Firstly, unlike functionalists, neofunctionalists are convinced that integration must develop on a separated territory.

Secondly, while functionalists argue that science and technology are the key factors for integration, neofunctionalists believe that integration is characterized not only by economic and technological factors, but also by political; political factors play an important role in this process.

Thirdly, unlike functionalists, neofunctionalists do not call for the creation of organization in the future. Instead of prediction of the integration's final outcome, neofunctionalism pays more attention to the process of integration itself. Interaction and integration firstly occur in one field and then spill over to other fields. For example, economic integration can contribute to the development of active cooperation among participants and to relocate joint efforts to the environmental protection, etc. "Spill over" is one of the key principles of neofunctionalism.

The above described three main approaches are the key to an understanding of the integration processes, after that it is necessary to determine which approach best describes the case of Hong Kong and China Mainland.

1.3.3 Theoretical concepts of integration applied to Hong Kong and China Mainland

Before starting to search for the right concept, firstly let us define the concept of "integration". Basically, "integration" means "connection of separated parts into one unit"". Then, from the very concept of "integration" two key questions arose: the first question deals with the final product of integration, the second - with the integration process.

Firstly, what is the final product of integration? There is a separation into two models: state and public Ibid. P. 19.. Federalism and neofunctionalism belong to the state model. Federalism is primarily focused on the creation of federal institutions at the supranational level, and then on the conviction of participating countries to unite in accordance with the formulated common system. According to neofunctionalism, the final result is the "emergence of a new political community, developed on top of the previous community" Ibid. P. 15.. Neofunctionalism also focuses on the creation of certain forms of international political institutions at the supranational level, but does not give a clear description of the overall system, which will be used after the integration. Functionalism, in turn, is related to the public model. In this model, more attention is paid to the public, not to the state, and the development of political institutions is not considered as important as the growth of people's welfare, the emergence of common values.

Next, what is the process of integration? It should be noted that there are two groups of factors: the group of political factors and the group of economic, social and technological factors. Federalists are concentrated on the first group of factors, whereas functionalists and neofunctionalists are concentrated on the second group of factors, when changes in the economic, social and technological fields can lead to changes in the political sphere.

In case of integration between Hong Kong and China Mainland it is supposed that the final product of integration is a sovereign unit, which is compatible with the above-described state model. Then, how to make a choice between federalism and neofunctionalism? Federalism pays more attention to the final outcome of the integration, to the creation of a federal state. Neofunctionalism, on the contrary, is mainly focused on the process of integration.

For Hong Kong the final product of integration is a reunion with China. In fact, under the "one country, two systems" model Hong Kong and Mainland China have already reunited. Nevertheless, it is possible to assume that the "one country, two systems" model is not the final product of integration; it only describes the initial stage of the integration between Hong Kong and the Mainland. In ten years after the beginning of the re-integration Hong Kong and China Mainland have become very dependent on each other. It also can be assumed that the parties will continue the process of re-integration in the future. Perhaps, by 2047 the parties will put an end to the existence of "two systems", however, federalism cannot predict what system the parties will choose judging from the current situationPeter T. Y. Cheung?. Who's Influencing Whom? Exploring the Influence of Hong Kong on Politics and Governance in China. - Asian Survey, Vol. 51, № 4 (July/August 2011). P 720. . Thus, according to this, neofunctionalism at the moment is probably the best theoretical concept to explain the processes of integration between Hong Kong and China Mainland.

By this assumption, it is important to note that neofunctionalism often describes the integration processes between the states; however, relations between Hong Kong and Mainland China are not the example of international relations. More specifically, they are an example of inner-state relations, as legally Hong Kong is a part of China; at the same time, the Hong Kong's Basic Law gives the right to use a high degree of autonomy and allows Hong Kong people to govern the territory. Considering all these points, Hong Kong and Mainland China should be correctly perceive as two units within one united nation.

Nevertheless, our final conclusion should be the following: each theory has a lot of limitations, while the example of the re-integration between Hong Kong and China Mainland is too exceptional and it would be appropriate to consider it separately and no existing integration theory can fully explain this ongoing re-integration process.

From the perspective of the described stages of economic integration, currently the parties are at its first stage. Taking into account the uniqueness of the re-integration process between Hong Kong and Mainland China, it is very difficult to discuss the prospects of the parties' transition to the next traditional stage of the economic integration - the creation of customs union.

Examining the integration process between Hong Kong and the Mainland, two landmarks should be noted: 2004 and 1997. Until 1997, the integration between the parties had been mainly triggered by market incentives rather than political interests. The proclamation of the "one country, two systems" model has triggered off the formal integration. In this context it should be noted that the "one country, two systems" model limited to some extent the possibilities of integration between the parties.

Firstly, in accordance with this model, legislative, monetary, financial and tariff systems of Hong Kong are independent from Mainland China, which adds complexity to cooperation and integration without official bilateral interaction.

And, secondly, after the handover of Hong Kong the whole world was watching if China is able to keep its promise of non-interference, which was enshrined in the Sino-British Joint Declaration. The Beijing government declared non-interference in Hong Kong to maintain Hong Kong's autonomy. Beijing and Hong Kong have jointly developed the necessary mechanisms that will not allow the Chinese authorities to interfere with Hong Kong's affairs. However, these mechanisms have also limited opportunities for interaction between the two parties. For example, the central government of China Mainland has introduced strict limits for state officials visiting Hong Kong, especially for the high-ranking officials. Beijing officials believed that the less meetings and contacts between the parties will be, the less suspicion will fall on China in terms of its attempts to interfere with the internal affairs of Hong Kong. At the same time, the Beijing authorities were not aware that these restrictions could have a negative impact on the re-integration processes between the parties.

Eventually, in 2004, the signing of CEPA helped to speed up the processes of re-integration. This agreement became the first step of formal economic integration between Hong Kong and China Mainland.

Chapter 2. Impact of Free Trade Agreement of 2004 on re-integration between Hong Kong and Mainland China

Within the model of "one country, two systems" Hong Kong came under the jurisdiction of the PRC. From 1997 to 2003, export-oriented production model, economic cooperation between Hong Kong and the Mainland remained the same as they were before the reunification. There are three main aspects that characterize the interaction of the parties in this period.

Firstly, the economic cooperation between Hong Kong and Mainland China was vertical, that is, it took place in various sectors of the economy. Such interaction was mainly based on the use of comparative advantages and complementarity. For example, Hong Kong with its developed financial system and service sector has capital, technologies, management expertise and talented entrepreneurs, which generally gives a stimulus to economic development of Mainland China, especially in the Pearl River Delta; Mainland China enjoys advantages of cheap labor, land and materials that turns into a foundation for the development of the production base of Hong Kong.

Secondly, the interaction between the parties was stimulated by market forces, without undue involvement of governments. At that time there was no formal system of agreements and treaties.

Thirdly, the flow of resources between Hong Kong and the Mainland has been largely one-sided. Hong Kong's capital, technology and workers easily entered the Mainland, which was not observed in the reverse situation. We will consider the example of flows of workers: a huge number of workers was leaving Hong Kong to the Mainland, while the Chinese workers rarely went to Hong Kong due to strict immigration policy in China, except for the cases of illegal migration.

In general, economic relations between Hong Kong and Mainland China in the 1997-2003 period were initiated by the market and the enterprises were the main players. However, along with the increasingly active economic development the need for formal agreements and bilateral coordination at the highest levels began to emerge. In the process of solving the various "beyond the market" problems, in particular related to the construction of infrastructure, such interaction faced with a lot of restrictions. Moreover, this interaction was mainly concentrated on the export production and did not include other sectors of the economy. The parties could not make use of regional cooperation without formal agreements.

2.2 Prerequisites for signing FTA

Interaction with the Mainland was the best way for Hong Kong to boost its economic development. At the same time, "in the first few years after the Handover of Hong Kong Hong Kong's elites doubted the necessity of deep integration with Mainland China, as they were worried about the negative impact of integration on Hong Kong's autonomy and its reputation on the international arena" Song B. New Progress in Establishment of Bilateral FTA for China: CEPA, the start point of Greater China Economic Circle. - China Business Update, 2004, №5. P.12.. Although the Hong Kong government gave great importance to cooperation with the Mainland, in fact, they did not contribute actively to this due to concerns about the intervention from Beijing.

Furthermore, with the rapid development of Shanghai, cities in the Yangtze River Delta and other coastal cities of China, the status of Hong Kong as the sole intermediary between the foreign companies and the Chinese market began to decline, the amount of capital and goods entering China via Hong Kong also reduced, which meant for Hong Kong a loss of its traditional advantage. It was essential in some way to regain the important role of Hong Kong in China's economic development and to coordinate economic relations between Hong Kong and other cities and regions of Mainland China, especially with its competitors.

Economic cooperation between the parties also faced with new challenges. For instance, how the Hong Kong and Mainland China could reduce tariffs among themselves and to remove other restrictions on trade to ensure that the procedure complies with the WTO rules? Since Hong Kong is a free trade port, for most of the goods entering into it, a zero tariff rate is used. Mainland China, in turn, was the territory with relatively high tariffs, when all imported products subject to customs duties. If Mainland China offered to Hong Kong to import goods at a zero tariff, all foreign goods would enter the Mainland via Hong Kong avoiding high tariffs and Mainland China also would turn into a free trade area, which seems impossible. However, as Hong Kong was still waiting for better conditions in trade with the Mainland compared to other members of the WTO, the parties faced the need to conclude a bilateral free trade agreement.

The rule of origin of goods is considered to be one of the most important rules of the WTO. After Hong Kong's manufacturing base relocated to the Mainland, most of Hong Kong's goods were produced there, which made the determination of the place of origin an even more confusing problem. This complicated significantly the negotiation process on the implementation of bilateral free trade agreement.

Hong Kong, being a free port, hosted a large number of foreign companies and organizations. If Mainland China provided preferential treatment for all participants in the trading industry of Hong Kong, the numerous foreign companies located in Hong Kong, could make use of them too; Hong Kong companies in this case would not have individual preferences.

During the annual visit to Beijing in 2001 the Chief Minister of the Administration of Hong Kong mentioned about the difficulties faced by the Hong Kong's economy and Hong Kong's desire to strengthen economic cooperation with Mainland China. He put forward the idea of signing a free trade agreement. Beijing approved the proposal and organized a working group to develop a special strategy which would help Hong Kong to maintain its status as a financial, commercial and tourist center. On the 29th of June of 2003 the parties signed CEPA, which became effective on the 1st of January of 2004.

2.2.1 Interests of Mainland China in FTA

A reasonable explanation to the fact that Beijing approved signature of the free trade agreement can be found by examining three aspects: the national interest, international factor and considerations regarding Taiwan.

An important reason for the signing of the FTA for Beijing was the stagnation in the economy of Hong Kong after the Asian financial crisis. After China joined the WTO in 2001, Hong Kong was positive about China's further opening up to international trade and investment, while at the same time, Hong Kong's authorities realized that the SAR will lose its advantages over other WTO member countries and the pace of its economic growth will slow down.

Another motive was China's intention to change the model of development in the Pearl River Delta region from "market coordination" to "policy coordination". Due to the low cost of labor and land in Mainland China over the past three decades Hong Kong has relocated most part of its industries to the Pearl River Delta region. With the development of industrial sector Shenzhen was becoming a regional center in the Pearl River Delta area, where previously Hong Kong had a strong leading position. In comparison with the Yangtze River Delta region, which center was undoubtedly Shanghai, the economic development in the Pearl River Delta region needed more mutual trust among the participants. The market itself could not regularize the competition.

This has led to the need of establishing an open platform, where all participants could express their wishes and consult with each other. Thus, Beijing and Hong Kong governments have developed a special agreement that allows giving a new impetus to the development of Hong Kong's economy and putting in order the economic situation in the area of the Pearl River Delta. On the basis of CEPA "Hong Kong will continue to be the center for logistics, shipping, trade, finance and high value-added services, and Guangdong will continue to be the center for production" En C. On the Services Cooperation between the Mainland and Hong Kong under CEPA Framework. - International Economics and Trade Research, 2006, №1. P. 34.. Economic relations between Hong Kong and Guangdong province are based on the complementarity of the two economies.

The second reason for the signing of CEPA for China is an international factor. China had been obliged to introduce a regime of preferences for the WTO member countries by 2006. However, China did not really have a rich experience with the correct behavior in free trade zones. Mainland China by implementing the policy of preferences in relation to Hong Kong would acquire necessary experience. This would help China have a better guidance in the process of the international trade's liberalization.

And the third significant reason for signing CEPA for China was considerations about further relations with Taiwan. Mainland China intended to set an example for Taiwan with the hope of signing such an agreement with Taiwan and use it as a means of economic cooperation on the way to the gradual resolution of the reunification issue Jiaqing P., Shan'ang C. Imperative for the Signing of CEPA between Mainland China and Taiwan.

Development Research, 2007, №11. P. 21..

Thus, the Chinese central government due to economic and political considerations came to the decision to sign CEPA.

2.2.2 Interests of Hong Kong in FTA

For the government of Hong Kong the FTA signing was motivated mainly by economic interests. Authorities believed that the signing of such an agreement with the Mainland was the best way to stimulate the development of the economy of Hong Kong and Hong Kong could not afford to miss this opportunity.

After the Asian financial crisis, Hong Kong's economy faced with many serious difficulties. "Securities, tourism, real estate, retail markets and others were in a recession" Sung Y., Wong K. Op. cit. P. 201. . As a result, enterprises have to dismiss workers, which led to an increase in unemployment. In January of 2002, the unemployment rate in Hong Kong reached its maximum of 6.7%ЌЃЌ`“Б±рЌsђ­‹жђ­•{НіјЖґ¦ http://www.censtatd.gov.hk/. These economic problems for Hong Kong were not cyclical; they were more related to structural problems. Hong Kong needed a political strategy aimed at restructuring its economy.

Apart from the considerations about economic development, FTA signing for Hong Kong was also justified by the external environment. In the Asia-Pacific region, most of the participants of the Asia-Pacific Economic Cooperation (APEC) forum, with the exception of Hong Kong, Taiwan, Russia and Peru have already signed or were in a process of negotiations on the signing of free trade agreements. Hong Kong was away from these processes. Hong Kong's economy could not any longer prosper without the Mainland economy, and Hong Kong could not take part in the economic integration in Asia, without conducting initial economic re-integration with the Mainland.

Besides the main comparative advantage of Hong Kong was its service sector. By the time when China would open its market to WTO member countries in 2006, Hong Kong would start losing its advantages. Hong Kong was hoping to enter the Chinese market before 2006 to improve its positions in advance. Thus, Hong Kong hoped for more concessions from the Mainland, which were not included in the protocol of accession of China to the WTO. For example, "in the protocol the exhibition industry was not marked, and this industry in Hong Kong had a very strong position in, and its participants were patiently waiting to enter the Mainland market" The Background and Significance of CEPA. - Foreign Investment in China, 2007, №23. P. 51..

CEPA has opened up a huge market of China for Hong Kong goods and services. It is worth noting that the impact of zero tariffs on Hong Kong goods entering the Mainland was small, since the industrial sector of Hong Kong in the 1980s moved to the area of the Pearl River Delta. Therefore, the focus of the FTA's attention was in the business services, in particular, financial, legal, auditing, banking and retail trade related services Ibid. P. 54..

2.3 Main content of CEPA

CEPA consists of the basic agreement and six appendixes. The main subjects of CEPA are trade in goods, trade in services and promotion of trade and investment between Hong Kong and Mainland China. Six applications cover such specific issues of implementation of the agreement as the procedure of imposing a zero rate tariff, rules for determining the place of origin of goods, the procedure for the issuance of certificates of origin of goods, the individual obligations of each party for the liberalization of trade in services, the definition of a service provider and conditions of the service provider status assignment, measures for trade and investment promotion. In general, the main objectives of CEPA are an increase of access of Hong Kong companies to services sector on the territory of China, the reduction of customs duties for Hong Kong's manufactured goods and an increase in quantitative indicators of mutual trade and investment.

After the agreement execution Hong Kong and the PRC continued liberalization of trade in goods and services. The original agreement was supplemented several times. To date, ten Supplements to CEPA have been concluded, the 10^th Supplement was signed on the 29^th of August in 2013.

In addition, on the 18^th of December in 2014 Hong Kong and Mainland concluded the Agreement on Achieving Basic Liberalization of Trade in Services in Guangdong.

The latest agreement concluded between Hong Keg and the Mainland within the framework of CEPA was the Agreement on Trade in Services signed on the 27^th of November in 2015, its implementation will begin from the 1^st of June of 2016https://www.tid.gov.hk.

2.4 Practical aspects of trade in goods and services within the framework of CEPA

We will consider the general principles of CEPA and its key provisions aimed at liberalizing trade in goods and, especially services between Hong Kong and Mainland China.

2.4.1 General Principles of CEPA

For achieving the main goal of CEPA - strengthening of cooperation in the field of trade and investment between Hong Kong and Mainland China, and promotion of development of the parties, the following steps have been emphasized: to loosen gradually and remove tariff and non-tariff barriers on virtually all goods items in trade between the two sides, to move gradually to the liberalization of trade in services with the help of the weakening and elimination of various discriminatory measures, as well as contribute to the expansion of bilateral cooperation in trade and investment.

During the conclusion of CEPA, as well as during further implementation and amendment of the agreement, Hong Kong and Mainland China have committed to adhere to the model of "one country, two systems" and to comply with the existing WTO rules. The beginning of the implementation of mutual commitments for the implementation of the liberalization of trade in goods and services was the 1^st of January of 2004. In addition, at the conclusion of CEPA parties agreed on the expansion and supplement of the agreement by the regular development of additional agreements on further liberalization.

2.4.2 Trade in goods

Under the FTA Hong Kong continues to apply a zero rate tariff on all goods imported from Mainland China. China, in turn, introduced a zero tariff from the 1^st of January of 2004 for part of the goods, and from the 1^st of January of 2006 for all other products originating in Hong Kong.

The parties also reached an agreement not to take non-tariff measures, not to use customs quotas; anti-dumping measures, countervailing measures and subsidies for the goods of Hong Kong and China, respectively.

If there is a sharp increase in imports of certain products, set out in the annexes to the agreement, which could cause serious negative consequences for the industry of the importing country of the goods, by the means of written notification the relating party may temporarily suspend concessions on imports of the product and start holding consultations upon the request of the other party.

In order to avoid customs duties when importing goods in China, Hong Kong businessmen should comply with the rules of determining the place of origin of the goods. Hong Kong can be determined as the place of origin of goods, if the goods are wholly manufactured or sufficiently processed on the Hong Kong territory. The criteria of sufficient processing are the following:

1. production or technological operations: performance of certain production or technological operations is sufficient to recognize one of the parties of the agreement as the place of origin;

2. change of goods items: changes in tariff code of goods according to the commodity classification at the level of any of the first four numbers, occurred as a result of certain production or technological operations by one of the parties of the agreement;

3. the rule of ad valorem share: change of the value of the goods, when the share of the cost of the materials used, labor costs, product development costs, incurred exclusively by one of the parties of the agreement, equals or exceeds 30% of the exported goods price on terms FOB (provided that the final production or technological operation is performed in the respective party of the agreement; product development costs may include licensing fees for the use of patent technology, industrial design, trademarks, intellectual property rights);

4. other criteria: other criteria for determining the origin of goods, apart from certain production or technological processes, change of goods headings, ad valorem share rule;

5. mixed criteria: the criteria for determining the origin of goods based on a combination of two or more of the above-mentioned criteria Hong Kong analytical and information portal "Business in China" http://asia-business.biz.

Nevertheless, for certain Hong Kong goods the import ban is maintained in the PRC; a list of such products is published by the Ministry of Commerce of China.

2.4.3 Trade in services

Under the agreement, Mainland China significantly reduced the restrictions on access to its market for Hong Kong suppliers of various kinds of services including advertising, management consulting, exhibitions, operations in the securities market, banking, accounting, transport services, insurance, manufacturing and rental of movies and TV series, construction, telecommunication services, scientific research services, engineering services, legal services, online - games and so on.

For example, in cooperation with the Chinese partners Hong Kong service providers can create websites hosting online games. Other foreign service providers cannot enjoy this opportunity. Hong Kong firms, providing legal services, can establish their representative offices in China, teaming up with local law firms. Banking institutions of Hong Kong may establish branches and offices in China, following the reduced requirements regarding the minimum share capital. Hong Kong suppliers of transport services earlier than other foreign suppliers received the right to establish enterprises in China, based on the 100% foreign and in this case - Hong Kong capital.

Overall, the measures for liberalization of trade in services between Hong Kong and Mainland China can be summarized as follows:

1. relaxation of requirements to the maximum share of foreign capital: for some activities Hong Kong service providers have the right to establish enterprises with majority participation companies or fully controlled companies in China, while other foreign companies have the right to engage in these activities only within the joint ventures and only when the controlling share belongs to the Chinese partner;

2. access to the activities closed to foreign capital: Hong Kong service providers under certain conditions have the right to engage in the activities closed to foreign business (for instance, on-line games) in the PRC;

3. relaxation of requirements to the investor's qualification: for Hong Kong service suppliers, establishing companies (branches, representative offices) on the territory of China, there are relaxed requirements for the authorized capital of a newly created company, experience in conducting relevant activities and other requirements that are necessary for foreign investors of the Chinese companies;

4. recognition of qualifications: professional qualifications acquired in Hong Kong are recognized in China and allow for taking the professional examinations (e.g., advocatory exam) Ibid. .

An individual person, being the citizen of China and permanent Hong Kong resident, as well as an organization, which was established in accordance with the legal framework of Hong Kong (for example, public or private, commercial or non-commercial, including companies, sole proprietorships, partnerships, associations, trusts, etc.), if it meets with all the conditions for obtaining the status of service provider in Hong Kong, can be regarded as Hong Kong supplier.

Going deeper into the legal aspects, it should be noted that to receive the status of service provider an organization must satisfy the following requirements: first, it must be established in Hong Kong in accordance with the "Corporate law" and have a certificate for business registration and, if necessary, a business license; second, the organization must conduct a "substantial" business activity on the territory of Hong Kong.

The criteria for determining such business activity are the following: 1) the object of activity of the Hong Kong service provider is the services that they are going to provide on the territory of China; 2) Hong Kong service provider is obliged to conduct their business for at least three years before applying for the desired status, and for banking institutions and insurance companies this period should last for 5 years; 3) Hong Kong service provider is required to pay corporate income tax in Hong Kong during their business activity; 4) Hong Kong supplier is obliged to have a permanent place of business, which is fitting to the scale and nature of the activity, and 5) more than half of the staff of the Hong Kong service provider must be resident of Hong Kong Mainland and Hong Kong Closer Economic Partnership Arrangement http://www.tid.gov.hk/english/cepa/.

It is important to note that service providers from other countries, members of WTO, can also benefit from the advantages and privileges given to Hong Kong companies under CEPA, if they set up a company in Hong Kong that will meet all the requirements for conducting "substantial" business activity in Hong Kong.

In addition, foreign service providers may also use the preferences within the framework of CEPA, used by Hong Kong companies, after a year from the date of acquisition or merger with the Hong Kong service provider meeting all legal requirements.

2.4.4 Promotion of Trade and Investment

Measures for promotion of trade and investment within the framework of the FTA include the simplification of customs clearance, cooperation in inspection and control of safety and quality of food products, harmonization of standards, mutual assistance in the development of small and medium-size businesses, as well as in e-commerce development, educational projects, production of the traditional Chinese medicine's drugs, protection of intellectual property rights, compliance with the legislation transparency.

In conclusion, attention should be drawn to the fact that the FTA between Hong Kong and Mainland China was developed with the aim to eliminate tariffs and any non-tariff barriers in trade in goods between the parties, to provide greater access to the Chinese market for Hong Kong service suppliers, to take appropriate measures that will contribute to the development of mutual trade and investment.

2.5 Analysis of benefits of Hong Kong and Mainland China from FTA implementation

During the preparation of CEPA the parties carefully considered the aspect of the economies complementarity. It lies in the fact that Hong Kong has advantages in raising capital, product development, distribution and management, and Mainland China has a large number of relatively cheap land and labor resources and huge domestic market.

From Hong Kong's perspective, the benefit from CEPA is obvious in the short-term period. CEPA gives an incentive for a new cycle of economic development of Hong Kong and offers the opportunity to become once again an important intermediary between Mainland China and the rest of the world. Unlike Hong Kong, Mainland China will be able to benefit from CEPA in a long-term period.

It is worth noting that in the emergence and implementation of CEPA one can found considerable political context.

Firstly, one of the basic principles of cooperation between Hong Kong and Mainland China is the implementation of CEPA in accordance with the "one country, two systems" model. CEPA has established a preferential trade regime between Hong Kong and Mainland China, between the state's main territory and state's separate customs territory. CEPA also strengthened the intermediary role of Hong Kong as a starting point for foreign companies wishing to enter the Chinese market.

Second, the signing and implementation of CEPA is actively supported by the leaders of Mainland China. For example, Hu Jintao and Wen Jiabao personally contributed to the implementation of CEPA and made it an integral part of national development strategies.

Third, from the economic point of view Hong Kong's benefit from CEPA is much greater than the gain of Mainland China. For example, CEPA eliminates various institutional barriers to the development of bilateral economic and trade cooperation and allows Mainland Chinese to visit Hong Kong individually, what has a positive impact on the level of consumption in Hong Kong and provides a great incentive to the development of Hong Kong's tourism industry. In addition, by applying zero tariffs to the goods of Hong Kong origin, Beijing annually loses up to 350 bln renminbi, which could be received as taxes Lo W. A Step Forward to Regionalism: China's Preferential Trade Agreements with Hong Kong. - The Chinese Economy, 2007, №9. P. 63..

Fourth, CEPA provides an illustrative example of cooperation within the framework of "one country, two systems" to Taiwan. From the political point of view this is very significant for the Chinese authorities. Hong Kong has already taken advantage of preferential treatment to penetrate the Chinese market, which put a considerable pressure on Taiwan to discuss similar agreements: successes of CEPA caused Taiwanese private companies and political parties to strike a compromise with the Mainland. In 2010 the parties signed the Economic Cooperation Framework Agreement.

In general, the ultimate goal of CEPA is to pursue economic re-integration between Hong Kong and Mainland China, and the preparation of a solid foundation for political re-integration in the futureKovalenko V. Formirovanie "Bolshogo Kitaya". Ekonomicheskoe vzaimodeistvie Gonkonga i KNR. - Spb.: Izdatelstvo Sankt-Peterburgskogo universiteta, 2012. S. 56. . CEPA takes into account the interests of both sides and is very beneficial for both Hong Kong and Mainland China.

2.6 Impact of FTA on Hong Kong's economy

Evidently, Hong Kong's economy after 2004 began to recover from the crisis. Undoubtedly, the growth of economic activity could also be stimulated by other factors, however, the implementation of CEPA has played a pivotal role in this situation.

2.6.1 FTA promotes the development of Hong Kong's economy

In the process of CEPA implementation Hong Kong economy started to develop faster than before. To assess the impact of CEPA on the economic development of Hong Kong comparative data of major economic indicators from 2000 to 2006 will be presented.

Hong Kong's GDP in 2006 amounted to $193.5 bln, which is 19.8% more than the GDP in 2003 ($161.4 bln)ЌЃЌ`“Б±рЌsђ­‹жђ­•{НіјЖґ¦ http://www.censtatd.gov.hk/. Average annual GDP growth from 2000 to 2002 was 1.77%, and from 2003 to 2006 - 7.44% Ibid..

With regard to employment indicators - in 2003 the number of employed people in Hong Kong was 3.37 million, whereas in 2006 3.58 million people, which is 3.14% more Ibid.. From 2000 to 2003, the average annual employment growth in Hong Kong was 0.96%, and from 2003 to 2006 - 1.03%. At the same time from 2000 to 2003 the number of unemployed grew by an average annual rate of 18.2%, and from 2003 to 2006 - it annually decreased by 14.62%. It is clear that the year of 2004 was a turning point for the indicators of unemployment. Until 2004 the Hong Kong's unemployment rate rose annually, but after 2004 it was falling rapidly: unemployment rate in Hong Kong in 2003 was 7.9% and in 2006 - only 4.8% Ibid..

We will consider the figures on trade: in 2003 Hong Kong's imports amounted to $232.6 bln, while exports, including re-exports, amounted to $224 bln, in 2006 the corresponding figures were $334.7 bln and $316.8 bln, respectively. From 2003 to 2006 the Hong Kong import and export increased by 43.97% and 41.24%, respectivelyЌЃЌ`“Б±рЌsђ­‹жђ­•{ЌHТµГі€ХЏ‹ http://www.tid.gov.hk/scindex.html.

From 2000 to 2003, average annual growth rates of imports, exports and re-exports of Hong Kong amounted to 2.89%, -12.39% and 5.21%, respectively, while from 2003 to 2006 these figures amounted to 12.92%, 3.40% and 12.81%, far exceeding the growth rate of the previous reporting period Ibid.. All these data prove the fact that the implementation of CEPA has played the key role in the Hong Kong's trade development.

2.6.2 FTA optimizes the economic structure of Hong Kong

The FTA also contributes to the optimization of industrial structure of Hong Kong. FTA's influence on the manufacturing sector was mainly focused on two types of industries: innovative, technological production industries and traditional industries with less use of high technologies. Influence of the FTA on the service sector is also differentiated, two groups of services can be distinguished: firstly, services that are most important for the economic development of Hong Kong and services that Hong Kong provides to Mainland China and to the world (financial and consulting), and, secondly, services that are consumed in Hong Kong: services related to real estate, entertainment, construction, etc Ramуn-Berjano C.B., Xiaobin S.Z. and Ming C.Y. Hong Kong's Transformation into a Service Hub Regional Development within "One Country, Two Systems". - Asian Survey, Vol. 51, №4 (July/August 2011). P 593..

All in all, owing to the FTA Hong Kong instead of expanding its production structure horizontally, has improved it vertically. Therefore, the competitiveness of some of its previously dynamic sectors has become even higher. At the same time, Hong Kong's financial and audit services strengthen their competitive advantage.

Industrial sector

In the 1960s and 1970s Hong Kong was one of the industrial centers in the Asia-Pacific region. However, after the 1980s years because of the rising prices of local materials and the beginning of the policy of openness in Mainland China labor-intensive industries of Hong Kong were massively relocated to Shenzhen, Dongguan and other cities of China. FTA offers new opportunities for the development of Hong Kong industries, especially for three categories of them.

The first category includes the industrial sector with the Hong Kong brands, which are already quite competitive, for example, watches production. They enjoyed a lot of benefits from the use of zero-tariff policy.

The second category includes industries that are heavily influenced by the world market environment, for example, textiles and clothing industries. Since the United States and various European countries use special protective measures against imports of textile products from China, Hong Kong enterprises will benefit from returning some production processes back to Hong Kong to change the place of goods origin, and the policy for applying zero tariffs to goods of Hong Kong origin will ensure full liberalization when importing these goods to the market of Mainland China. Under the FTA a considerable number of Hong Kong companies can develop new forms of cooperation with corporations of the Mainland.

The third category includes high-tech manufacturing industries. Under the FTA's rule of origin of goods the costs of research and development, including costs for design and development, and costs relating to intellectual property rights are also taken into account in the calculation of value added in order to determine the place of origin. Thus, Hong Kong benefits from increasing the value added, while developing its high-tech industries.

In general, CEPA facilitates the restructuring and renewal of Hong Kong industrial sector. In 2003 the gross output of the industrial sector of Hong Kong amounted to $20.1 mln, and by 2006 it advanced to $22 mln with the increase of 9.4% Fung H., Zhang J. Op. cit. P. 41.. From 2000 to 2003, the gross output of the sector declined by the average of 11.51% per year, but from 2004 to 2006, it annually increased by the average of 3.07% Ibid. P. 42.. It can be concluded that the FTA played a very important role in the development of industrial sector of Hong Kong.

Services sector

Services sector accounts for 90% of the GDP of Hong Kong and is the basis of its economy. The FTA has created a lot of good opportunities for 18 service industries of Hong Kong such as management consulting, exhibitions, legal services, etc. Only in 2004 more than 600 Hong Kong companies - service providers entered the market of Mainland China Sharif N. and Tseng M.M?. The Role of Hong Kong in Mainland China's Modernization in Manufacturing. - Asian Survey, Vol. 51, № 4 (July/August 2011). P. 652..

First, the FTA has given a considerable boost to Hong Kong's financial services sector. Even before the FTA a large number of small and medium-size banks of Hong Kong were interested in penetrating the Mainland's market, but they could not do this because of extremely high entry barriers. Owing to the fact that in Mainland China, unlike Hong Kong's banks, only few small and medium-size banks could provide high-level professional services, there was a huge demand for Hong Kong's banking services in the PRC.

Prior to the application of the FTA to foreign banks, including Hong Kong's banks, at the opening of branch offices in Mainland China, year-end assets of $20 bln were required Heng W. Hong Kong seeks to boost investments from China. - Pacific Economic Review, 2012, Vol. 3, №1. P. 193.. After the signing of the FTA minimum requirements have been relaxed to $6 bln Ibid. P. 195.. The following Hong Kong banks immediately fitted the new standards: Shanghai Commercial Bank, Critic Ka Wah Bank, Wing Hang Bank, ICBC (Asia), Dah Sing Bank, DBS Bank and Nanyang Commercial Bank. The FTA gives advantages to Hong Kong small and medium-size banks in their competition with other foreign banks in the Mainland. Currently, in Mainland China there are 58 operating banking institutions of Hong Kong, accounting for ј of the total number of foreign banks in China. Among all foreign banks Hong Kong banks have the largest number of branches in Mainland China Ibid. P. 186..

The FTA allows Hong Kong banks to lend and provide services to private customers in China for deposits and guarantees, obligations and insurance. There is no difference between services that Hong Kong banks are authorized to provide in China and the services provided by the local Chinese commercial banks. Taking Hong Kong's position as an international financial center into consideration, it is logically to conclude that Hong Kong banks have additional comparative advantage, so they gain a huge benefit from the Chinese market penetration.

During the implementation of the FTA Hong Kong travel industry has began flourishing again. Before the Agreement the residents of Mainland China wished to go to Hong Kong for traveling, but they faced with a lot of restrictions. However, the FTA allowed Mainland residents to visit Hong Kong individually, not as part of the organized tour group, as it used to be earlier. These changes have significantly improved the situation in the tourist services market of Hong Kong: new hotels have been built, new restaurants have been opened, entertainment industry and the retail sector actively have been developing. Indicators of domestic consumption in Hong Kong improved, which, on the whole, had a favorable impact on its economic growth.

Finally, the FTA strengthens Hong Kong's position as a mediator between the Chinese Mainland and international market. The agreement allows wide access to the Chinese market, which improves the attractiveness of Hong Kong in the international arena and its comparative advantages. Raising the economic structure of Hong Kong to a new, higher level and contributing to the recovery of the economy, the FTA aims to maintain the competitiveness of Hong Kong.

2.7 Impact of FTA on economic re-integration between Hong Kong and Mainland China

The benefits of both parties, generated by the FTA can be illustrated not only with numbers, such as the number of goods subject to a zero tariff rate, but also through political significance of the agreement. The FTA accelerates economic re-integration between Hong Kong and Mainland China. This is the first legal document that regulates economic cooperation between the parties, which currently is moving to a new level. With the coordination and cooperation at the national level, Hong Kong and Mainland China accelerate the re-integration process in all its manifestations.

In order to understand better the impact of the FTA on economic re-integration, we will consider the following three aspects.

Impact of zero tariff rates

CEPA has established the rule that for all goods of Hong Kong origin, aimed at exports to Mainland China, zero tariffs will be applied. During the first stage of the FTA implementation in the 2004-2005 period 374 types of goods of Hong Kong origin were exported to the Mainland at a zero tariff rate. During the second stage in the 2005-2006 period the number of products' types was increased to 1087 Mainland and Hong Kong Closer Economic Partnership Arrangement http://www.tid.gov.hk/english/cepa/.

Zero-tariff policy implementation reduces import costs for Hong Kong goods to the Mainland, thus enhancing the competitiveness of these products and stimulating the growth of Hong Kong's exports to the Mainland.

The FTA also contributes to the process of the production division between Hong Kong and Mainland China. As described in the previous section, the FTA contributes to the development of high-tech industries of Hong Kong, while Mainland China uses its advantages in the labor-intensive production. The parties will cooperate in the fields of labor-intensive production, especially in those that are subject to changing market conditions. For example, if some enterprises in Mainland China will transfer part of their manufacturing process to Hong Kong, Hong Kong will be considered as the place of origin of the final product and they will be able to avoid a policy of discrimination and protection measures of Western countries against the Chinese goods.

Impact of preferential conditions on access to the Chinese Mainland market for Hong Kong service providers

After almost 40 years of reforms and opening up China's labor-intensive production industries have reached a new level of development, and Mainland China has become the "world factory". However, provision of transportation and financial services in China still remains at a relatively low level. Unlike the Mainland Hong Kong services sector is considered to be highly developed and competitive. Hong Kong Services sector has advantages in capital and technologies, and Mainland China offers low cost of labor and a huge consumer market. Both sides can combine these advantages, so that Hong Kong companies will provide high-quality services for the manufacturing sector in Mainland China, thereby increasing the overall competitiveness of the Chinese economy.

In particular, the FTA contributes to the mutual openness of capital markets of both parties. It reinforces the important role of Hong Kong as a link of Mainland China with the international market. The FTA provides support for the Mainland China's companies looking to put their shares to the Hong Kong Stock Exchange. Thus, there is an increasing number of Chinese companies that can use the Hong Kong Stock Exchange as a platform to sell their shares.