As a British colony, Hong Kong is used mainly as an entrepot in the "triangular trade" between China, India, and Britain. The complementary industrial activities developed -- shipbuilding, rope-making, sugar, and matches -- have little direct impact on the local economy. Hong Kong's growth comes primarily from its position as a trading port.
When Hong Kong comes under Japanese occupation during World War II, trade dries up. With the end of the war, the establishment of a new communist government in China, and the outbreak of the Korean War, Hong Kong's dependence on entrepot trade comes to an end.
The 1951 U.N. trade embargo on China slashes trade in Hong Kong's port, forcing the colony to shift its economic focus towards export-oriented manufacturing. Shipbuilding gives way to textiles and plastics. In a stunning transfer of industrialization refugees from Southeastern China provide cheap labor, capital, and technical expertise. In one decade Hong Kong's exports jump from 30 to 80 percent.
An export promotion strategy continues to dominate. The Hong Kong Trade Development Council is established to support local industries and expand trade. Textile industries expand, while technology- and capital-intensive industries are also built up. Hong Kong becomes a leading exporter of electronics, optical goods, clocks, and watches.
The development of other export-oriented Asian countries heightens competition in labor-intensive products market. Some factories move north into China. Hong Kong imports more cheap goods, food, and water from China. Home industries diversify by producing higher-quality electronics and other goods. Because of its thriving free port, Hong Kong becomes a center of smuggling traffic.
China begins a reform era and opens Special Economic Zones (SEZs) near Hong Kong. Increasing investment in labor-intensive industries in Guangdong province leads Hong Kong to shift from light manufacturing to a services industry. It emerges as an international financial center, with finances beginning to replace manufacturing as its largest industry.
Hong Kong investment flows into new industrial zones in China that produce goods for export. Hong Kong is the busiest container port in the world and one of the world's largest exporters, although most exports are now classified as re-exports. It also remains one of the financial capitals of the world.
Under the "one country, two systems" agreement with China, Hong Kong keeps its status as a free port and tariff-free zone. The Asian financial crisis is a blow to Hong Kong, whose primary trading partners besides China and the U.S. are Japan, Taiwan, South Korea, and Singapore. Reduced import demand creates a downturn in Hong Kong's exports and re-exports.
The economy gradually recovers from the Asian financial crisis, only to encounter another slowdown in 2001 brought on by the economic problems of Hong Kong's key trading partners, the U.S. and Japan. Despite this dependence, Hong Kong benefits from its position as gateway to and from China, and trade grows in double digits in 2002, helped along by a revival of tourism.
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