Developments in the Textiles and Clothing Trade: Impact of Quota Elimination from 2005 (hktdc.com)

In terms of export value, textiles and clothing (T&C), which account for 16% of Hong Kong exports, is the second largest manufacturing industry in Hong Kong, after electronics. According to the World Trade Organisation (WTO), the global T&C trade amounted to US$395 billion in 2003, accounting for over 5% of total trade. Now Hong Kong's T&C industries are facing new opportunities and challenges, as quotas have been eliminated among WTO members from 1 January 2005.

In the past, the existence of quotas served to distort the global T&C trade. Quota elimination is expected to result in stronger sales at companies with better competitive capabilities. It is generally expected that T&C manufacturers in China can capitalise on their efficiency in T&C production. Many Hong Kong T&C exporters, with operations on the mainland, are also set to benefit from the quota phase-out. On the downside, a protectionist undercurrent countering the phase-out of quotas has emerged. Part of the sentiment comes from domestic manufacturers and labour unions in the quota countries, which are reluctant to face competition from imports. Resistance also comes from T&C manufacturers in certain exporting countries, which perceive themselves not as competitive as others.

There is a very long history of quantitative restrictions on global T&C trade. As far back as the first century AD, the Roman Empire limited imports of silk garments from China since Chinese silk took away jobs from Roman weavers. More recently in the 1930s, the US requested Japan to exercise voluntary export restraints (VER) on its textile exports to the US. In 1961, a Short-Term Arrangement Regarding International Trade in Cotton Textiles (STA) was reached at the initiative of the US and under the auspices of the General Agreement on Tariffs and Trade (GATT). The STA allowed importing countries to impose temporary restrictions on T&C imports in the face of market disruption for one year, pending negotiation of a longer-term arrangement. The Long-Term Arrangement (LTA) was then reached in 1962. It imposed a 5% annual growth limit on imports of cotton T&C products for a five-year period.

During the period from 1974 to 1995, the T&C trade was governed by the Multifibre Arrangement (MFA), which established quotas limiting imports into countries. However, quotas do not comply with the WTO's general preference for customs tariffs over measures that restrict quantities. They are also not in line with the WTO's principle of treating all trading partners equally as quotas specify how much an importing country is going to accept from exporting countries.

In 1995, WTO's Agreement on Textiles and Clothing (ATC) came into effect. Among other things, the agreement stated the percentage of quotas that should be removed in accordance with the stipulated schedule. The agreement also stated that the quantities of imports permitted under the quotas should grow annually, and that the rate of growth should increase at each stage. The ATC was applicable to WTO members. Non-WTO members, notably Vietnam, have remained subject to the quota systems in the restricted markets.

Quota elimination was scheduled to take place under four phases. The first phase began on 1 January 1995. Each party would liberalise products from the specific list in the Agreement, which accounted for not less than 16% of its total volume of imports in 1990. At the beginning of Phase two, on 1 January 1998, products which accounted for not less than 17% of 1990 imports were liberalised. Phase three started on 1 January 2002. Products which accounted for not less than 18% of 1990 imports were liberalised. All remaining products, mostly sensitive items like trousers and shirts, were liberalised at the end of the transition on 1 January 2005. The quotas have now come to an end and, generally speaking, importing countries will no longer be able to discriminate among exporters of different countries. The ATC also no longer exists.

In tandem with the quota phase-out, imports of clothing into the US and EU have recorded substantial growth during the period from 1995 to 2003. In the US, imports of clothing rose from US$36 billion in 1995 to US$63 billion in 2003, an increase of 74%. In the EU, clothing imports rose from US$65 billion to US$91 billion in the 1995-2003 period, an increase of 40%.

In 2003, the global imports of clothing amounted to US$226 billion, an increase of 12% from the previous year. The EU was the largest market for T&C articles, accounting for 43% of the total, followed by the US (30%), Japan (8%), Canada, Switzerland and Russia (2% each).

In 2003, global imports of textiles totaled US$169 billion, rising by 11% from 2002. The EU again was the largest market for textiles, accounting for 29% of the total, followed by the US (10%), China (8%), Mexico and Japan (3% each).

Previously, the existence of quotas encouraged proliferation of T&C manufacturing in the world. By setting up production in locations with available quotas, manufacturers could have guaranteed access to the restricted markets. As such, T&C production was not necessarily linked to the competitiveness of the manufacturers, but the availability of quotas. The traditional quota systems thus fell short of providing a level playing field for manufacturers to compete on equal footing.

After the removal of quotas, T&C manufacturers have started to compete in the global T&C market according to their strengths in the manufacturing and exports of T&C products. While some exporters may derive competitiveness from lower labour costs, others may excel in craftsmanship and design. One likely development is that some exporters may specialise in particular categories of T&C articles. In general, the clothing sector, which is largely labour-intensive, will witness substantial restructuring and relocation. But textile production, which is more capital-intensive, will see restructuring and relocation less significant.

According to the assessment of the US International Trade Commission (USITC), China is commended by the US industry for being strong at producing T&C articles at any quality and price level. The report also says that China is likely to be the supplier of choice for most large US apparel companies and retailers, given its huge supply of inexpensive and skilled labour, as well as availability of efficient management and supporting infrastructure. To capitalise on the competitive advantages of the Chinese mainland, Hong Kong will continue to be a supplier of T&C under outward processing arrangements over the near term.

But despite the rise of China, there is still room for other countries to prosper. India and, to a lesser extent, Pakistan are cases in point. While India is considered by USITC as a competitive supplier of a wide range of apparel, particularly for home textiles, Pakistan will be another competitive supplier to the US market, particularly for men's apparel, cotton yarns and fabrics. USITC points out that many other T&C production bases can become niche producers specialising in particular categories of T&C articles.

Trade preferences through free trade agreements (FTAs) and proximity to the market will also be important factors influencing the competitiveness of T&C exporters. An FTA allows members to import goods from each other free of tariff, which in turn helps reduce the costs of goods. On the other hand, quick response is commonly practised in the T&C industry as fashions change rapidly. In this connection, proximity to the market enjoys an edge not only on delivery time, but also cultural similarity and hence sensitivity to market trends. As such, Latin America (including the Caribbean countries) and Eastern Europe could enjoy competitive edges in these aspects in the US and EU markets, respectively.

The existence of quotas in the past made it necessary for retailers and importers to source from different locations. As mentioned, they were compelled to source from locations where quotas were available, instead of locations with better competitiveness in T&C production. The removal of quotas will enable importers and retailers to source from locations which offer the most competitive products and services, leading to a reduction of sourcing locations. A typical importer, for instance, may reduce its number of sourcing locations from over 30 to around 10 after quota elimination. This is expected to lower administrative costs, given that some 40% of the time and effort was spent on previous allocations of orders to a large number of sources.

Without quotas, it is expected that price competition among suppliers will continue to intensify. For one thing, lower prices are now possible by the elimination of quota premiums. For another, competition will become fierce as newcomers from different locations, not just companies holding quotas as in the past, will make a great effort to actively explore the US and EU markets. The removal of quotas, in tandem with an increasingly number of new players clamouring for market share, is exerting enormous downward pressure on the prices of T&C products.

To enhance their competitiveness, importers and retailers are pushing their suppliers hard not only to offer the best prices, but also premium services in production management, design, delivery and the entire supply chain management. Increasingly, US and EU importers and retailers request overseas suppliers to comply with their practices in ethical sourcing as well as security measures required by the US government.

Sourcing locations preferred by US and EU importers will be further affected by factors other than price, productivity and services. In particular, trade remedy measures from the US, and possibly the EU, will have a direct bearing on the sourcing decisions of overseas importers. For instance, clothing imports into the US are clouded with uncertainty resulting from the US industry's petitions to invoke textile safeguards against T&C imports from China. The re-imposition of quotas on T&C from China will inevitably curb the export growth of T&C articles from China. To minimise potential risks, overseas importers and retailers may continue to maintain sourcing from different locations.

Since quota elimination may cause a re-alignment in sourcing locations, some T&C exporting countries have expressed deep concerns over prospective losses in market shares. Such concerns led to the signing of the Istanbul Declaration. Textile and trade associations from developed and developing countries¹ alike have signed on to the Istanbul Declaration, a letter to the WTO which called for extending the quota phase-out until 31 December 2007.

The involved groups argued that China's WTO accession represents a severe and disruptive change in circumstances not present during consideration in the early 1990s of a timetable for the phase-out of quotas. They alleged that numerous studies warn that unlimited access by China to global T&C markets would result in massive unemployment and bankruptcies in dozens of countries that depend on T&C trade.

In response to the Istanbul Declaration, WTO's Director-General, Mr. Supachai, held informal consultations with a number of WTO members to examine the adjustment issues related to quota abolition. While expressing understanding for adjustment challenges, Mr. Supachai said that overall ATC implementation would bring considerable welfare and efficiency gains for the global economy as well as benefits for consumers. Mr. Supachai highlighted the Trade Integration Mechanism (TIM) of the International Monetary Fund (IMF) as an instrument for assisting low-income developing countries in receiving assistance from the international community to help them deal with adjustment difficulties as a result of the expiry of the ATC and the restoration of more liberal trade in T&C.

In October 2004, the WTO Council for Trade in Goods also started its final review of the implementation of the ATC. Chairman of the WTO Textiles Monitoring Body Mr. Andras Szepesi pointed out that the timely and full implementation of the ATC should also be regarded as a renewed manifestation of WTO members to their commitments undertaken in the framework of the multilateral trading system, thereby also strengthening the credibility of this system. In any event, while the request of these T&C exporting countries has been turned down, it seems that they will continue to voice their concerns, thus hastening the imposition of protectionist measures against the mainland.

In the US, quotas on T&C imports have been eliminated in compliance with the ATC schedule. Despite this, great uncertainty still lingers in the US market. Among the major concerns are the safeguard provisions on T&C contained in China's WTO accession protocol, which allows the US (and other WTO members) to restrain imports of T&C of Chinese origin if it believes these imports are, due to market disruption, threatening to impede the orderly development of trade in these products.

In May 2003, the US promulgated regulations which set out the procedures for the invocation of Chinese textile safeguards. According to the regulations, once a safeguard petition is filed, the US Committee for the Implementation of Textile Agreements (CITA) has 15 working days to accept or reject the petition. If CITA accepts the petition, a 30-day public comment period commences. It would be in this phase of the investigation that interested parties could submit their arguments in opposition to the proposed safeguard. After the comment period, CITA has up to 60 days to weigh the submitted comments, and decide whether to impose safeguard quotas and request consultations with China.

The quotas, if re-imposed, will come into force on the date on which the consultation request is presented to the mainland government. The 30-day consultation period with China, which could be extended to 90 days, starts at this time. China would immediately have to hold its shipments in the categories at issue to a level of 7.5% (6% for wool products) above the imports entered over the past 12-month period ending two months before the consultation request was made.

Textile safeguards are not an empty threat. In December 2003, major US textile and clothing associations successfully filed petitions to invoke safeguard quotas in three T&C categories (i.e. knit fabrics, brassieres and dressing gowns), which took effect on 24 December 2003 for one year.

On 22 October 2004, CITA determined that the US market for socks was being disrupted by imports from China, and that this situation threatened to impede the orderly development of trade in these products. The new quotas took effect on 29 October 2004, and will stay in effect for one year if bilateral consultations with China yield no result.

In October and November 2004, a US T&C industry coalition and a labour union filed nine threat-based safeguard petitions against trousers, shirts, underwear, cotton yarn and synthetic filament fabrics from China, quotas on which expired only on 1 January 2005. While an injunction issued by the US Court of International Trade on 30 December 2004 in response to a complaint filed by US retailers and importers will provide temporary relief, this ruling can be overturned by a higher court. Safeguard quotas can still be imposed provided that concrete evidence of market disruption caused by a surge in imports is available. To be sure, the court's injunction will not affect consideration of any petitions that may be filed on the basis of actual market disruption caused by imports from China.

The coalition has also filed three separate petitions, requesting the US government to extend safeguards placed on three T&C categories from China, namely knit fabrics, brassieres and dressing gowns and robes. The safeguards on these three categories expired on 23 December 2004.

In addition to Chinese textile safeguards, the US (as well as other WTO members) also has anti-dumping (AD) duties under its belt. AD duties may be imposed if imports are sold at "less than fair value" in the US market. AD investigations are especially disadvantageous to China as it is regarded as a "non-market economy" by the US, as well as the EU.

The EU has also removed its quotas on textiles and clothing, although some domestic manufacturers of the EU have become increasingly jittery about quota elimination. Similar to the US, the EU is equipped with Chinese textile safeguards. According to EU regulations, when the EU, upon request by a member state or on its own initiative, has decided that China's T&C imports are, due to market disruption, threatening to impede the orderly development of trade in those products, the EU may, until 31 December 2008, impose safeguard measures. The European Commission will then hold consultations with China, during which China will have to hold its shipments in the categories at issue to a certain level. The consultations have to be completed within 90 days. Should consultations end without success, the European Commission can establish a quantitative limit for the category or categories concerned. No safeguard measures may remain in force beyond one year, but re-application is possible.

Compared with the US, the EU has adopted a softer approach towards T&C imports from the mainland. However, it has set up a surveillance system to monitor China's T&C imports to detect any rapid increases that could disrupt the EU market. In the meantime, recent rumours suggest that a lobbying group of European textile manufacturers is collecting evidence, and may have already requested an EU member state to file an application to initiate a safeguard investigation against five different categories of textile products originating from the mainland. It seems that the European Commission is open to raising short-term quotas against some mainland products.

In addition, the Commission initiated an anti-dumping investigation concerning certain finished polyester filament apparel fabrics (FPFAF) originating in China on 17 June 2004. It should be noted that the petitioner initially wished to have this product subject to a safeguard action, and the EU Commission officials also warned of further anti-dumping investigations in the future, particularly in view of the elimination of quotas.

Turkey, for its part, has imposed safeguard measures in the form of quotas against 42 categories of Chinese textile products since 9 January 2005. Affected products include ladies', men's and children's clothing as well as home and bath textiles. These quotas will protect Turkish T&C industries, which are among the key industries in the country, against a likely surge in Chinese T&C imports after quota elimination under the ATC. Although the affected exports to Turkey are relatively small in amount, Turkey's action may add to recent sentiment in Europe against a possible surge in imports from the mainland.

In addition to safeguard measures, Turkey has initiated anti-dumping investigations against certain textile products from China. On 10 December 2004, the Turkish investigating authorities commenced an investigation on woven pile fabrics and chenille fabrics from China. The investigation may last one year, but it can be extended up to 18 months in special circumstances. Another investigation was initiated on 7 June 2004 by Turkish investigating authorities targeting similar textile products from the mainland, such as textile fabrics impregnated, covered or laminated with polyurethane.

Protectionist sentiment, particularly in the US, has come as a bitter blow to the global trade in T&C, which is supposed to have completely liberalised on 1 January 2005. ATC already contained a 10-year phasing-out period to avoid sudden changes, and provide gradual transition and certainty to the trade. It was intended to allow both importing and exporting economies to make the necessary adjustments. Reversion to quantitative restrictions serves to destroy the spirit of ATC.

Meanwhile, many importers and retailers in mature markets, especially in the US, have expressed concern over the rise of protectionist sentiment, including the imposition of safeguard quotas, which seem to be more unpredictable and difficult to manage than the previous conventional quotas. Such developments may affect sourcing costs, and hence price competitiveness and profit margins. Indeed, US retailers and importers have, as mentioned earlier, recently filed a petition to a US federal court, and successfully argued that safeguard quotas would bring about irreparable harm to their businesses.

The ATC purports to generate welfare and efficiency gains for the global economy as well as benefits for consumers. Evidently, clothing imports from China generate savings for global consumers. As an illustration, while US consumer prices increased by 24% over the past 10 years, nominal prices of clothing in the US fell by 10% during the same period thanks to the increase in imports. According to USITC, elimination of quotas, as well as import tariffs, would save US$13 billion a year in prices paid by US consumers. The biggest beneficiary of quota removal will undoubtedly be consumers, who will gain from the elimination of quota premiums and from lower prices stemming from intensified competition. Be that as it may, extension of quotas, even on a selected basis, is an unwelcome development for global consumers.

On production, it is commonly agreed that the mature markets are generally not competitive in the manufacturing of clothing products, which are labour intensive. Protectionist sentiment is of no help to workers in these markets. In the US, the loss of manufacturing jobs in clothing production has indeed started for years, particularly since the implementation of the North American Free Trade Agreement (NAFTA) in 1994. To capitalise on the advantage of lower labour costs in Mexico, many US importers brought in clothing articles from Mexico. Certain US clothing manufacturers also set up production facilities in Mexico, and exported the products back to the US. At the beginning of 1994, US apparel manufacturing employees amounted to 857,800. Just before China's WTO accession at end-2001, employment had already dropped to 381,100. In the eight-year period after implementation of NAFTA, US employment in apparel production recorded an average annual decline of 59,600.

It follows that even if China's T&C products were restrained by restrictive import measures, they might simply be substituted for by other competent alternatives, such as from Southeast Asian and Latin American countries. A case in point is brassieres from China, which had been put under safeguard quotas for one year since late 2003. During 2003, when US imports of brassieres originating from China were largely free of quotas, the US's total imports of that product fell by almost 5%. But in the first 11 months of 2004, when China's brassieres were subject to restraint, the US's total imports of the product increased by 16%. Many other supplier countries were able to capture China's market share, which dropped from 27% in 2003 to 26% in January-November 2004. Meanwhile, the Dominican Republic's share expanded from 9% to 10%, Indonesia's from 8% to 9%, and Thailand's from 7% to 8%.

	03/02 Change %	Import Share % 2003	Jan-Nov 04/03 Change %	Import Share % Jan-Nov 04
Total	-4.5	100	+16.3	100
China	44.8	27.4	+10.3	26.0
Dominican Republic	-18.2	9.0	+27.8	9.7
Indonesia	4.0	8.3	+24.4	8.9
Thailand	-10.5	7.0	+26.6	7.8

On the other hand, importers and retailers are puzzled by the rise of protectionism. While many are well aware of the opportunity for streamlining their sourcing activities, they tend to be reluctant to make changes until the dust in the post-quota era settles. It has been reported that quite a number of overseas importers and retailers, especially those from the US, are unwilling to increase their sourcing from China over the near term, mainly out of fear of possible disruptions to their supplies due to safeguard quotas.

Imposition of safeguard quotas on China will likely divert orders to the smaller T&C producing countries, at least until 2008. Yet the bottom line will be irreversible. In the longer term, all T&C producing countries will eventually face genuine competition in a quota-free environment. Continued quota restrictions on China will just postpone structural adjustments in the T&C industries of smaller countries, and serve to shield them from global competition over the short to medium term.

Simply put, safeguard quotas on China are by no means conducive to the development of the T&C industries of the smaller countries. The countries that can become winners in the post-quota era will be those focusing on strengthening their competitive edges, such as improved quality, timely delivery and a better trained workforce, in order to adapt to the eventual reality in T&C global business. A genuine free T&C market will certainly boost employment and hence welfare benefits in the emerging world.

As regards China, the most devastating impact of intensified protectionism is the uncertainty it brings. The threat of safeguard measures not only discourage overseas buyers to buy from the mainland, but also dissuade foreign manufacturers, including Hong Kong producers, from relocating to the mainland. Despite appearance to the contrary, even a few indigenous Chinese manufacturers are contemplating to produce in other countries in the region. As a result, the growth of Chinese T&C exports is suppressed. As an increase in T&C exports is expected to help boost the Chinese economy, and in turn stimulate its appetite for imports from other countries, slower expansion of such exports will somewhat undermine China's demand for imports.

As a matter of fact, the supply chain of China's T&C exports spans across the world. In producing T&C articles, China has to import a handsome amount of raw materials, including cotton, wool and synthetic fibres, in addition to machinery, equipment and their parts and components. Since many T&C manufacturers in China are engaged in original equipment manufacturing (OEM), product design and development are basically conducted in overseas countries. Meanwhile, shipments of finished T&C articles pass through freight forwarders, shipping companies as well as transportation companies abroad. Many foreign T&C companies also set up their own plants in China to exercise a more direct control of production.

All of these indicate that China's T&C production is closely linked with other supply chain activities both inside and outside the country. Restrictions on China's exports of T&C articles could hurt this world trade, and jeopardise the interests of other industries. Between 1999 and 2003, China's total imports from the world expanded remarkably by an average annual rate of 26%. In line with the expansion of the mainland's T&C industries, its imports of textile and clothing machinery expanded by an average annual rate of 34% during the period. As it now stands, such textile and clothing machinery still mainly comes from developed countries.

In any event, to assuage fears in the US, the EU and other countries over a likely surge in T&C imports from China, China has announced eight measures to ensure a smooth transition to a quota-free global trading environment. In particular, China has started to levy an export tax ranging from 0.2 and 0.5 yuan per unit/kg from 1 January 2005, covering 148 apparel items in six categories, namely outerwear, dresses, pants, blouses, sleepwear and underwear. Exports of items covered by the new tax amounted to US$34 billion in 2003, accounting for 75% of mainland clothing exports.

While this tax, which amounts to an average of 1.3% in value terms, may not be able to appease the worries of overseas countries completely, the measures suggest that China is moving to address their concerns. Following China's announcement, the EU indicated that it welcomed the country's action, although the US response has been less encouraging. On the other hand, the export tax, which is levied on a volume basis, will encourage China's T&C industries to move towards higher value-added production, thus somewhat allaying fears of other low-cost producing countries.

On a technical perspective, while an export tax will distort trade and bring about an inefficient allocation of resources, it is less damaging than the imposition of quotas. Both an export tax and quantitative restraint raise product prices, reduce the welfare of consumers and increase the revenue of producers. But quantitative restraint will entail substantial administrative burdens of allocating quotas among T&C manufacturers and exporters, and lead to inconvenience and delays in documentation and exportation. On the other hand, the export tax now imposed by China, as it is simple and applicable to all markets and manufacturers, will still conserve price signals, somewhat alleviating the distortion in trade and production of T&C products.

Apart from imposition of the export tax, the other seven measures announced by China are: (i) the release of textile export information in a more timely fashion; (ii) offering timely information on investment, improving 'risk warning', and preventing over-investment in the sector; (iii) encouraging Chinese enterprises to invest abroad and providing them with policy support to achieve this objective; (iv) expanding the role of intermediary organisations to encourage industrial self-discipline and co-ordinate exports; (v) promoting the adoption of the ISO9000 standard and the ISO14000 environmental protection standard; (vi) adopting trade promotion measures to develop and strengthen domestic brands; and (vii) enhancing bilateral and multilateral discussions and co-operation to safeguard the legitimate rights of Chinese companies.

In line with the disruption to Hong Kong manufacturers' plans to relocate across the border, the growth potential of Hong Kong's re-exports of T&C products to overseas markets, especially the US, will be affected by any restrictive measures imposed on T&C from the Chinese mainland. In 2003, Hong Kong's re-exports of T&C of mainland-origin to the world amounted to US$21 billion, or almost 58% of Hong Kong's total exports of T&C.

Hong Kong's economic loss definitely goes beyond the obvious loss of opportunity in expanding re-exports. Indeed, Hong Kong's potential in supply chain management will be constrained. In addition to T&C manufacturing, many Hong Kong companies are engaged in value-added activities across the whole supply chain, including procurement of raw materials, fashion design, logistics control and administrative support.

Meanwhile, the mainland's imposition of export tax on 148 clothing items, which covers both normal trade and processing trade, will also have an impact on Hong Kong. In 2003, Hong Kong's re-exports of these items of mainland-origin to the world amounted to nearly US$9 billion, or 63% of Hong Kong's clothing re-exports of China origin. In any event, such an impact is not expected to be substantial, as the tax will more affect lower-priced items rather than higher-end items in which Hong Kong manufacturers excel.

The textile safeguard measures are primarily targeted at T&C products from the Chinese mainland, and are not applicable to T&C products made in Hong Kong. In other words, Hong Kong T&C manufacturers will not be bound by any import restrictions on the Chinese mainland through outward processing arrangements (OPA) as long as their products meet the origin rule. Under OPA, a certain part of the production process is undertaken in Hong Kong, so that the final products can be considered as having Hong Kong origin. While OPA is expected to fade out gradually over the longer term, the spectre of safeguard measures will sustain the viability of this arrangement in the short run.

To ensure origin compliance of Hong Kong's T&C exports, the Trade and Industry Department (TID) has implemented its new textile control arrangements from 2005 onwards. Among other things, it requires that all textiles export to and imports from the Chinese mainland, and exports to those economies which have invoked safeguard measures on T&C products from the mainland (notably the US) will have to be covered by either an Import Notification or Export Notification I/II completed by a trader registered under the Textiles Trader Registration Scheme (TTRS) or a consignment-specific export licence (Form 4) or import licence (Form 7) issued by the Director-General of Trade and Industry. According to TID, these new textile control arrangements, which are aimed at easing the documentation burden of Hong Kong suppliers while maintaining a simple yet effective control system, are estimated to save each local exporter some HK$40,000 in administrative expenses per year.

Now that quotas have been removed, Hong Kong's T&C manufacturers have more leeway in relocating their production to low-cost manufacturing bases, including the mainland, in order to enhance their price competitiveness and profitability. Over the medium term, however, they are advised to consider maintaining a diversified production base rather than just concentrating on the mainland. To alleviate the threat of restrictive import measures, they should consider undertaking production activities in a global setting rather than putting all their eggs in one basket.

Besides manufacturing activities, Hong Kong's T&C exporters should further strengthen their marketing and sourcing skills. Overseas buyers have already commended Hong Kong as a global T&C sourcing centre, where orders can be placed but with production allocated to different locations according to cost, level of sophistication and complexity required, as well as availability of quotas. As such, Hong Kong T&C exporters should enhance their sourcing skills to ensure that their service to overseas buyers will not be handicapped by any restrictive measures on mainland imports. Particularly for distributors, which may be exposed to higher risks of disintermediation amid the likely lowering of sourcing complexity in the long run due to quota removal, the ability to allocate different sources in view of market and regulatory changes is crucial.

Over the longer term, Hong Kong garment manufacturers are advised to keep moving their T&C manufacturing towards more sophisticated high-value activities, with a view to fending off not only competition from other T&C producing countries, but also protectionist undercurrents in importing countries. Presumably, protectionist measures, such as safeguards, will target the hot items that hit the mass-markets. In order to avoid being over-exposed to the low-to-medium end of the markets, it would appear advisable that Hong Kong garment manufacturers actively identify market niches higher up the scale. While keeping an unbiased focus on creating more value for their apparel products generally, Hong Kong garment manufacturers should work consistently on product differentiation by upgrading quality, image and style. This may inevitably lead to a choice of pricey fabrics and clothing accessories, with the resultant effect of raising the overall price of the garment items.

More importantly, Hong Kong companies should strive to strengthen their long-term competitiveness by moving further towards more sophisticated and high value-added processes, such as clothing design, sales and marketing, fabrics procurement, financial control, production coordination, logistic arrangement, and retail and distribution. According to the Organisation for Economic Cooperation and Development (OECD), while low wages remain a competitive edge, time factors now assume a more important role in shaping competitiveness in world markets. Increasingly, it is the logistics capability of T&C manufacturers that makes the major difference. Hong Kong's T&C exporters and manufacturers must focus on high-value niche markets which are less price-sensitive, and to seek competitive advantages through quick response and high technology. In all, there will be little prospects for Hong Kong companies unable to provide considerable value-added to their products.

While Hong Kong companies already have good connections with overseas buyers, developing further closer relationships is still necessary. OECD has rightly pointed out that retail distribution in major overseas markets is increasingly dominated by large retail groups. As competition intensifies further after the removal of quotas, these large retail groups will face greater pressure to buy from sources which can offer the best price-quality mix. Not surprisingly, they have found that restructuring their global sourcing is the only viable means of maintaining their competitiveness. Many of them are taking a new look at their existing sources, with a view to reducing the number of their suppliers as a way to be more efficient in terms of sourcing.

In view of this development, Hong Kong's T&C exporters and manufacturers should forge closer links with overseas buyers, particularly large retail groups. Hong Kong suppliers also have to better understand their competitors from other countries and regions. They need to know what these other companies can and cannot provide in terms of price, quality, variety, delivery and other services. Only then will they know if they are in a good bargaining position with their buyers.

The market and competitive environment aside, Hong Kong exporters have to pay heed to trade and regulatory developments worldwide, particularly in the US. The US's trade deficit with China surged from a modest US$29.5 billion in 1994 to US$124 billion in 2003. Against this background, China can hardly escape from the attention of those who embrace protectionist beliefs. It is thus expected that trade remedy measures will continue to be invoked by certain US industry groups to curb T&C articles from China. Chinese textile safeguards are an easy weapon available to these groups. In addition, anti-dumping investigations can be invoked either separately or jointly with Chinese textile safeguards to curb T&C imports from China.

To minimise potential risks, Hong Kong T&C exporters are advised to monitor developments closely, and take appropriate actions accordingly. Since it takes time for importing countries to process any safeguard or anti-dumping petitions, they can respond properly in the interim to minimise disruption.

¹ These countries include Argentina, Austria, Bangladesh, Belgium, Bolivia, Botswana, Bulgaria, Chile, Colombia, Costa Rica, Czech Republic, Dominican Republic, Denmark, Ecuador, El Salvador, France, Germany, Ghana, Greece, Indonesia, Israel, Italy, Ivory Coast, Jordan, Kenya, Latvia, Lesotho, Lithuania, Madagascar, Mauritius, Mexico, Namibia, Nepal, Netherlands, Norway, Paraguay, Peru, Philippines, Poland, Portugal, Senegal, Slovenia, Spain, Sri Lanka, South Africa, Swaziland, Switzerland, Tanzania, Turkey, UK, US, Uruguay, Venezuela and Zambia.