The threat to the clothing and footwear sector from the proposed Hong Kong agreement
- Bill Rosenberg
The proposed free trade and investment agreement with Hong Kong raises concerns for the survival of much of the remaining clothing and footwear industry if, as proposed, tariffs are removed on Hong Kong imports. These concerns are based not on cheap labour and sweatshops in Hong Kong itself. Hong Kong is moving rapidly away from its more familiar role of manufacturing based on low cost labour. Manufacturing has fallen from almost a quarter of Hong Kongs total production in 1980 to less than 6%.
Despite being one of the most unequal societies in the world, Hong Kong is no longer a low wage economy: its per capita Gross Domestic Product (GDP) in 1999 was approximately $NZ45,600 70% higher than New Zealands $NZ26,700. Instead of manufacturing products themselves, Hong Kong traders make money from organising production on behalf of buyers mainly in the industrialised world using the cheapest raw materials, factories and labour, wherever they can find them.
The concerns are on two fronts: first, that widespread fraud occurs in passing off Chinese goods as made in Hong Kong; and second that it will be exceptionally difficult to create enforceable "rules of origin" that are acceptable to Hong Kong authorities. Textiles, clothing and footwear still provide jobs for over 21,000 New Zealanders (21,868 in 1999), with production of $2.77 billion. Most vulnerable are clothing and footwear, which employed 13,000 people in 1999 and produced $1.45 billion worth of goods.
It is easy to say it is a "sunset" industry, but it has also shown that with sufficient investment, inspiration, and critical mass it can produce quality, higher value goods that will sell. On the other hand, if it is not internationally competitive, before we put over 10,000 New Zealanders out of work many in provincial areas where there are few employment alternatives a credible strategy to replace those jobs must be in place. No such strategy is evident, yet the Hong Kong deal endangers those jobs.
There are credible concerns about the enforceability of any rules of origin. If they cannot be enforced, then we are effectively zeroing tariffs to China and a score of other countries in Asia, the Middle East and West Africa which Hong Kong traders use to contract out their orders. Just one such trading house alone, Li & Fung, has offices in over 20 countries and oversees the entire fabrication of a good, from purchasing raw materials and planning production to monitoring manufacturing among 7,500 independent plants to which it subcontracts orders.
In 2000, almost 90% of Hong Kongs exports were "re-exports" exporting imported goods that have undergone no further processing or only simple processing in Hong Kong. Much of that is to and from China. Goods are processed partly or fully in China and then re-exported to Hong Kong.
Hong Kong traders put large markups on the goods averaging 24%. 10% of Hong Kongs entire GDP in 1996 was such markups more than manufacturing. There is therefore very close integration of production between Hong Kong and China. Evidence for fraud comes from a number of sources including US Customs, businesspeople with experience in the area, and statistical analysis.
The US Customs Service has been trying for over a decade to enforce Hong Kongs rules of origin, without much success. In 1993, US authorities estimated that illegal transshipments from China alone totalled $US2 billion (about $NZ3.7 billion) annually. By 1999, one US Customs publication still reported that 50% of factories it inspected in Hong Kong were suspected of being involved in illegal transshipments. It concluded that enforcement measures were having little impact.
A US Customs report dated as recently as 28 June 2001 listed 392 "Hong Kong Convicted Factories" whose shipments would be detained by US Customs because they had been "convicted, penalized, and/or excluded from entry because of [illegal] transshipment". Richard Leary, of the NZ Exporters Institute, speaking from many years experience in the area, does not believe New Zealand Customs can effectively enforce rules of origin. He notes the huge volumes of traffic through Hong Kong, mainly from China. Writing in the Independent (20/6/01) he observed:
He is not alone in such observations, and statistics back him up. Over half of Hong Kongs "domestic exports" (those supposedly produced in Hong Kong itself) were textiles, clothing and footwear in 2000 worth about $NZ25 billion. The "domestic" output per worker of Hong Kong garments appears to show Hong Kong clothing workers producing about three times as much (by value) as New Zealand workers do, and four times as much as US workers. Such large differences cannot be explained by higher productivity or higher priced garments. They indicate that only a small part of the manufacturing process of so-called "Hong Kong" garments is in Hong Kong, and/or that there is widespread cheating.
Unenforceable Rules Of Origin
It will be exceptionally difficult to define rules of origin that are enforceable and distinguish Hong Kong-made "domestic" products from ones substantially made in China or elsewhere. For its huge exports to the US and European Union, Hong Kong uses rules of origin that allow clothes to be cut, and parts sewn in low cost countries such as China and Bangladesh, then assembled into a garment in Hong Kong, followed by potentially quite extensive finishing in, say, China.
These are called "Outward Processing Arrangements". Hong Kong put them in place "to help manufacturers in Hong Kong to lower the cost of production and enhance the competitiveness of Hong Kongs exports by making use of the lower production cost of the nearby areas". Only a very small part of a so-called "Hong Kong" garment needs to be processed in Hong Kong. The rest can be carried out in low-wage countries, especially China.
Minutes of a meeting of the Hong Kong Legislative Council Panel on Trade and Industry on 4 June 1996, considering a revision to the rules, stated the purpose was to change the existing rules from "cutting and sewing" to "assembly of parts into garments". That would make better use of "the Outward Processing Arrangement (OPA) whereby cutting and minor sub-assembly processes could be taken in places outside Hong Kong where costs were lower".
Hence a possible scenario is:
Both the first and third stages could be substantial. Work that could be left undone in Hong Kong on the "finished" garment and be carried out elsewhere under the OPA includes a wide variety of processes such as buttoning, embroidering, inserting a belt or elastic band, overedging and trimming.
By including (and if necessary inflating) "factory costs" such as supervision, design and royalty payments (perhaps to related parties), the "local content" can with little difficulty be increased to 40% (or whatever local content requirement is set in an agreement with Hong Kong). The total cost will then be little different from importing the whole product directly from China, after adding markups reported to be between 28% and 34%, and the return to the manufacturer can be very similar. However it will save them 19% on New Zealand tariffs.
Cabinet is considering the rules of origin for the proposed agreement. Will Hong Kong be willing to dispense with its Outward Processing Arrangements just for New Zealand? Even if it is, will it be willing to accept all processing, to the final packaging, being done in Hong Kong? Because that seems the only way to ensure a level playing field. Even then, can it be enforced?
Removal of tariffs contradicts Labours policy to freeze remaining tariffs at their 2000 levels at least until 2005 unless removed on a reciprocal basis. Yet Hong Kong has no tariffs at all so there is no reciprocity possible. Once again a New Zealand government is proposing to remove tariffs unilaterally, without an industrial strategy to replace the industries and jobs that will be lost.
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