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European Union: Market Profile

Major Economic Indicators 
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Recent Developments

• 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, 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, has not only spawned instant repercussions across the global financial market, but also unleashed ambiguities over the future arrangements for Brexit. As Britain will remain in the EU until the conclusion of an exit agreement, significant changes may take time to unfold.

• For the EU as a whole, the loss of the UK, a leading financial centre and one of the few comparatively fast-expanding economies in Europe, will definitely have negative repercussions on EU growth. The union would further suffer from the absence of an influential supporter of trade and service liberalisation.

• More seriously, the UK departure could lead to a domino effect that threatens the whole EU, spurring some other member states to push for their own membership referendums. Even if no other member states ultimately choose to leave, any intensified anti-EU sentiment will hinder the further integration and development of the union, which may translate into a less lucrative, yet more difficult, market for the rest of the world.

• All EU member states adopt common external trade policy and measures, which affect their trade relations with Hong Kong/the Chinese mainland. 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 increased by 4% to US$40.2 billion in the first eleven months of 2017, while its imports from the EU rose by 7% to US$33.1 billion.

• As one of the most popular investment destinations, the inflows of foreign direct investment (FDI) to the EU amounted to US$566 billion in 2016, with China’s contributing US$10 billion. As of the end of 2016, China’s total stock of FDI in the EU exceeded US$69 billion, up from US$1.3 billion in 2006. Accounting for 2% of EU’s inward FDI stock, China, including Hong Kong, was the 5th-largest non-EU FDI investor (after the US, Switzerland, Canada and Japan) in the bloc in 2016.

• 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. According to European Commission estimations, the Investment Plan has the potential to add €330 to €410 billion to the EU's GDP and create 1 to 1.3 million new jobs in the coming three years. More information on the investment plan and the relevant regulations can be found at the European Investment Bank.

• To accommodate greater synergies, 15 of the 28 EU member states have signed Double Taxation Agreements (DTAs) with Hong Kong, including Austria, Belgium, the Czech Republic, France, Hungary, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Romania, Spain and the UK, while negotiations with Latvia, Cyprus, Finland 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.

EU Membership
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. 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 about two-thirds of the total EU output.

Current Economic Situation
So far, the EU economy has demonstrated resilience as it maintains the course of growth and job creation, thanks to a number of favourable factors such as acceleration in exports, a weaker euro, lower deflationary pressure and a continued support of accommodative monetary policy and fiscal stance. The new cycle of EU structural funds and a growing number of projects approved under the umbrella of the Investment Plan for Europe moving into the implementation phase have also helped some Member States to expedite their economic development plans and reforms.
Overall, after 2.0% growth in 2016, the EU economy is set to expand by a faster pace in 2017 and 2018, while eurozone’s GDP growth will also quicken to 2.1% this year and 1.9% next year, compared with 1.8% in 2016. This steady expansion should remain driven by domestic demand, thanks to the falling unemployment rate to 8% in 2017, the lowest since 2009. Investment, despite continued improvement in financing conditions, is expected to stay weak as firms would likely adopt a “wait and see” approach, given the uncertainties related to Brexit, the Catalonian referendum in Spain, the post-election developments in some major Member States, as well as the uncertainty over future US external policies, plus the spectre of terrorism, heightened geopolitical tensions and the lingering immigration problem.

Trade Policy
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.
Quotas
No quotas are imposed on textiles and clothing exports, as well as non-textile products exports from Hong Kong and the Chinese mainland 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. The Chinese mainland 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.
Anti-dumping Measures
The EU is legally required under World Trade Organization (WTO) rules to start treating the Chinese mainland as an industrialised “market economy” before the end of 2016, meaning it is no longer permitted to apply the tougher trade measures against the Chinese mainland 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 the Chinese mainland 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 the Chinese mainland’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 the Chinese mainland 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 Chinese mainland-origin products are subject to EU’s anti-dumping duties, including bicycles, bicycle parts, ceramic tiles, ceramic tableware and kitchenware, fasteners, ironing boards and solar glass, which are of interest to Hong Kong exporters. As at end-December 2017, the EU did not apply any AD measures on imports originated from Hong Kong.
Other Measures
To combat the spread of the Asian longhorn beetle, the EU introduced in July 1999 emergency controls on wooden packaging material originating in the Chinese mainland. 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 will widen, as from 22 July 2019, the current 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 as of 2016 and 65% as of 2019) and a wider scope of measure 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 [1]
Hong Kong’s total exports to the EU increased by 4% to US$40.2 billion in the first eleven months of 2017, following a 1% decrease to US$42.4 billion in 2016. Major export items in January-November 2017 included telecommunications equipment & parts (shared 29% of the total), computers (8%), electrical apparatus for electrical circuits (6%), semi-conductors, electronic valves & tubes (5%), pearls, precious & semi-precious stones (5%), toys, games & sporting goods (4%), articles of apparel, of textile fabrics (4%), jewellery (3%), electrical machinery & apparatus (3%), watches and clocks (3%), electric power machinery & parts (3%), and parts & accessories of office machines/computers (3%).
On the other hand, Hong Kong’s imports from the EU rose by 7% to US$33.1 billion in the first eleven months of 2017, after decreasing by 4% to US$34.2 billion in 2016. Major import items in January-November 2017 included pearls, precious & semi-precious stones (shared 7% of the total), non-electric engines & motors & parts (5%), travel goods & handbags (5%), aircraft & associated equipment; spacecraft & parts (5%), jewellery (4%), silver & platinum (4%), telecommunications equipment & parts (4%), semi-conductors, electronic valves & tubes (4%), perfumery, cosmetics or toilet preparations (excluding soaps) (3%), fresh, chilled or frozen meat & edible meat offal (3%), measuring, checking, analysing & controlling instruments & apparatus (3%), medicaments (including veterinary medicaments) (3%) and milk and cream and milk products other than butter or cheese (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 the Chinese mainland. As of June 2017, there were 452 EU companies with regional headquarters in Hong Kong, while another 705 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$157 billion (or HK$1,217 billion) as at the end of 2016.
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 more than 29,000 EU nationals resided in Hong Kong as at the end of 2017.

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[1] 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.

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