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  1. 1. The influences of CEPA and Quota Phasing-out on HKs textiles and clothing manufacturing industryEffectiveness of Economic Policy EF3461 2013/14 Semester B Sin Dick Wai, Andy (53040515)
  2. 2. Summary
  3. 3. What is MFA? Multi-fibreArrangement (MFA)First adopted in 1974 Protecting industrial countries textiles and clothing industry from developing countriesOfficially come to the end in 1993 Abolish all quota on internationallytraded textiles gradually (3 stages)
  4. 4. CEPA (Closer Economic Partnership Arrangement) Nature:Regional Free-Trade Agreement Aim: Promote & Facilitate joint economic prosperity & developmentBETWEENOneCountry, TwoSystems regime
  5. 5. How CEPA works?Goods GeneralPicture: Tariff abolition by Mainland Customs1st Phase: CEPA I 1st January, 2004 273 Hong Kong-made goods2nd Phase: CEPA II 1st January, 2005 Additional 713 tariff codesOther products NOT yet covered On-going CEPA Applications (CO(CEPA))
  6. 6. How CEPA works?Goods Expectedresults: Local clothing manufacturers Benefitted from savings on import tariffs Being stimulated to expend output capacity / strategically exploit China market Otherlocal / foreign companies Being attracted by CEPAs potential benefits Set up new production facilities in HK
  7. 7. ServicesHow CEPA works? ProvideMarket Access to the MainlandConvention & ExhibitionAdvertisingConstruction & Real estate SecuritiesLogisticsBanking HelpbyAccounting TourismEtc18Service IndustriesHK small & medium companies thresholds of entry Thresholdsof entry for service industry sector are comparatively HIGH (WTOs protocol)
  8. 8. General Impression on CEPA I Impact Basedon the study by HKSAR government, companies believed that CEPA is beneficial to:Company's mainland-related business53% 89%HK's manufacturing industry93%HK economy0%20%40%60%80% 100%
  9. 9. Authors response to the survey Suggestedthat 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
  10. 10. Impact of CEPA I on Scale of Operation Basedon the same study, companies have increased 7% 6%The use of self-owned machinery and equipment20045% 4%Area of premises used Number of staff employed9% 0% Overall20052%4%6%11%8% 10% 12%impact Slight on manufacturing industry (Only at margin)
  11. 11. Impact on domestic Manufacture & Trade of CEPA goods Domestic exports of Hong Kong (2004 in HK$ Billion)CEPA I products 24.4 (~66%)Mainland 37.9 (~30%) Other regions 88.1
  12. 12. 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 reshipped to HK for completion Overall tariff savings is small in percentage Low F.O.B. Value compared to other industries
  13. 13. 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
  14. 14. Industry Competitiveness in the Post-MFA Regime Determents of industry attractivenessPotential of profitability Market demandFor HK garment industry in Post-MFA regime Strategiesto have value-added productivity Produce high-tier/value-added items Improve production efficiencyTextile and clothing industry will continue to shrink in the futureUnable to carry out
  15. 15. Implications Theusefulness of CEPA in increasing domestic exports to mainland is in doubt. Thetextiles and clothing industry will continue to shrink in size (Without the protection of quota rights) due to: Erosion of value-added profitability & Market demand
  16. 16. Conclusion HKtextiles and clothing industry will continue to play an import role in the Management and Control Hub (With benefits of infrastructure & legal system in HK) Theyshould consider tapping the underdeveloped resources of Greater Pearl River Delta region reallocate their production facilities
  17. 17. My Opinions & Recommendations
  18. 18. My opinions Thewhole 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) Itshard for companies which focus on manufacturing to earn high return They have to transform in order to surviveHow?
  19. 19. Smiling Curve Analysis Suggestedby Stan Shih (), founder of Acer, an IT company from Taiwan Showing the value-added potentials of different components within a supply chainManufacturing has the LOWEST valueadded potential
  20. 20. What should HK textile / clothing manufacturers do? Movingtheir 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)
  21. 21. What the government can do to assist them? Providesubsequent 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
  22. 22. Limitations / Obstacles Poor systems in Mainland ChinaHigh Corruption rate Poor law enforcement Inadequate in property rights protection Lackof long-term view and strategic thinking of the management Risk-adverse Mainly focus on short-term returns
  23. 23. Q&A
  24. 24. Related Questions Doestrade liberalization benefits the world as a whole at the cost of industries being protected before?
  25. 25. Sources Articles: TradeLiberalization in the Post-MFA Regime: The Influences of CEPA and Quota Phasing-out on Hong Kongs 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)
  26. 26. Sources Web-pages: TheSmiling Curve: Stan Shih | Chaitravis Blog http://chaitravi.wordpress.com/2010/02/1 0/the-smiling-curve-stan-shih/
  27. 27. 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_2 013/130620_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/wpcontent/uploads/2012/10/Strategy-Small1.jpg http://blog.ukfast.co.uk/wp-content/uploads/2012/02/Q7A.jpg