(This essay was published in Hong Kong Economic Journal on 18 March 2015.)

 

Parallel trading has created inconveniences for a large number of Hong Kong residents. The blame has been placed on Mainland visitors. However, many of them are not engaged in this trade – in fact, Hong Kong residents are deeply involved.

 

The “individual visit scheme” that was started in July 2003 contributed $26.1 billion in value-added (1.3% of GDP) and 114,280 jobs (3.1% of total employment) to the economy in 2012, according to a government study. These are very significant figures. Capping the number of individual visitors in the scheme will have economic consequences.

 

How these numbers are capped will have different impacts. In 2013, the number of visitors from the Mainland was 40.7 million (75.0% of the total number of 54.3 million visitors). Mainland visitors who came on the individual visitor scheme numbered 27.4 million (67.4% of total Mainland visitors). Of these, 17.8 million (43.7% of total Mainland visitors) only made a day trip and 11.1 million came on the one-year multiple-entry endorsement (27.3% of total Mainland visitors).

 

Despite these large numbers, according to reports an estimated 60% of parallel traders are Hong Kong residents. Those traders from the Mainland are predominantly residents in Shenzhen since they are the only people granted multiple-entry endorsements.

 

Consequently, capping the one-year multiple-entry permits will primarily impact residents in Shenzhen and Hong Kong. This is, firstly, because a non-discriminating cap on the number of multiple-entry permits may not reduce the number of Shenzhen-based traders, but primarily inconvenience other Shenzhen residents.

 

Second, it is highly likely that if the number of Shenzhen-based traders is effectively curtailed then their numbers will be immediately replaced by Hong Kong-based traders.

 

Third, a targeted restriction focused on traders in Shenzhen implies asking Shenzhen border authorities and Chinese Customs to either take extra-legal action or adopt new regulatory measures that require legislation.

 

Fourth, if Hong Kong border authorities and Customs begin to target traders, they will require legislation approval to limit parallel trading activity, which would have multiple consequences for all forms of trading activity. It could seriously damage Hong Kong’s other parallel trading activities and its status as a free port, and could have constitutional implications as any restrictions might violate the Basic Law.

 

Many diverse interests are involved when it comes to capping the individual visit scheme and deciding how to do so. Reducing the number of individual visits may not even curb parallel trading activity, and it would have a limited impact on reducing the total number of visitors from the Mainland. It would also not be successful without major efforts by authorities in both Shenzhen and Hong Kong, including their respective legislatures. Even if this were to happen, it would not be a quick and easy solution by any means.

 

Two other solutions, however, may prove to be more effective at alleviating the burden on overloaded local communities caused by cross-border parallel traders.

 

First would be to build border shopping centers in Hong Kong, especially shopping centers with temporary operation permits. This would be a simple, fast, short-term solution by providing a convenient destination for parallel traders away from many local communities. Transportation and border crossing arrangements to these border centers could be organized  to avoid peak periods and reduce inconvenience to others who cross the border.

 

Second would be to set up duty free shopping centers in Shenzhen that could be rented out to Hong Kong operators and obviate the need for parallel cross-border trading activity altogether. Over time these centers may be rented out to local operators after their reputations have been established. This could lead to innovation and competition in retail services in Shenzhen and may over time spread to other cities on the Mainland. Permission to set up these centers would be needed from the central authorities and it may take time for the policy to be approved.

 

If these initiatives were successful, they would reduce the number of visitors from the Mainland who come to Hong Kong solely for shopping purposes. Retail business in Hong Kong would, however, suffer as a consequence. In essence this would be an opportunity for the Mainland to lower its tariffs and other restrictions on consumption imports.

 

Creating border area shopping centers in Hong Kong would be relatively easy and provide some short-term relief, but it would not reduce the significant numbers who come to Hong Kong to enjoy a shopping experience and other tourist services. Setting up duty free shopping centers in Shenzhen would also require difficult policy approvals that would take time to secure. In the long-term, though, it would change the retail environment on the Mainland and the mix of visitors coming to Hong Kong for the benefit of all.

 

The vast numbers of visitors to Hong Kong from the Mainland is a product of the different stages of economic development between the two places. It will largely disappear in as China continues to reform and open up its economy. This may take some time and opening duty free shopping centers in Shenzhen would contribute this effort. Hong Kong can help solve the visitor problem by helping the Mainland further its reforms and opening up.

 

Parallel trading has also given rise to another local impact. Radical political groups have been railing against parallel traders in Yuen Long and other areas. Local media have labeled them as protesters or demonstrators. Their behavior is that of hooligans in the guise of populist politics. Their real purpose is to harass, humiliate, abuse and terrorize their political targets. They derive their strength from the fact that media fascination with their outrageous actions gives them maximum coverage.

 

A well-known maxim in the news business is that it is only news when a man bites a dog, not when a dog bites a man. These hooligans understand this perfectly. Their actions are calculated for maximum media coverage. Their ultimate goal is to gain political notoriety so that they can advance their cause in Hong Kong’s present distorted and fragmented political system. Democracy serves only as a cover to whitewash their political opportunism.

 

Some features of their behavior bear amusing resemblance to other organizations in history that were motivated by political ideology. The best researched in modern times is the Ku Klux Klan, which was examined succinctly by American economist Steven Levitt in Freakonomics.

 

The Ku Klux Klan has had a markedly up-and-down history. It was founded in 1865 immediately after the Civil War by six former Confederate soldiers, who saw themselves as merely a circle of like-minded friends. They chose the name “kuklux” a slight variation of the Greek word for “circle” – kuklos.

 

At the beginning their activities were midnight pranks – for instance, riding horses through the countryside while draped in white sheets and pillow case hoods. Very soon the Klan evolved into a multistate terrorist organization designed to frighten and kill emancipated slaves. But within barely a decade, the Klan as a terrorist force was suppressed by legal and military interventions by the federal government even though there were lingering continuing activities.

 

Beginning in 1915, the Klan experienced a revival, portraying its members as crusaders of white civilization. By 1920 it claimed 8 million members and had chapters throughout the U.S. It not only targeted blacks, but also Catholics, Jews, communists, unionists, immigrants, and others who did not fit into their ideas of the status quo.

 

The onset of World War II briefly laid the Klan low, but within a few years, wartime anxiety and postwar uncertainty led to a rapid flourishing of Klan membership. Klan members took pride in publicly disparaging anybody who was not a conservative white Christian. The lynching of blacks also continued, but it was becoming increasingly rare and fell precipitously over time (see Figure).

 

 

Figure: Lynchings of blacks in the US 1890-1969

 

Years Lynchings of Blacks
1890-1899 1111
1900-1909 791
1910-1919 569
1920-1929 281
1930-1939 119
1940-1949 31
1950-1959 6
1960-1969 3

 

Klan terrorism worked because the early lynchings worked. White racists had, through their actions and rhetoric, struck a terrible fear in the hearts of every black person that if they violated the accepted code of behavior, whether by talking back to a bus driver or daring to vote, they would be punished, perhaps killed. The Klan used a very powerful incentive – the fear of random violence, the terrorists’ threat.

 

The Klan after the war was not uniformly violent, but a sorry fraternity of men, most of them poorly educated and with poor prospects, who needed a place to vent – and an excuse for occasionally staying out all night. Their fraternity engaged in quasi-religious chanting and oath taking, all of it top secret, which made it that much more appealing.

 

The Klan was also a slick moneymaking operation, at least for those near the top of the organization. Klan leaders had any number of revenue sources: thousands of dues-paying rank-and-file members; business leaders who hired the Klan to scare off the unions or who paid the Klan protection money; Klan rallies that generated huge cash donations; plus the occasional gunrunning or moonshine operations. Then there were rackets that sold insurance policies to Klan members and accepted only cash personal checks made out to the Grand Dragon.

 

The Klan also had great designs on political influence. Its considerable membership gave their leader David Duke, the Grand Wizard of the Knights of the Ku Klux Klan, a considerable political base. He was elected as a member of the Louisiana House of Representatives in 1989. Duke even sold the members’ list for US$150,000 to the governor of Louisiana. Later Duke succeeded in raising hundreds of thousands of dollars by letting his supporters know that he was broke and needed their donations. In actual fact, the money raised was to support his gambling habit. He was arrested and sent to prison for running a scam in 2003.

 

The Klan was a feared terrorist organization built around a political ideology. It kept many secrets. Fear made it powerful. But its power was gradually eroded after a radio program started revealing its secrets from 1948.

 

Those who opposed the Klan’s political ideology were able to use such information to take action against the Klan. Those who supported the Klan were given all sorts of cautions against doing so. Public sentiment began to shift and the Klan’s power was eclipsed. Although the Klan still existed, its ability to strike fear had ended and its political activities became increasingly ordinary.

 

The Hong Kong public should also try to be better informed about the myths and truths behind those local groups who advocate extremist ideologies locally.

 

Reference

 

Steven D Levitt and Stephen J Dubner, Freakonomics, Penguin, 2005

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