Macau, China: March 2001

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Business as usual in Macau, China's highly open economy  

Macau, China's trade and investment regime remains among the most open in the world; it was virtually unaffected by the Asian crisis, and the Territory's reversion to China and its designation as the Macau Special Administrative Region (MSAR). The Government's approach has long been to let free and open markets be the main determinant of the allocation of resources within the MSAR and thus its economic development, says the report. It would appear that this approach to economic policy will continue in the foreseeable future; under the Territory's Basic Law that provides for “one country, two systems”, the MSAR will enjoy a high degree of autonomy for 50 years in the administration of all its affairs except defence and foreign policy, according to a WTO report on the trade policies and practices of Macau, China.

The report notes that economic crisis in Thailand in July 1997 and its spread to other countries in (and beyond) South-East Asia seriously impaired the Territory's economic performance, which had already started to deteriorate in 1996; real GDP contracted in four successive years (1996-99), with largest negative growth, of 4.6%, in 1998.

Trade is critical to the economy, the report stresses, with exports and imports (of goods and services) equivalent to roughly 80% and 50% of GDP, respectively, in 1999. Although the Territory's merchandise trade account has been in deficit, this has been more than offset by a large surplus in services trade, mainly involving tourism and related activities such as gambling.

The report says that the pegging of the pataca to the Hong Kong dollar severely limits the authorities' scope for controlling the money supply. The outcome is relatively high real interest rates. The peg to the Hong Kong dollar and thus indirectly to the U.S. dollar has also resulted in an effective appreciation of the pataca, particularly in relation to the devalued currencies of countries in the region. The authorities believe that the advantages of the peg outweigh its disadvantages.

The high degree of openness of the economy for trade in goods is indicated by the duty-free entry of all imports into Macau, China. While only 23% of tariff lines have been bound, all bound tariffs are zero; moreover, the status of Macau, China as a free port under the Basic Law appears to preclude increases in applied rates for those tariff lines that are unbound.

The report also points out that Macau, China introduced new laws with respect to intellectual property rights in 1999, aimed, in particular, at ensuring compliance with the TRIPS Agreement. These new laws established a comprehensive legal framework for protecting intellectual property rights.

Macau, China is largely a services-based economy: services accounted for 90% of GDP and 69% of employment in 1998. The share of services in the economy has been growing and the authorities expect this trend to continue owing to investment in infrastructure (i.e. the new international airport and improved port facilities), which has facilitated access to Macau, China, and continuing efforts to improve the quality and diversity of services related to tourism, the mainstay of the economy. Community and social services alone, including gambling and casino activities accounted for nearly 47% of GDP (and over 28% of employment). By contrast, the industrial sector (manufacturing and construction) accounts for some 13% of GDP and provides about 31% of all jobs, suggesting that labour productivity in this sector is relatively low. The contribution of agriculture and fisheries to GDP and employment is negligible.

The openness of the Macau, China economy to trade in agricultural and, particularly, manufactured products has undoubtedly contributed to competition in domestic goods markets, in the absence of an over-arching competition law. While there are few formal barriers to foreign direct investment (FDI) to impede the establishment of foreign firms providing services, competition in several services markets could nonetheless be improved. Key services, such as electricity, water, telecommunications, and transport, are currently provided by private companies with exclusive rights under government concessions. Gambling services, another major subsector, has remained a private monopoly since 1961, although this particular concession is scheduled to expire in 2001.

The Government forecasts growth of 2.4% for 2000, which is considerably lower than that of Macau's neighbours, including Mainland China and Hong Kong, China. But there are some other positive signs of economic recovery, particularly in tourism, where the number of visitors between January and September 2000 increased by 24.3% compared with the same period of the previous year; and in exports, which increased by about 17% in the first eight months of 2000. In the first quarter of 2000, however, the real estate subsector was still weak. In order to alleviate high unemployment, the Government has, inter alia, been encouraging more public infrastructure projects, reducing the amount of quotas on foreign workers, and providing additional employment training and re-training courses.

Note to Editors

Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries' trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO's full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB's meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO's Secretariat report, together with a policy statement prepared by the Government of Macau, China will be discussed by the Trade Policy Review Body on 19 and 21 of March 2001. The Secretariat report covers the development of all aspects of Macau, China trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.

Attached to this press release is a summary of the observations in the Secretariat report and parts of the government policy statement. The Secretariat report and the government's policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes of the TPRB's discussion and the Chairman's summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bahrain (2000) Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992, 1996 and 2000), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995), Côte d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Ghana (1992 and 2001), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995,1998 and 2000), Kenya (1993 and 2000), Korea, Rep. of (1992, 1996 and 2000), Lesotho (1998), Macau (1994 and 2001), Madagascar (2001), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), Mozambique (2001), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and 2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991, 1996 and 2000 (jointly with Liechtenstein), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

 

The Secretariat’s report:  back to top

summary 

TRADE POLICY REVIEW BODY: MACAU, CHINA
Report by the Secretariat — Summary Observations

The period since the previous Review of Macau, China in late 1994 has been marked by two main events. The most important of these was Macau's reversion to the People's Republic of China (PRC), on 20 December 1999, and its designation as a Special Administrative Region (SAR). Under the Basic Law of the Macau Special Administrative Region (MSAR) of the People's Republic of China (Basic Law), which provides for "one country, two systems", the MSAR has a high degree of autonomy for 50 years in the administration of all its affairs, except defence and foreign policy. The MSAR has retained its status as a free port and is exempt from all taxes imposed by the central government of the PRC. Thus, the Territory's reversion to the PRC appears to have had little, if any, effect on its trade and trade-related policies. On the other hand, since the reversion the authorities have succeeded in sharply reducing crime, much to the benefit of tourism; they have also taken steps to build a more robust civil society, with local people seemingly participating more in public life than previously.

Macau's reversion to China took place subsequent to the other main event during the review period, namely the outbreak of the economic crisis in Thailand in July 1997 and its spread to other countries in (and beyond) South-East Asia. This crisis seriously impaired the Territory's economic performance, which had already started to deteriorate in 1996; real GDP contracted in four successive years (1996-99), with largest negative growth, of 4.6%, in 1998. Concurrently, the unemployment rate has more than doubled since 1997 (reaching 7.1% in the second quarter of 2000). At the same time, the MSAR has experienced mild deflation since 1998.

Trade is critical to the economy, with exports and imports (of goods and services) equivalent to roughly 80% and 50% of GDP, respectively, in 1999. Although the Territory's merchandise trade account has been in deficit, this has been more than offset by a large surplus in services trade, mainly involving tourism and related activities such as gambling.

Macroeconomic policies

The autonomy of Macau, China in formulating its monetary policy is stipulated by the Basic Law; the Law further stipulates that neither foreign exchange nor capital controls can be used. The objective of monetary policy is to maintain the stability of both the currency and the financial system. Accordingly, the Basic Law requires that the MSAR's currency, the Macau pataca, be fully backed by a reserve fund. The exchange rate is pegged at 1.03 to the Hong Kong dollar, and hence indirectly to the U.S. dollar, under a currency-board type of arrangement.

The pegging of the pataca to the Hong Kong dollar severely limits the authorities' scope for controlling the money supply. The outcome is relatively high real interest rates. The peg to the Hong Kong dollar and thus indirectly to the U.S. dollar has also resulted in an effective appreciation of the pataca, particularly in relation to the devalued currencies of countries in the region. The authorities believe that the advantages of the peg outweigh its disadvantages. One possible major disadvantage is that the effective appreciation of the pataca and high real interest rates may hamper both the Territory's economic recovery and the Government's efforts to diversify the economy. On the other hand, the authorities consider that maintenance of the peg of the pataca to the Hong Kong dollar imparts a high degree of stability to the financial system and the economy as a whole.

Macau, China has no exchange controls, other than the obligation imposed on merchandise exporters to convert 40% of their export proceeds in foreign currency into patacas. There are no other controls on the use of payments or invisible receipts, nor are there any restrictions on capital flows.

The Basic Law requires the MSAR Government to strive to achieve fiscal balance, which accords with the Territory's traditional practice of prudent fiscal policy. There has been a fiscal surplus, albeit declining, since 1994; the surplus in 1999 was P 306 million (0.6% of GDP), about one fifth of that in 1994. The share of public expenditure in GDP, including by autonomous bodies, has been increasing since 1994. It is estimated to have been about 20% in 2000, although data are not always readily available; transparency with respect to expenditure, especially in the area of government procurement, could be improved. Taxes on gambling and other exclusive concessions accounted for about 31% of government revenue in 1998. As about 95% of the land in the MSAR is owned by its Government, the leasing of land is another major source of government revenue.

Trade and Trade-Related Policies and Measures

Neither the Asian crisis, nor Macau's reversion to China in December 1999 has materially altered the Territory's trade and investment regime, which remains among the most open in the world. The Government's approach has long been to let free and open markets be the main determinant of the allocation of resources within the MSAR and thus its economic development. Since its Review in 1994, there have been few major trade policy-related changes in Macau, China, other than those related to commitments made in the Uruguay Round. One of the main developments in this regard has been the strengthening of protection accorded to intellectual property rights.

The high degree of openness of the economy for trade in goods is indicated by the duty-free entry of all imports into Macau, China. While only 23% of tariff lines have been bound, all bound tariffs are zero; moreover, the status of Macau, China as a free port under the Basic Law appears to preclude increases in applied rates for those tariff lines that are unbound. Although the consumption tax is levied on domestically manufactured and imported goods alike, it falls disproportionately on imports because there is little, if any, local production of the goods subject to the tax. Non-tariff barriers to trade (NTBs) are few; by and large, they involve measures aimed at ensuring security as well as protecting public health and the environment (including endangered species). The recent inclusion of equipment and material used for the manufacture of optical discs in the list of imports requiring prior authorization is one of several measures intended to curtail the infringement of intellectual property rights. Macau, China has no legal instrument protecting domestic producers from perceived unfair foreign trading practices in the form of dumping or export subsidies.

Besides export licensing, there are virtually no government controls on exports except those maintained in accordance with UN sanctions and international conventions. Pursuant to the long-standing quota system maintained under the WTO Agreement on Textiles and Clothing, the MSAR restrains its exports of textiles and clothing in certain markets. The authorities' allocation of export entitlements tends to favour entrenched interests. The MSAR does not grant any assistance to exports other than tax incentives, which are not specific to any sector.

Although Macau, China also maintains an open foreign investment regime, with few restrictions on inbound or outbound investment, both domestic and foreign investments are, in practice, prevented in some key services owing to the Government's granting of exclusive rights to certain companies in the form of concessions.

While Macau, China has not made any significant changes to its legislation on government procurement since 1994, it has taken steps to simplify procedures and enhance transparency in order to attract a larger number of bids. Purchases of foreign goods and services exceeding a certain threshold are approved only if there is no local supplier. At the same time, employment of local labour is encouraged in all procurement activities. Macau, China is not a party to the Government Procurement Agreement, but it does plan to become more involved in the Working Group on Transparency in Public Procurement.

Macau, China introduced new laws with respect to intellectual property rights in 1999, aimed, in particular, at ensuring compliance with the TRIPS Agreement. These new laws established a comprehensive legal framework for protecting intellectual property rights. Furthermore, the authorities have shown their determination to improve enforcement of these laws. Nevertheless, gaps do appear to remain; for example, there is some doubt as to whether the penalties actually imposed are sufficient to constitute an effective deterrent.

The internal tax system of the MSAR is characterized by a low overall level of taxation relative to GDP (13%) and relatively heavy reliance on direct taxes, especially those derived from gambling. Most direct taxes, notably those on profits and employment income, are levied at low rates, which contributes to the Territory's attractiveness for domestic and foreign investors. At the same time, however, the tax system is used as the main instrument of industrial policy, with various tax incentives being offered to projects that, inter alia, promote industrial diversification, encourage exports to new markets, contribute to technological progress, raise value added, and create employment. Refundable and non-refundable grants as well as interest rate subsidies are also provided. In addition, as 95% of all land in the MSAR is owned by the Government, the seemingly complex (and possibly discretionary) system for leasing government-owned land constitutes a potential instrument of economic policy.

Confident of the disciplinary effects of an open market environment, Macau, China has no competition law as such; nonetheless, the 1999 Commercial Code establishes some general principles regarding competition policy in order to safeguard economic freedom and combat business practices that impair competition. While the openness of the Macau, China economy to trade has undoubtedly fostered competition as far as goods are concerned, competition appears to be somewhat lacking in several service activities.

Sectoral Issues

Macau, China is largely a services-based economy: services accounted for 90% of GDP and 69% of employment in 1998. The share of services in the economy has been growing and the authorities expect this trend to continue owing to investment in infrastructure (i.e. the new international airport and improved port facilities), which has facilitated access to Macau, China, and continuing efforts to improve the quality and diversity of services related to tourism, the mainstay of the economy. Community and social services alone, including gambling and casino activities accounted for nearly 47% of GDP (and over 28% of employment). By contrast, the industrial sector (manufacturing and construction) accounts for some 13% of GDP and provides about 31% of all jobs, suggesting that labour productivity in this sector is relatively low. The contribution of agriculture and fisheries to GDP and employment is negligible.

The openness of the Macau, China economy to trade in agricultural and, particularly, manufactured products has undoubtedly contributed to competition in domestic goods markets, in the absence of an over-arching competition law. Though there are few formal barriers to inbound foreign direct investment (FDI) per se that would impede the establishment of foreign firms providing services, competition in several services markets could nonetheless be improved. Key services, such as electricity, water, telecommunications, and transport, are currently provided by private companies with exclusive rights under government concessions. Gambling services, another major subsector, has remained a private monopoly since 1961, although this particular concession is scheduled to expire in 2001. The resulting restraint on competition in these and other services enables suppliers to charge higher prices not just to consumers, but to firms for which services such as energy, telecommunications and transportation, for example, are important business inputs. The unduly high cost of such inputs would tend to impair such firms' competitiveness and discourage them from doing business in Macau, China, thereby hampering the Territory's economic development. The authorities note that initiatives are under way with a view to improving competition in certain services, notably telecommunications and gambling.

With the MSAR's current commitments under the GATS confined mainly to financial services, further commitments in other services could also foster economic development in Macau, China by reinforcing the Government's efforts to diversify the economy, especially away from gambling into other services. While the Government has announced plans to liberalize unilaterally some telecommunications activities, the making of additional commitments under the GATS in these and other fields would tend to enhance the transparency and predictability of the Territory's trade and investment regime and move the liberalization process forward in the services sector, much to the benefit of the MSAR economy as a whole.

Outlook

The Government forecasts growth of 2.4% for 2000, which is considerably lower than that of Macau's neighbours, including Mainland China and Hong Kong, China. But there are some other positive signs of economic recovery, particularly in tourism, where the number of visitors between January and September 2000 increased by 24.3% compared with the same period of the previous year; and in exports, which increased by about 17% in the first eight months of 2000. In the first quarter of 2000, however, the real estate subsector was still weak. In order to alleviate high unemployment, the Government has, inter alia, been encouraging more public infrastructure projects, reducing the amount of quotas on foreign workers, and providing additional employment training and re-training courses.

The continued recovery of several South-East Asian economies, the source of the majority of tourists to Macau, China, and recent growth in the United States and the European Union, where most of the MSAR's clothing exports are directed, also augurs well for economic recovery. These developments complement the gradual rebound in consumer spending and corporate activity in the MSAR. On the other hand, it remains to be seen whether the high real interest rates prevailing in Macau, China and the related high level of the real effective exchange rate hinder that recovery.

 

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Government report  

TRADE POLICY REVIEW BODY: MACAU, CHINA
Report by the Government — Part IV

Trade Environment

The fact that Macau, China is one of the smallest separate customs territories in the WTO, with a geographical size of only 23.8 km² and a population of around 450,000, imposes limitations on the government as well as economic operators. Therefore, the adoption of a laissez-faire, market-driven economic and trade policy has been demonstrated to be the only way in which Macau, China can achieve its economic development objectives.

In essence, the MSAR's primary concerns have been to provide a regulatory framework, which facilitates business for economic operators, but at the same time which meets the MSAR's international commitments and maintains a high level of credibility for the MSAR in the international community. Therefore, with a relatively small public administration, the MSAR has attempted to keep regulation to the minimum necessary, whilst at the same time providing legal certainty to facilitate business for economic operators.

Macau's merchandise trade is traditionally dependent on the export of manufactured goods, in particular clothing and textiles. The exports of these products accounted for approximately 85% of the total exported goods. Non-textile exports, namely footwear, toys, electronics, and other goods accounted for 7.3% of total sales abroad in 1999. The MSAR's main exporting markets are the United States and the European Union, accounting respectively to 46.9% and 30.2% of the total exported goods in 1999. Hong Kong SAR and the PRC are also destinations to MSAR's exports and accounted respectively for 6.8% and 9.2% of total exports in the same year. Re-exports, which are a part of exports, and represented 14.4% of the total exports in 1999, rose significantly in that year mainly to the PRC and Hong Kong SAR representing more than four-fifths of total re-exports. The major merchandise items were textiles and related products.

Since the major export items in Macau are textile and clothing products, the biggest group of imported merchandise is raw materials and semi-manufactures, accounting for around 48% of total imported goods in 1999. The remaining imported commodities are machinery and transport equipment, agricultural and consumer goods. The majority of imports are acquired predominantly from neighbouring Asian and Pacific economies. The PRC retained and bolstered its position as the biggest imports partner with a share of 35.6% (+3%), while the share of Hong Kong SAR fell remarkably by 5.6% points to 18.1% in 1999.

Given the importance of trade in goods to Macau's economy, the Government has - in the period under review - taken a number of practical measures to facilitate trade. Apart from products subject to licensing, imports and exports can be customs-cleared by means of a simple import-export declaration form. The Macau Marine Police and Customs (MMPC) is in the process of computerizing customs clearance procedures for all border entries to facilitate the flow of goods. The Government has also decided to implement electronic data interchange (EDI) system. This will allow licence applications and approvals to be handled electronically, thereby improving the efficiency and effectiveness of customs procedures and the accuracy of import data. The EDI project was initiated in September 1998. After the system is fully implemented, all documentation involved in foreign trade will be processed through EDI. Export licences for products subject to textile quota have been processed through EDI since September 2000. Finally, it is significant to note that 2001 will see the establishment of a customs services in the MSAR, the Commissioner for which has already been appointed.

With regard to invisible trade, the MSAR's export of services registered an annual average decline of 0.3% in the last six years, as a result of the fall in tourism related receipts. Imports of services posted an annual average growth rate of 7.8% in view of increased residents' consumption abroad and foreign services paid by the local airline. However, despite the performance of this sector, the service trade balance surplus has been sustained and reached MOP 16,054 million in 1999.

Investment Environment

In the first year of the MSAR's establishment, the Government has made great efforts to maintain a free, fair and open investment environment, in order to speed up economic recovery. The positive impact has been apparent even in the first half of 2000, when there has been a remarkable growth in exports and in the number of visitors entering the MSAR. In order to achieve the objectives set by the Government on becoming a regional services centre and a gateway to China, several measures have been adopted by the MSAR Government to improve the business environment and to encourage industrial and export diversification. Such measures include incentives to investments, various tax exemptions, interest subsidies on MOP bank loans for the purchase or leasing of new equipment, as well as for the purchase, construction or leasing of industrial buildings. The concession of government-owned land is also deemed as a potential instrument for projects, which would benefit the environment and stimulate economic growth and diversification. Further, the governmental agency — Macau Trade and Investment Promotion Institute (IPIM) — has been set up in order to provide assistance (for example the “One stop service”) to both local and foreign investors in implementing their investment projects.