Effectiveness of

Economic

Policy

EF3461 2013/14 Semester B

Sin Dick Wai, Andy

(53040515)

The influences of CEPA

and Quota Phasing-out

on HK’s textiles and

clothing manufacturing

industry

Summary

What is MFA?

Multi-fibre Arrangement (MFA)

First adopted in 1974

• Protecting industrial countries’ textiles and clothing industry from developing countries

Officially come to the end in 1993

• Abolish all quota on internationally-traded textiles gradually (3 stages)

CEPA (Closer Economic Partnership

Arrangement)

Nature:

Regional Free-Trade Agreement

Aim:

Promote & Facilitate

joint economic prosperity & development

BETWEEN‘One-

Country, Two-

Systems’

regime

How CEPA works?

1st Phase: CEPA I

•1st January, 2004

•273 Hong Kong-made goods

2nd Phase: CEPA II

•1st January, 2005

•Additional 713 tariff codes

General Picture:

Tariff abolition by Mainland Customs

Goods

Other products NOT yet covered

→ On-going CEPA Applications (CO(CEPA))

How CEPA works?

Expected results:

Goods

Local clothing manufacturers

→Benefitted from savings on import tariffs

→Being stimulated to expend output capacity / strategically exploit China market

Other local / foreign companies

→Being attracted by CEPA‟s potential benefits

→Set up new production facilities in HK

How CEPA works?

Provide Market Access to the Mainland

Help HK small & medium companies

by thresholds of entry

Thresholds of entry for service industry sector

are comparatively HIGH (WTO‟s protocol)

Convention & Exhibition Advertising

Accounting

Construction & Real estate

Logistics

TourismBanking

Securities

18Service

IndustriesEtc…

Services

General Impression on CEPA I

Impact

Based on the study by HKSAR

government, companies believed that

CEPA is beneficial to:

0% 20% 40% 60% 80% 100%

HK economy

HK's manufacturing industry

Company's mainland-related

business

93%

89%

53%

Authors‟ response to the survey

Suggested that the statistics should be

interpreted with care due to

Small + probably biased sample (Only 1,311

out of 3,211 CO(CEPA) total applications are

textiles and clothing companies)

Only 30% of the sample of companies

surveyed are manufacturers/traders

Impact of CEPA I on Scale of

Operation

Based on the same study, companies have

increased

0% 2% 4% 6% 8% 10% 12%

Number of staff employed

Area of premises used

The use of self-owned

machinery and equipment

9%

4%

6%

11%

5%

7% 2005

2004

Overall impact → Slight on manufacturing

industry (Only at margin)

Impact on domestic Manufacture

& Trade of CEPA goods

Domestic exports of Hong Kong (2004 in HK$ Billion)

Mainland

37.9

(~30%)

Other regions

88.1

CEPA I

products24.4

(~66%)

Impact on domestic Manufacture

& Trade of CEPA goods

Key findings:

2/3 of exports are NOT subject with import

tariffs, which means large proportion of

exports to China are shipped to factories in

Mainland for partial assembly and then re-

shipped to HK for completion

Overall tariff savings is small in percentage

Low F.O.B. Value compared to other

industries

Industry Competitiveness in the

Post-MFA Regime

Within MFA:

Quota right → the „passport‟ to play in this

industry

HK was an active exporter of MFA garment

products just because it has accumulated a

huge quota, but NOT depends on its own

comparative advantage

The industry is protected, new entrants with

lower production costs(e.g. Mainland China)

were being restricted in production

Industry Competitiveness in the

Post-MFA Regime

Determents of industry attractiveness

Potential of profitability

Market demand

Strategies to have value-added

productivity

Produce high-tier/value-added items

Improve production efficiency

For HK garment industry in

Post-MFA regime

Textile and clothing industry will continue to

shrink in the future

Unable to

carry out

Implications The usefulness of CEPA in increasing

domestic exports to mainland is in doubt.

The textiles and clothing industry will

continue to shrink in size (Without the

protection of quota rights) due to:

Erosion of value-added profitability

&

Market demand

Conclusion HK textiles and clothing industry will

continue to play an import role in the Management and Control Hub (With benefits of infrastructure & legal system in HK)

They should consider tapping the under-developed resources of Greater Pearl River Delta region

→ reallocate their production facilities

My Opinions &

Recommendations

My opinions The whole manufacturing industry is

declining at trend

Cost ↑due to increasing labor welfare and

high inflation in developing countries

Revenue↓, due to increasing competition

lead by quota and tariff abolition (Free-trade

market)

It‟s hard for companies which focus on

manufacturing to earn high return

They have to transform in order to survive

How?

Smiling Curve Analysis

Manufacturing has

the LOWEST value-

added potential

Suggested by Stan Shih (施振榮), founder of Acer, an IT company from Taiwan

Showing the value-added potentials of

different components within a supply chain

What should HK textile /

clothing manufacturers do?

Moving their strategy to R&D or Branding /

Marketing (Having HIGHER value-added

potentials)

Access Mainland market by setting up their

own brands in Mainland China (Through

CEPA)

Moving their production facilities from pearl

river delta region to lower-cost regions (e.g.

Inner-China, South Asia) (Not applicable for

long-term)

What the government can do

to assist them?

Provide subsequent funds/measures that

encourage firms to carry long-term

investments

Examples:

Set-up foundations to assist local R&D activities

Tax exemption for R&D activities

Provide low-interest rate funds to small &

medium enterprises to carry out investment

activities

Limitations / Obstacles Poor systems in Mainland China

High Corruption rate

Poor law enforcement

Inadequate in property rights protection

Lack of long-term view and strategic

thinking of the management

Risk-adverse

Mainly focus on short-term returns

Q&A

Related Questions

Does trade liberalization benefits the

world as a whole at the cost of industries

being protected before?

Sources

Articles:

“Trade Liberalization in the Post-MFA

Regime: The Influences of CEPA and

Quota Phasing-out on Hong Kong‟s

Textiles and Clothing Manufacturing

Industry”, by Chester K.M., To, Z.M.

Zhang, Chun-sun Leung, Jimmy M.T.

Chang and K.L. Moon, published by

Institute of Textiles and Clothing, The Hong

Kong Polytechnic University, Hong Kong

(2005)

Sources

Web-pages:

The Smiling Curve: Stan Shih | Chaitravi‟s

Blog

http://chaitravi.wordpress.com/2010/02/1

0/the-smiling-curve-stan-shih/

Sources Illustrations:

http://kstours.com.au/wp/wp-content/uploads/Hong-Kong-692.jpg

http://www.the-best-of-both-worlds.com/images/hkflag.png

http://easyfreight.co.nz/wp-content/uploads/2013/04/import.png

http://morethanshipping.com/united-states-free-trade-agreements/

http://git-fl.com/wp-content/uploads/2013/09/customer-service.jpg

http://www.karmamedical.com/data/editor_upload/images/News_2013/130620_Smile-Curve_EN.png

http://snomie.com/wp-content/uploads/2012/07/decline.jpg

http://upload.wikimedia.org/wikipedia/commons/d/d7/Flag_map_of_the_People's_Republic_of_China.png

http://www.cascadestrategy.com/wp-content/uploads/2012/10/Strategy-Small1.jpg

http://blog.ukfast.co.uk/wp-content/uploads/2012/02/Q7A.jpg