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In Chinese societies the birthrate tends to increase in the Year of the Dragon and 2012 was such a year. That explains the rise in demand for baby formula on the mainland. This is true, but not the whole truth. Parallel trade on the Hong Kong border with Shenzhen has existed for decades. In the 1960s, for example, Hong Kong people brought cooking oil, dry food and clothing back to their hometowns on the mainland across the border. In the 1970s and early 1980s, people brought household electric appliances. Today, parallel trade remains active. Baby formula and numerous basic necessities are brought across the border.

One should take an economic viewpoint. Economic order has been weak in the entire mainland economy. Fake products, violation of copyright, abuse of production and social ethics are still common. Since the discovery of a toxic milk case on the mainland several years ago, the situation has not improved. Even though there are many genuine products on sale, mainland consumers do not trust what they are buying. Product insecurity has forced them to shop elsewhere. Baby formula is particularly important as there is no alternative.

The baby formula problem is not a Hong Kong problem. It is a spillover from the mainland's poor production and consumer distrust that mothers have to come to Hong Kong and Macao to buy essential goods. Baby formula, cosmetics and medicines are clear examples. The Individual Visit Scheme has become a convenient channel through which consumers shop for necessities. The solution on the mainland side will be to rebuild consumer confidence. This may take a long time, but without strong economic ethics and the revival of genuine goods, mainland consumers will go elsewhere.

How should Hong Kong's economy and authority cope with the increasing parallel trade, especially in baby formula? The Hong Kong government has reacted by imposing a ceiling on the amount of baby formula being brought across the border. This has raised concerns and criticisms, as it may lead to conflicts (and has in some cases already) with mainland residents.

First, it is beyond Hong Kong's control if mainland consumers distrust their own products. Suppliers of baby formula should have made good business, and free-market believers would think that suppliers of baby formula would seize the opportunity and make a good business. Hong Kong people can seize the opportunity to open more shops nearer the border, or shops in the other side of the border, declaring that their baby formula are imported from Hong Kong. Why the suppliers and the business sector fail to seize these opportunities?

Second, some have criticized the government saying the imposition of restrictions on parallel trade in baby formula is a violation of the World Trade Organization (WTO) conditions as it effectively amounted to trade protectionism and Hong Kong SAR is a member of the WTO. But no, this is not a case of trade protectionism. The WTO does not cover parallel trade or personal carriage across border immigration. This is just a law executed by immigration. Such examples can easily be found in other countries: some countries restrict travelers from Hong Kong bringing dry mushrooms at immigration. Immigration restrictions can be imposed for various reasons. Protectionism or violation of free trade will be the case if there is "formal" restriction of export or import of baby formula.

There can be a better solution to the baby formula case in Hong Kong by separating the problem of parallel trade and supply of baby formula to local mothers. All babies in Hong Kong are born in local hospitals, and all babies need baby formula to a certain age. All Hong Kong's hospitals, either collectively, individually or through government arrangement, can work with the supplier of baby formula so that mothers can return to the same hospital to acquire the formula. All hospitals need to do is have additional facilities catering for the supply of formula. This will bring extra business to the hospitals. All new births have to return to hospital for regular checkups anyway. Getting the baby formula from the hospital is just another convenient service provision. If the mother has moved or lives far away, arrangements to obtain the supply from another nearby hospital could easily be made.

Since hospitals have records of all new births, demand for formula can be accurately estimated, given there is the possibility of supply from different brands. Such an arrangement through the hospital will be an effective way of ensuring supply to the needed mothers. Of course, mothers can choose to use the hospital or buy from the market.

The solution to tackle parallel trade is even easier. There are always duty-free shops at the border. It will be an extremely good business for them to stock up with baby formula. New and additional rules or laws can easily be instituted to allow duty-free shops to sell formula, and other high-demand consumer goods. Pre-orders can even be made so that purchasers are guaranteed a supply. If this can be made possible, individual travelers can come to Hong Kong for leisure and on their return pick up the goods at the duty-free shop when they cross the border. This will be a more civilized solution.

The author is an associate professor in the Department of Economics and Finance at City University of Hong Kong.

(HK Edition 04/27/2013 page4)