1.Introduction

Hong Kong lacks natural resources and agricultural products，relying almost entirely on trade with the rest of the world. The importance of foreign trade to Hong Kong can be seen from the ratio of trade to gross domestic product（GDP）. As shown in the last column of Table 1，merchandise trade including total exports and imports，averaged more than 160 per cent of Hong Kong’s GDP，over the period 1961 to 1998. During the same period，import shares in GDP averaged more than 85 percent，and export shares increased steadily from 53 per cent in 1961 to 106 per cent in 1998. Taken together，the two-way trade value rose from 1.3 times total GDP in 1961 to about 2.2 times in 1998.

For many years Hong Kong has found its largest market in the United States for almost all its principal commodity exports，ranging from garments to jewelry. At the same time，the US is also one of the main suppliers of Hong Kong，s imports，particularly of capital goods. The impacts of change in the US on Hong Kong’s trade flows can be analysed using several different methods. The one employed in this paper is a simulation approach utilizing the 1999 version of the Hong Kong model of Chou and Lin（1994）. This model has been linked to the world econometric model system of the LINK project since 1986.

An overview of Hong Kong’s trade flows with the US is presented in Section 2.Section 3 describes the trade equations in the LINK Hong Kong model，and gives the estimation results of these equations. Policy simulations are made in Section 4. The policy shock variables that the model tests include changes in the US’GDP，exchange rate，interest rates，and the export price index. Section 5 is a summary of the main findings.

2.Hong Kong-US Trade：An Overview

2.1 Domestic