Hong Kong is one of the global apparel industrys main sourcing hubs

Hong Kong is one of the global apparel industry's main sourcing hubs

Textile and apparel industry leaders are playing down concerns that US trade with Hong Kong could be affected by a policy change threatened by President Trump.

Changes to the Trump administration's China policy were announced at the end of May and include "beginning the process of eliminating policy exemptions that give Hong Kong different and special treatment." The move was itself prompted by China's plans to impose a national security law on Hong Kong. 

While the details of the US policy change are sketchy, several possible impacts could be expected should Hong Kong no longer treated as separate customs territory:

  • All products, including apparel items, exported from Hong Kong to the US, will no longer enjoy duty-free treatment but be subject to the most-favoured-nation (MFN) tariff rate.
  • All US Section 301 punitive tariffs, as well as other trade remedy measures (such as anti-dumping and countervailing duties) imposed on exports from China, will also apply to products originating from Hong Kong.
  • New requirements will apply to the country of origin labelling on goods made in Hong Kong.
  • New restrictions on visa application and travel could destabilise the overall trading relationship and business environment.

However, speaking to just-style, Louis Chan, assistant principal economist (global research), for the Hong Kong Trade Development Council (HKTDC), claims sourcing offices in Hong Kong will continue to operate smoothly. 

"As long as the subject merchandise is not made in Hong Kong, the possible revocation of the special trading relationship or any suspension of HKCO (Hong Kong country of origin) recognition should have little or even no direct impacts on Hong Kong's re-exports (of those items)."

This is because Hong Kong has long reduced the size of its clothing manufacturing base, with Hong Kong-based manufacturers largely making clothes outside the wealthy special administrative region (SAR). 

"The special trading status applies to domestic exports. Hong Kong's domestic garment exports accounted for 0.3% of the city's total garment exports in 2019," says Chan, although he adds these comments were "pending further announcement of any concrete measures from the US." 

Until then, "the role of Hong Kong as a sourcing hub for garments and textiles remains intact." 

Sourcing hub

Hong Kong is, of course, a major sourcing location, with the HKTDC noting there were 14,170 garment traders established in the territory, "experienced in fabrics procurement, sales and marketing, quality control, logistic arrangements, clothing designs and international and national rules and regulations" as of December 2018. 

The trade is huge – with apparel and accessories exports from Hong Kong to the US being worth US$3.9bn dollars, according to international trade data.

However, the trade in clothing actually made inside the 1,106 square kilometre territory is a lot smaller, stresses Henry Tan, chairman of the Textile Council of Hong Kong. 

He says Hong Kong-based manufacturers sold US$99.46m worth of Hong Kong-made garments and textiles to the US in 2019.

The Council's ruling committee members include several pro-Beijing politicians such as Andrew Leung, president of the legislative council. 

Commenting after the National People's Congress on 28 May approved laws that would pave the way for detailed legislation that could allow mainland Chinese security services to work in Hong Kong – which could be approved this summer – Tan hopes the US response would be muted.

"The US is yet to announce what sanctions it will impose. But if the US and China could do business together, it would be good for both countries and everyone in the world," he told just-style.

Potential negative impact

His comments come as concern is rising over the potential negative impact the national security law could have on Hong Kong's clothing trade.

A protest note from the US, UK, Canada and Australia said the legislation would breach Hong Kong's Basic Law – effectively a constitution agreed between Britain and China ahead of the 1997 handover – highlighting the potential diplomatic disruption. 

The US state department on 27 May decertified Hong Kong as an autonomous jurisdiction following the move. 

Under the Hong Kong Human Rights and Democracy Act of 2019, such a certification is required for the US to recognise special trading rights and agreements applying to Hong Kong. That said, decertification does not automatically scrap these special rights.

However, by being recognised as a separate customs territory, Hong Kong has escaped being hit by the tit-for-tat tariffs imposed by the US on exports from mainland China. It also benefits from agreements in areas such as exchanging tax information and preventing double taxation. 

As for the 558 Hong Kong based clothing and textile manufacturers (HKTDC figures), many have long moved their manufacturing facilities outside the territory, to mainland China and other countries, including Vietnam and Cambodia. 

"There is not a large amount of [Hong Kong-made] textile and garments shipped to the US. Hong Kong as a city serves only as headquarters to the companies," Tan says. 

He adds some Hong Kong clothing companies are looking for opportunities in mainland China anyway – trade that would not be impacted by any change in diplomatic recognition. 

"Traditionally, the US and Europe have been the target market for Hong Kong textile export companies. But I think it's time to look into the China market as the Chinese government continues to pump up domestic demand."

Some major Hong Kong companies are indeed investing in China. One example is Esquel, which did not want to comment on the current diplomatic row. During the pandemic, the shirt maker has been expanding Chinese sales of its own brand Determinant, selling men's shirts and polo shirts in the country through e-commerce sites, targeting young urban professionals. 

The diplomatic row over China's security law follows ongoing protests over the future of Hong Kong – which for the past 40 years has been the centre of the global garment industry: What does the future hold for Hong Kong?

With additional reporting by Keith Nuthall.