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Russell Barling

'To enhance the air cargo handling capacity of Hong Kong International Airport, continuous efforts will be made to increase the number of cargo freighter parking stands and to expand its air cargo terminal facilities ... to reinforce our position as an international and regional aviation hub.'

Donald Tsang Yam-kuen,

Hong Kong Chief Executive

during his 2006 Policy Address

As expected, our cautious chief executive steered well clear of controversial issues during his policy address this week.

And why not - he is so far ahead of his nearest rival for re-election as chief executive that the only possible outcome from tackling contentious issues such as a minimum wage or goods and services tax (GST) head on would have been to let someone else into the race.

Nonetheless, it's likely the logistics community took heart from hearing Sir Donald keep the fate of the aviation sector - particularly as it applies to the transport of high-value goods - at the centre of any near-term government initiatives.

Especially since pending tax reform proposals had many believing the government had forsaken or at least forgotten the industry and its important contribution to our economy.

Mr Tsang and his ilk are trying to convince a hugely sceptical logistics community that enough exemptions such as a  zero tax regime for qualified exporters have been built into present GST proposals that their industry 'would remain internationally competitive', according to an executive summary of the proposal. But rather than assuage concerns, the administration's rationale has only heightened suspicion that there remains a huge degree of ignorance among government policymakers about how Hong Kong's logistics industry works.

The government's argument during the present consultation period has been that GST exemptions and compensatory reductions in vehicle registration and trade declaration fees will leave the industry in a revenue-positive position, mitigating the impact of the tax.

This argument is hugely naive. Anyone paying attention to our trade transport industry of late knows that just about our last competitive advantage vis-a-vis the mainland is Hong Kong's status as a free port.

That status allows local traders and their transport providers unlimited flexibility to consolidate products and consignments, as well as to add any last-minute touches such as language-specific labels to products before shipping them to their final markets.

All of this is done in thousands of buildings and loading bays across Hong Kong without having to be under the watchful eye of customs.

Taxing specific products - at whatever level - would require secure segregation of those goods for accounting purposes. It would require bonded warehouses and bonded trucks and it would add many more steps to a trade-documentation process the industry has been at pains to reduce.

Moreover, it would change forever the way the industry does business here, slowing and complicating the facilitation of trade to the detriment of the estimated 850,000 people the government itself says work in our import/export-driven industries.

Inevitably, it would result in a significant exodus to the mainland by cargo agents, transport firms and warehouse and terminal operators and the trade they handle.

The Hongkong Association of Freight Forwarding and Logistics (Haffa), whose members comprise 95 per cent of Hong Kong-based forwarding firms, is well aware of the threat posed by a GST.

'It is not about how they apply the GST, it's about how it will totally change the present way we do business,' Haffa chairman Kelvin Leung Kai-yuen said yesterday.  'The introduction of a GST will significantly compromise the competitive edge Hong Kong has for being a logistics hub.'

Haffa is part of a growing camp that believes there is no compromise to be found that would allow a GST and Hong Kong's free-port status to co-exist.

A GST, they say, would severely compromise the future of an industry that by some estimates directly and indirectly contributes as much as a third  to our gross domestic product.

It is a decision Mr Tsang and his cohorts will have to weigh heavily. Getting it wrong could put a lot of people out of work and preclude the need to expand the cargo terminals or the freighter stands at the airport.



GST will destroy our competitive advantage as a free port