The Hong Kong apparel industry is set to become a leading fashion centre, in addition to its role as a regional sourcing hub for quality, branded fashions. In addition to the territory's well-established business infrastructure, the Closer Economic Partnership Agreement with mainland China is also set to encourage new production of higher value-added and branded items in Hong Kong.

Historically, Hong Kong companies were mostly CMT (cut, make and trim) manufacturers of garments. However, rising costs and the imminent phase-out of MFA quotas are making manufacturing in the territory increasingly uncompetitive. Domestic production has declined as Hong Kong firms have relocated manufacturing operations to mainland China in an attempt to remain competitive.

Nonetheless, Hong Kong has managed to maintain its role as a supplier of high quality, branded fashion collections. And as a regional sourcing hub, it can take full advantage of its international network and accumulated skills.

Hong Kong has a number of strengths which would favour its development into a fashion hub.

Many international companies have maintained a regional base in Hong Kong, taking advantage of the territory's well-established business infrastructure and a proficiency in English, which facilitates corporate communications.

Moreover, the industry itself has strong managerial skills, and is experienced in international trade and supply chain coordination. Increasingly, it is also adopting advanced manufacturing and information technology which is seen as essential to future competitiveness.

Closer Economic Partnership Agreement
The apparel industry - and, in turn, the fashion sector in Hong Kong - will also receive a boost from the Closer Economic Partnership Agreement (CEPA) with mainland China, which was finally signed in June 2003. The CEPA aims to achieve a progressive reduction in tariffs and non-tariff barriers on all trade in goods between the two regions, and to liberalise trade in services by reducing or eliminating all discriminatory measures.

Under the provisions of the CEPA, Hong Kong will continue to apply zero tariffs to all imports of goods of mainland origin, and from January 1, 2004, mainland China will apply zero tariff to imports of 273 specified goods of Hong Kong origin - including all commonly traded textile and clothing items.

Currently, the tariff rates applied by China to imports of textiles and clothing range from 5 per cent to 21.3 per cent - although the upper rate is due to be lowered to 17.5 per cent under China's WTO accession agreement.

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The CEPA will make Hong Kong goods cheaper in the mainland Chinese market from 2004 because they will no longer be subject to Chinese import duties. Although Hong Kong manufacturers are unlikely to move operations back to Hong Kong having already relocated them to China, the CEPA may encourage new production of higher value-added and branded items in Hong Kong - especially those requiring high skill levels and high quality standards.

Having such goods made in Hong Kong may be particularly attractive to foreign companies. When exporting garments to mainland China from countries other than Hong Kong, the costs of import duties and meeting various regulations can total up to 35 per cent of a garment's value.

Growing demand
Observers point out that the rise of the Chinese middle-income class is providing a large and growing source of demand for higher value-added and branded products. It has been estimated recently that this grouping now represents 15 per cent of the population.

One remaining weakness, however, which may hamper Hong Kong's development as a fashion hub, is its apparent lack of designers. Production of original design is important to Hong Kong's development as a fashion hub - which, in turn, is seen as being vital to the territory's ability to compete in 2005 and beyond when quotas on international trade are finally eliminated.

The future development of the industry will depend largely on its ability to innovate and integrate new skills in this area.

"Competitiveness of the Hong Kong Apparel Industry: from Manufacturer to Fashion Hub" was published in Issue No 107 of Textile Outlook International.