I am often asked what the world will look like on January 1, 2005 from a quota perspective. While I am not a fortune teller, we won't need to wait until then to know the answer to this question. What happens within the next few months should be fairly telling. And what we learn may contradict the popular wisdom that no Hong Kong garment factories will be left standing come January 1, 2005.

The issue of course turns on quota. Without quota, garments, like shoes and toys, would no longer be manufactured in Hong Kong in any meaningful amounts. Quota, however, prevents the natural migration of manufacturing from high-cost/labor-scarce jurisdictions, such as Hong Kong, to low-cost/labor-abundant jurisdictions, such as China.

Under the Uruguay Round of the WTO, quota is phased out or "integrated" in four stages for all WTO members over a 10-year period that began on January 1, 1995 and will end on December 31, 2004. The first three stages of integration have already occurred, with the third stage of integration effective January 1, 2002. Having become a WTO member, China has received the benefit of the first three stages of integration. While the third stage of integration covered some meaningful categories, including Category 350, most of the "good stuff", such as Categories 338/339 and 347/348, won't be integrated until the fourth round, which occurs on the very last day of the 10-year period, December 31, 2004.

But even before then, the protectionists will have shown their hand. As part of the agreement by which China became a WTO member, China agreed to a special textile safeguard, which runs through December 31, 2008. Under this safeguard, the US can re-impose quotas on integrated categories on a showing of market disruption by an aggrieved domestic petitioner, likely a protectionist organisation such as ATMI (American Textile Manufacturing Institute). The procedures by which the US will act on such petitions were recently finalised. Unfortunately, the US government agency which reviews and decides on the merits of these petitions is CITA (Committee for the Implementation of Textile Agreements), a body that draws upon representatives from several government departments and has historically been pro-protectionist.

CITA is now open for business to hear petitions filed by ATMI and other who are yelling and screaming that China's trade in integrated categories, such as Cat. 350, has grown exponentially. While this is true in absolute terms, most of the growth has not been at the expense of US domestic industries but other exporting jurisdictions, such as Hong Kong and Taiwan. Petitions are expected to be filed by ATMI shortly, if they have not been so already. ATMI will time the filing of its petition, so that CITA will be unable to make its decision until on or after October 1, 2003. This is because any quota re-imposed on or after October 1st of a year has a duration of one year. Quota imposed before October 1st of a year is only in effect through the end of the calendar year in question.

Importers of course will have the opportunity to respond to these petitions before CITA makes any determination but, given recent actions by the US including its negotiating posture in the textile bilateral with Vietnam concluded in April, my sense is that the deck is somewhat stacked in favor of the ATMI's of the world.

If CITA re-imposes quota on an integrated category, it will work as follows. CITA will look to the volume of exports in the category in question during the first 12 months of the 14-month period preceding the month that quota is to be re-imposed, and allocate new quota equal to that volume + 7.5% (6% for wool products). Thus, assume quota was to be re-imposed on Category A on or after Oct. 1, 2003, the new quota for Category A would run for a one-year period (October 1, 2003-September 30, 2004) because the re-imposition date was on or after October 1st of the year in question. To determine the new quota level, CITA would look to the quantity exported in Category A for the 12 months through July 31, 2003, as this is the first 12 months of the 14-month period preceding the month in which the request was issued. Assume the exports in Category A during this 12-month period were 200 dozen. The new quota level for Category A for the period October 1, 2003-September 30, 2004 would then be 215 dozen (200 dozen x 107.5%), however, the US and China could agree to a different level as a result of consultations but I don't think the US will go much above 7.5%.

An open question is whether the US could re-impose quotas under this textile safeguard for multiple one-year periods. The US thinks "yes".

If quota is re-imposed under this textile safeguard on already integrated categories, the same fate certainly awaits any categories that will be integrated on January 1, 2005. If so, China will again have limits on its exports. To live with those limits, traders will need to look elsewhere to manufacture. This can only mean that Hong Kong, which will be quota-free from January 1, 2005, will still be in the garment-manufacturing picture.

The moral of this story is: Hong Kong garment manufacturers - don't turn out the lights yet!