distinction between market and non-market economies, while trying to keep tariffs on dumped goods at a similar level as today. As mainland China’s challenge of the EU AD methodology at the WTO could take years, even up to 2021, during which the EU would be able to continue to treat mainland China as a non-market economy.
The EU has initiated anti-dumping (AD) proceedings against certain mainland-origin products. As it now stands, there are a number of mainland China-origin products subject to EU’s anti-dumping duties, including bicycles, ceramic tiles, ceramic tableware and kitchenware, ironing boards and solar glass, which are of interest to Hong Kong exporters. As at end-August 2019, the EU did not apply any AD measures on imports originated from Hong Kong.
To combat the spread of the Asian longhorn beetle, the EU introduced in July 1999 emergency controls on wooden packaging material originating in mainland China. Wood covered by the measures must be stripped of its bark and free of insect bore holes greater than 3mm across, or have been kiln-dried to below 20% moisture content.
For health reasons, the EU has adopted a Directive on the control of the use of nickel in objects intended to be in contact with the skin, such as watches and jewellery. Following the emergency ban adopted in December 1999, the EU has adopted a Directive to ban the use of some phthalates in certain PVC toys and childcare articles on a permanent basis, which came into effect from 16 January 2007. In addition, the EU has adopted a Directive to prohibit from September 2003 the trading of clothing, footwear and other textile and leather articles which contain azo-dyes, from which aromatic amines may be derived.
On the other hand, the EU has adopted a number of Directives for environmental protection, which may have an impact on the sales of a wide range of consumer goods and consumer electronics. Notable examples include the Directive on Waste Electrical and Electronic Equipment (WEEE) implemented in August 2005, and the Directive on Restriction of Hazardous Substances (RoHS) implemented in July 2006. On 3 December 2008, the European Commission (EC) presented two proposals: one for a recast RoHS Directive and the other for a recast WEEE Directive.
The recast RoHS Directive was published on 1 July 2011 and entered into force on 2 January 2013. The new Directive continues to prohibit EEE that contains the same six dangerous substances as the old RoHS Directive. Nonetheless, the new Directive has widened, since 22 July 2019, the scope of the previous RoHS Directive, by including any EEE that will have fallen out of the old RoHS Directive’s scope, with only limited exceptions.
Another important law for Hong Kong companies to grapple with concerns waste EEE, i.e., the WEEE Directive. With the formal approval on 7 June 2012, the recast WEEE Directive entered into force on 13 August 2012, while Member States have until 14 February 2014 to transpose the new directive into national law. In brief, the recast WEEE Directive will see Member States subject to higher collection/recycling targets (i.e. 45% collection rate from 2016 to 2018 and 65% as of 2019) and a wider scope of measures covering essentially all electric and electronic equipment, while establishing producer responsibility as a means of encouraging greener product designs.
On the heels of the recast RoHS and WEEE Directives, the EU’s new framework Directive for setting eco-design requirements for energy-related product (ErP) is now in place. The ErP Directive is no longer limited to only EEE (as it was under its predecessor, the energy-using product, or EuP, Directive), but potentially covers any product that is related to the use of energy, including shower heads and other bathroom fittings, as well as insulation and construction materials.
Moreover, REACH, an EU Regulation which stands for Registration, Evaluation, Authorisation and Restriction of Chemicals, entered into force in June 2007. Among others, it requires EU manufacturers and importers of chemical substances (whether on their own, in preparations or in certain articles) to gather comprehensive information on properties of their substances produced or imported in volumes of 1 tonne or more per year, and to register such substances prior to manufacturing in or import into the EU.
Following the entry into force of the new Toy Safety Directive (Directive 2009/48/EC) on 20 July 2011, the Official Journal of the EU published on 11 August 2011 references to two important safety standards concerning electric toys (EN 62115:2005 and its amendment EN 62115:2005/A2:2011) and two previous standards on the mechanical and physical properties of toys and a standard on the flammability of toys.
Hong Kong's Trade with the EU 
Hong Kong’s total exports to the EU increased by 2% to US$27.3 billion in the first seven months of 2019, following a 10% increase to US$48.8 billion in 2018. Major export items in January-July 2019 included telecommunications equipment & parts (shared 32% of the total), computers (7%), electrical apparatus for electrical circuits (6%), semi-conductors, electronic valves & tubes (5%), pearls, precious & semi-precious stones (5%), electrical machinery & apparatus (3%), jewellery (3%), works of art, collectors’ pieces and antiques (3%), articles of apparel, of textile fabrics (3%) and parts & accessories of computers and office machines (3%).
On the other hand, Hong Kong’s imports from the EU rose by 3% to US$23.3 billion in the first seven months of 2019, after increasing by 10% to US$40 billion in 2018. Major import items in January-July 2019 included pearls, precious & semi-precious stones (shared 7% of the total), non-electric engines & motors & parts (7%), travel goods & handbags (6%), silver & platinum (5%), jewellery (5%), aircraft & spacecraft associated equipment & parts (4%), works of art, collectors’ pieces and antiques (4%), semi-conductors, electronic valves & tubes (4%), perfumery, cosmetics or toilet preparations (excluding soaps) (4%) and telecommunications equipment & parts (3%).
EU’s Involvement in the Hong Kong Economy
Many EU companies have used their operations in Hong Kong as a springboard to other Asia-Pacific markets, especially mainland China. As of June 2018, there were 452 EU companies with regional headquarters in Hong Kong, while another 709 had regional offices.
The EU is one of the major sources of foreign direct investment in Hong Kong. According to the latest available figures from the Census and Statistics Department, the total stock of direct investment from the EU amounted to US$171 billion (or HK$1,333 billion) as at the end of 2017.
The EU is well represented in trading, finance, insurance, retailing, transportation and other sectors of the Hong Kong economy. Major companies with EU interests include the HSBC, Standard Chartered Bank, Barclays Bank, Inchcape, ICI (China), Prudential Portfolio Managers, Marks & Spencer, British Airways, Commerzbank AG, Deutsche Bank, BASF, L’Occitane, Lufthansa German Airlines, Siemens, TÜV Rheinland, BNP Paribas, Credit Agricole, LVMH Asia Pacific Ltd, Parfums Christian Dior Far East, Air France, ABN AMRO, P&O Nedlloyd (H.K.) Ltd., Philips Hong Kong Ltd., Shell Hong Kong Ltd, Banco di Roma and Ericsson Limited.
Reflecting EU’s widespread interests locally, there were some 45,000 EU nationals resided in Hong Kong as of August 2019.
 Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies.