Should tax incentives be used to support HK's maritime industry?

October 29, 2018 12:40
Hong Kong has been dropping as a hub for maritime services. We now rank seventh in the world, behind Singapore, Hamburg, Oslo, Shanghai, London and Rotterdam. Photo: Reuters

In her policy address on Oct. 10, Chief Executive Carrie Lam Cheng Yuet-ngor announced a large number of policies ranging from land to transport and healthcare. Understandably, her ideas on livelihood issues grabbed a lot of media and public attention. But some of her economic proposals were perhaps overlooked.

These included various initiatives in emerging sectors like IT, creative industries and high-end manufacturing, but they also covered older industries that have major roles to play in the future economy. One example is finance – a very visible activity in Hong Kong – and another is the maritime industry.

Port and maritime business does not exactly have a low profile in Hong Kong. Our harbor is full of shipping, and our container port is bustling round the clock. Many professionals work in shipping-related legal, brokering and other services (including my own sector, insurance).

However, the maritime industry is changing fast. Global trade growth is slowing, and at the same time new supply-chain and other business models are emerging. Technology is changing many aspects of the logistics sector, and the international regulatory environment is shifting rapidly – and giving some locations new competitive edges over others.

Against this background, Hong Kong’s cluster of maritime-related industries has by some measurements been losing ground to some other centers – or at least not expanding as fast as in other cities. This especially applies to our base of ship owners and managers, some of whom have been leaving Hong Kong and taking other ship trading, brokerage and financial services with them.

Rising competition means that Hong Kong has been dropping as a hub for maritime services, and we now rank seventh in the world (behind Singapore, Hamburg, Oslo, Shanghai, London and Rotterdam).

There is an argument that we should just let go of an industry if we no longer have a competitive edge in that activity. Most officials and economists would agree that we should not try to keep an industry going artificially, even if – like the port and shipping sectors – it is a historic heart of our economy.

However, there is also an argument that the government must play a role in keeping the economy both competitive and reasonably diversified. The maritime industry itself argues very strongly that it maintains a cluster of skills and activities that directly contribute to Hong Kong’s economic diversity.

The maritime sector has made several proposals. These include making it easier for the industry to relocate key personnel here, improving coordination between government departments, and raising Hong Kong’s profile as a hub for maritime services. It is also lobbying for a statutory body to replace the government-led maritime and port board.

One key suggestion is for the government to bring our tax system into line with competing centers elsewhere in the world (with Singapore being cited as the typical example of a competitor).

Hong Kong has many traditional tax advantages for most sorts of international business. Our tax system is transparent, consistent, and of course taxes themselves are fairly low.

But with other centers offering targeted tax breaks at the maritime sector, Hong Kong officials are in an awkward position. Should they match these low tax rates, or just let parts of the industry leave for other cities?

In her policy address, Carrie Lam indicated that Hong Kong should be prepared to use tax incentives more – for specific sectors in order to maintain economic diversity. In particular, she mentioned that maritime leasing and marine insurance would benefit from such policies (officials are working on the exact details).

The industry’s success in lobbying for such government support is interesting because it raises questions about how much and in what ways government should proactively support specific industries – and under what circumstances.

I have often said that Hong Kong needs to focus more on quality of life. If we can improve our housing, air, recreation and other facilities, at least much of our competitiveness problem will go away. Meanwhile, economists would point out that targeted tax breaks are essentially a subsidy from the rest of the economy.

However, if other governments directly target valuable business activities with such lures as tax breaks, we find ourselves on an uneven playing field. And whether we like it or not, many other business centers offer such breaks – and in some cases (such as certain financial activities), they have deliberately used them to attract business away from Hong Kong.

This is likely to continue in the future. Should we sit back and do nothing? The policy address suggests that the government believes that we have no choice but be more proactive.

-- Contact us at [email protected]


Executive Council member and former legislator; Hong Kong delegate to the National People’s Congress