Implications of the end of the WTO Agreement on Textiles and Clothing
by Willy Lin

The following is a speech by Willy Lin, Chairman, of the Hong Kong Shippers’ Council, in his capacity as Chairman of the Hong Kong Knitwear Exporters and Manufacturers Association, at the Pacific Economic Cooperation Council’s 15th General Meeting held September 1, 2003 in Brunei.

For over four decades, textile and garment exports from developing countries to certain developed countries have been subject to a series of quota restraints outside the normal rules of the General Agreement on Trade and Tariffs (GATTS), including the Multi-fibre Agreement which was in force from 1974 to 1994. These restrictions, which are yearly quantitative limits, were negotiated between the exporting and importing countries concerned. The quota system was instituted as a means of controlling the flow of goods manufactured in developing countries where labour and land are cheap, to the richer, consuming regions, particularly the US and EU. Such restrictions are a major departure from basic GATT rules, and particularly the principle of non-discrimination. With the establishment of the World Trade Organisation on January 1st, 1995, began the 10-year phase out of quota restraints under the WTO Agreement on Textiles and Clothing (ATC). The ATC replaced the Multi-Fibre Agreement, and calls for the progressive elimination of quotas over a 10-year period and in four stages. We have now entered Stage Three which started from January 1st, 2002, and which will end on December 31, 2004. By January 1st, 2005, trade in textiles and clothing will be fully integrated into normal GATT rules as any other commodity. Before we go into the consequences of this integration and total elimination of quotas, let’s take a look at the patterns that have emerged within the four decades when quota restriction was in place. Today, most of the textiles and clothing exported come from Asia. Early on, at the start of the 1980s, Hong Kong, like Singapore, Korea, Thailand and other Asian nations, was a major site of textiles and clothing production. As a businessman and owner of a garment manufacturing and trading concern called Milo’s Manufacturing Group, which today specialises in knitwear, we begun production in the late 1950s. Since Hong Kong exports were limited by quantitative control, the only way to expand the business was to invest overseas.

In the ‘70s, China had instituted its “Open Door Policy” which was indeed timely for Hong Kong’s entrepreneurs. China opened its Pearl River Delta through designated economic zones and Hong Kong took advantage of China’s low land and labour costs to expand its manufacturing activities. Milo’s, like many other Hong Kong entrepreneurs, established offshore production, with a factory in Thailand in 1985 which handled 30% of our production. In the late Eighties, we established a factory in Dongguan in southern China. Hong Kong manufacturers set up facilities in all corners of the globe, from Australia to Central America, from South America to South Africa, from India to the Middle East, and Europe. Garments and textile manufacturers needed the flexibility to avail not only of lower-cost manufacturing but also of quota allocations to expand market and client base. The end of the ATC would therefore mean that Hong Kong industrialists like ourselves would have more room to expand not only in our base regions but in other regions as well where there are textiles and clothing industries already established. There have been warnings from developed nations, particularly the US, that after the end of the quota era, China could go unchecked and possibly dominate the world’s textile and clothing sector. Such statement or warning has perhaps overexaggerated China’s competitiveness, and that they are merely an excuse to continually impose trade barriers and protectionist measures even after full liberalisation of the textile and clothing sector. When China joined the World Trade Organisation, it committed two provisions that would allow the US and all other WTO members to invoke safeguard measures against its textile and clothing products. These are the special textile safeguard and the product-specific safeguard. The special textile safeguard will last until the end of 2008, and stipulates that the importing country can invoke the restraints if imports from China cause market disruption. China will have no right to retaliate against these restraints. The product-specific safeguard will be in effect for 12 years, until December 2013. Similarly, the importing country can invoke the restriction if imports from China cause market disruption, but it will require a public hearing before invocation of the safeguard. Both safeguards cannot be applied to the same product at the same time. In addition to these two safeguards, China will continue to be subject to simpler rules for invocation of anti-dumping restraints until 2016. Despite the foreseeable opportunities that the post-quota era would bring for China and Hong Kong, these “Chinaspecific” safeguards will certainly put limits on the predicted wider expansion of the industry in China. Even before full non-quota status has been reached, the US textiles manufacturers have already petitioned their government to impose the safeguards on China. More uncertainty is thrown into the picture when it comes to non-tariff barriers. The chances of achieving the full potential of so-called free trade in the textiles and clothing sector would be slim if there is a surge in the use of non-tariff barriers in place of quotas and tariffs. Article XX(b) of the GATT does allow an importing country to introduce measures which are necessary to protect human, animal or plant life or health. Among others, the WTO Agreement on Technical Barriers to Trade also governs the imposition of technical requirements on products by an importing country. The principal non-tariff barriers (NTBs) are those relating to: Environmental issues - major concerns being environmental damage, consumer safety and worker safety. Social issues - major concerns being focused on child labour, forced labour, health and safety, disciplinary practices, working hours and remuneration. These are currently being addressed in such voluntary standards/certification schemes as SA 8000, Worldwide Responsible Apparel Production (WRAP) certification scheme, and Compliance and Supply Chain Management (CSM) system. Anti-dumping actions. Dumping takes place when a company sells a product in a foreign country at a price lower than the one in its own home market. To prove dumping a country needs to establish three things: (i) Dumping test: that imported goods are being sold at ‘below the normal price’; (ii) Injury test: that a domestic firm is being injured by these exports; and (iii) Causality test: that dumping is causing injury. Safeguard measures. While both safeguard and anti-dumping measures are aimed at import surges, safeguard measures act in a blanket nondiscriminatory manner, whereas antidumping measure is against a specific firm in the exporting country. When a safeguard measure is applied, the country applying the measure shall endeavour to maintain a substantially equivalent level of concession through mutual agreement with country(ies) affected by the measure. Whereas under anti-dumping actions, no compensation is required. A case in point is the recent move by the US textile industry to seek protection against Chinese imports. On 24 July 2003, the US textile industry coalition, including cotton, man-made fibre, yarn spinners and fabric manufacturers, submitted to the Committee for the Implementation of Textile Agreements (CITA) the first petitions under the special textile safeguard contained in China’s WTO accession agreement. This safeguard may be used to impose quotas on textiles and clothing products covered by the ATC, including those that have already been integrated into the GATT. The coalition wants the US government to impose quotas on Chinese knit fabric, dressing gowns, brassieres and gloves. A similar petition regarding socks is rumoured to be the next target for safeguard request. P r e f e r e n t i a l R u l e s o f O r i g i n . Preferential rules of origin under various free trade agreements and customs unions could be used by countries to discriminate between imports from different countries. They allow a country to deny the benefits of an agreement to countries that have not signed up to a treaty or agreement (e.g. NAFTA, AGOA, CBTPA, ATPA, EU, etc.). This discrimination can operate in a positive and negative manner, positive for countries which are members of an agreement or treaty, and negatively if they are not. Facing these challenges, Hong Kong has established a Compliance Resource Centre that has signed memorandums of understanding with the Worldwide Responsible Apparel Production or WRAP and with ECO-TEX. They cover auditing, social compliance, environmental issues and so on. These bodies take into consideration all the concerns of the buyers or customers, as well as educates the buyer or customer on Hong Kong companies’ compliance levels. Constant dialogue with customers and NGOs also ensures that even with the nontariff barriers in place after full ATC integration in 2005, there will be the least disruption to the trade of textiles and clothing for Hong Kong companies since the issues have already been addressed from the ground up.

Because of the challenges posed by the tariff and non-tariff barriers, Hong Kong industrialists sought ways to expand their businesses while remaining pro-active to NTB regulations. Hong Kong entrepreneurs availed of the low-cost land and labour for manufacturing in China. With strict quotas imposed on exports from Hong Kong, outward processing for non-origin conferring processes can be done in southern China, leaving the industry in Hong Kong a freer hand to concentrate on high-value specialised products. Not only have they become Original Design Manufacturers, Hong Kong entrepreneurs with the vision set up global production networks. This has made Hong Kong a welldeveloped hub for sourcing garments, managing production and services like order placement, product development, material sourcing, quality control, marketing and logistics. Hong Kong industrialists play a major role in helping shape Government policy. The industry works together to ensure that excellent logistic services are available and these efforts have ensured that Hong Kong renowned for its world-class port and airport, enables suppliers from this region to meet Just-in-Time demands and all the necessary supply chain capabilities that include sourcing, labelling, packaging, transportation and distribution. These abilities have also enabled Hong Kong entrepreneurs to branch out into offshore manufacturing and still be able to meet buyers’ Just-in-Time requirements, especially in this day of Internet shopping and e-commerce. Through well-honed logistics and supply chain solutions worldwide, they have been able to compete with suppliers operating in regions that receive preferential trading concessions under the Preferential Rules of Origin in the case of free trade agreements or customs unions like NAFTA, ATPA, the EU. Although the phasing out of quotas under ATC will boost textile and clothing exporting regions like Hong Kong and China, it would not mean that the trade environment for this sector would be a barrier free arena. Hong Kong still produces and exports garments today which amounted to US$8.3 billion in 2002 or about half of our total domestic exports to the world. To increase its competitiveness, the clothing industry in Hong Kong has evolved from OEM, or manufacturer and exporter of basic, labelless garments, to OBM, Original Brand Manufacturer and ODM, Original Design Manufacturer. In the late Eighties, our company, Milo’s, formed partnerships with Italian fabric and yarn suppliers. Acting as their agent in the region, Milo’s handles the distribution of their raw materials to garment manufacturers in Hong Kong and other production facilities in the region. For us, it meant shortening order lead time for knitwear garments to less than a month or as short as three weeks. We are now able to offer a One-Stop Shop for overseas clients with our buying office services. On behalf of our clients, Milo’s can source from Cambodia, Mongolia, and Southeast Asian counties for products not within our normal range. We provide related services such as quality control, inspection, warehousing and distribution. The services now available extend to automatic procurement that a number of leading industrialists are able to offer overseas department store clients. The daily replenishment of stock at these chain stores occurs automatically, in response to daily sales. This is just one of the cutting edge supply chain solutions that very few suppliers worldwide can offer. This fierce competition following the removal of the quota system would improve our suppliers’ end of the market and ultimately benefit the consumers in major markets such as the US and the EU. There will be enhanced product quality to source and value added services that would make their buying processes simpler and more directed towards retail on their end. The Hong Kong experience has shown that competition can be good. Production for most Hong Kong textiles and garment companies have moved upmarket, from mass-produced brand-less basic garments to Original Designs and Original Brand Manufacturing. In this sector, the development of fabrics, particularly synthetic in Hong Kong, has also been a must. The end of the Multi-fibre agreement will surely come with challenges and opportunities alike. While the tariff barriers may be going down, the Non-Tariff Barriers will ensure that the economic and business expansion that ensues would be a c c o m p a n i e d b y t h e e q u i v a l e n t improvement of social and environmental factors. Hong Kong industrialists have remained conscientious and pro-active on these issues, raising the product and manufacturing levels as well as achieving socio-economic solutions. This is why we have managed to keep ahead of the game and we intend to continue doing so.

Chans’ Advice
The following column is authored by Richard Chan and Simon Chan of Sun Hing Insurance Brokers Ltd. The authors welcome queries which can be addressed to their individual emails or contact details below.

Forwarder Operation Guidelines (Air)

We handle various types of transport liability insurance claims for our forwarder clients daily. A lot of these claim cases are a result of the errors or omissions of the forwarders, their employees, agents or subcontractors. Based on our years of experience in handling transport liability insurance claims, we have drafted the following forwarder operation guidelines hoping that these may be useful reference for the forwarders to avoid errors or omissions often made and, therefore, to help prevent losses or claims.

Exports

  1. Carefully check the external condition of the goods delivered by the shipper for shipment and ensure that the receipt and also the Air Waybill (“AWB”) are remarked accordingly when the goods show damage, defects or discrepancies.
  2. Ensure that the information stated in the AWB is correct, in particular:

    3. (a) the place/airport of departure and the place/airport of destination

    (b) the description, quantity and external condition of the goods

    (c) the shipper, consignee and notify party details.

  3. Ensure that the House AWB contains a notice to the effect that if the carriage involves an ultimate destination or stop in a country other than the country of departure, the Warsaw Convention may be applicable and that the Convention governs and in most cases limits the liability of carriers in respect of loss of or damage to cargo. If the House AWB does not include this notice, the forwarder shall not be entitled to limit its liability to US$20/kg of the goods lost, damaged or delayed as per the Warsaw Convention.
  4. Ensure to state the name of the forwarder (whose House AWB has been issued) as the shipper in the Master AWB issued by the airline. Otherwise, the forwarder may have no title to sue the airline.
  5. Do not issue a clean AWB for the goods which are already damaged or where discrepancies are noted upon receipt from the shipper.
  6. Do not guarantee any departure, arrival or delivery time. Only estimated time e.g. ETD, ETA is provided to the shipper and the consignee.
  7. Do not state any value of the goods in the box “Declared value for carriage” under the AWB.
  8. Do not send out blank AWB unless it is clearly marked “sample”.
  9. Do not issue AWB for promised goods. AWB can only be issued after the goods have been received from the shipper.
  10. Prior to cargo arrival at the place of destination, the shipper has the right to dispose of the goods by withdrawing them at the aerodrome of departure or destination, or by stopping them in the course of the journey on any landing, or by calling for them to be delivered at the place of destination or in the course of the journey to a person other than the consignee named in the air waybill, or by requiring them to be returned to the aerodrome of departure. However, the shipper has to produce the original AWB before the shipper is entitled to exercise the aforesaid right of cargo disposition.

Imports

  1. Carefully check the external condition of the goods upon delivery by the airline and ensure that the receipt is remarked accordingly when the goods show damage, defects or discrepancies.
  2. In the case of cargo damage or delay, ensure to send written complaint to the airline within 14 days or 21 days respectively from the date of receipt of the goods. Failing complaint within the times aforesaid, no action shall lie against the airline.
  3. On arrival of the goods at the place of destination, ensure that the goods are only released to the consignee.
  4. Ensure to have the consignee’s written approval if the goods are to be released to any other parties including the notify party.
  5. In case the consignee declines to accept the AWB or the goods, or the consignee cannot be communicated with, the shipper resumes the right of disposition of the goods.
  6. Ensure to collect any charges due to the forwarder e.g. freight, duty, tax, storage, ... before releasing the goods.
  7. Encourage the consignee to claim against the cargo insurance for fuller and quicker compensation in case of cargo loss or damage.

Please free to contact us should you have any questions on any of the above. Simon Chan, Associate Director (simonchan@sunhinginsurance.com) Richard Chan, Associate Director (richardchan@sunhinginsurance.com) Sun Hing Insurance Brokers Ltd, Unit C, 10/F., United Centre, 95 Queensway, Hong Kong. Tel: 2529 1299 Fax: 2866 7465