The removal of quotas in textile and clothing, as per the World Trade Organisation's schedule, has resulted in an industry that is streamlining and realigning its processes for better results for both the consumers and world manufacturers.

The removal of quotas has enabled importers and retailers to source only from those locations offering the best products and services, according to the Hong Kong Trade Development Council research paper on the impact of quota elimination from January 1, 2005. This has led to a reduction in sourcing locations, for example, from over 30 to around 10 after quota elimination. The move helps importers lower administrative costs as before quota abolition, some 40% of the importer's time and effort was spent on the allocation of orders to a large number of sources.

Consumers, meanwhile, would see even greater benefits from quota elimination, as they reap the gains from the removal of quota premiums and lower prices resulting from intensified competition.

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.

Changes in sourcing patterns

The existence of quotas in the past made it necessary for retailers and importers to source from different locationsDbasically 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.

Without quotas, it is expected that price competition among suppliers will continue to intensify. The elimination of quota premiums, increased competition from newcomers from different locations, 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.

Impact on China

The supply chain of China's T&C exports spans across the world. In producing T&C articles, China has to import a great 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.

But to assuage fears in the US, the EU and other countries over a likely surge in T&C imports from China, China 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$34bn in 2003, accounting for 75% of mainland clothing exports.

On March 1, the export licence law was implemented in the Mainland, requiring garment shipments to carry a new export license and covering Mainland-made garments and those made under the Outward Processing Arrangement (OPA). The export licence is basically a statistical tool to help monitor garment exports according to the Ministry of Commerce's website.

Any restrictive measures imposed on T&C from the Chinese mainland will have some sort o impact on Hong Kong's own T&C industry. In 2003, Hong Kong's re-exports of T&C of mainland-origin to the world amounted to US$21bn, or almost 58% of Hong Kong's total exports of T&C.

Moreover, 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.

For one, imposition of export tax on 148 clothing items in the Mainland, 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$9bn, 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 the 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.

The report, Developments in the Textiles and Clothing Trade: Impact of Quota Elimination from 2005, is available at the info.hktdc.com website, under Economic Forum, http://info.hktdc.com/econforum/.

by Gina Giron-Urquiola