Both parties hope to finalize an agreement before the end of this year.

Vice-Minister of Commerce An Min and Macao's visiting Secretary for Economy and Finance Tam Tak Yuen announced the launch of talks at a two-hour meeting in the Ministry of Commerce.

"Closer trade ties'' refers to the establishment of free trade zones while imposing no tariffs, but is also a system of regional economic co-operation between a national entity and independent tariff areas instead of two countries.

The two sides have agreed that the arrangement will cover trade in goods and services, as well as trade and investment facilitation measures.

An Min and Tam Tak Yuen told reporters after the meeting that they have discussed the content of the arrangement and the principles and mechanisms of negotiations.

They said bilateral negotiations will draw on the experience of the closer trade ties arrangement between the Chinese mainland and Hong Kong.

Mainland customs statistics show the mainland imported US$49 million from Macao and exported US$311 million to the region in the first four months of this year, up 40.2 per cent and 33.2 per cent respectively from comparable months of last year.

The mainland imported US$142 million and exported US$876 million last year.

Hong Kong and China's mainland are supposed to finalize talks on the closer trade ties arrangement June 30.

Under the arrangement, made-in-Hong Kong products will soon be able to enter the Chinese mainland market with no tariffs imposed.

Analysts believe the two sides have reached consensus on the definition of "made in Hong Kong,'' but officials declined to give details.

The trade arrangement was proposed to the central government in December 2001 by Hong Kong SAR Chief Executive Tung Chee-hwa and was also supposed to include the special administrative region of Macao.

Although Hong Kong and Macao returned to Chinese sovereignty in 1997 and 1999 respectively, they have separate customs and immigration jurisdiction and their own border controls.

The territories are WTO members in their own right despite the Chinese mainland's recent entry.

Analysts said a major block for arranging "closer trade ties'' with Hong Kong is the definition of "made in Hong Kong.''

Beijing must make sure that overseas products will not take advantage of the "closer trade ties'' to flood into the mainland market, they said.

The trade arrangements were meant as favours for the two regions because Hong Kong and Macao are already free trade zones in themselves and have no tariffs on overseas products.

The free trade pact is also expected to give Hong Kong and Macao companies a competitive advantage in the race to expand in the mainland's service sector, since China's WTO agreement obliges it to gradually open its service market. European and US companies are poised to take leading positions in the newly opened market.

(China Daily June 21, 2003)