3230
G.F. 323
CONFIDENTIAL
3.
...
7.
The High Hong Kong Cost Content Schemes, the object of which is to maximise the economic return to Hong Kong from quota limitations, requires all piecegoods, made-ups and garments exported to Britain under the Schemes, to be woven with Hong Kong spun yarns. This, in effect, provides a guaranteed, albeit limited, outlet for locally spun yarns. The removal of quota would automatically mean the end of the High Hong Kong Cost Content Schemes and the requiroment to use Hong Kong spun yarns. This would necessarily have further adverse effects on the spinning sector in Hong Kong unless local spinners could make themselves fully competitive with imports on the Hong Kong market.
8.
A final point is that, under the existing U.K. arrange- ments for duty free entry from the Commonwealth, the Commonwealth preference margin of 17% is worth claiming. In order to satisfy origin requirements for this, Commonwealth cotton is invariably used. With a 15% tariff, however, the preference margin would drop to only about 2% and this may not be worth claiming, in which case raw cotton from any source could be used. This may slightly reduce the cost of raw cotton used and would enable a greater choice to be made anong qualities.
Piecegoods (Grey)
9.
As far as can be ascertained Hong Kong has no significant cost advantage in grey fabrics at present compared with some other low cost competitors who are at present severely restricted in the U.K. by the global quota arrangements, although Hong Kong quality may be better. Hong Kong also would not appear to have any cost advantage over Portugal which, as a member of EFTA, would continue to benefit from duty free entry in the U.K. and has the advantage of lower freight costs. The average Hong Kong cost advantage over the better U.K. mills is also being reduced with the increas- ing use of modern high speed machinery in the U.K.
10.
On the assumptions set out in paragraph 3 above Hong Kong's landed prices in the U.K. of grey fabrics would probably need to be reduced by at least 30%, and possibly more, to remain competitive. This is made up of the assumed reduction in U.K. costs (15-20%), the cost of the tariff (15%) and possibly some further reduction to meet the effects of increased competition. Furthermore, as these are c.i.f. prices and freight costs would not fall merely because of a reduction in the selling prices of the goods carried, f.o.b. prices ex-Hong Kong would need to be reduced to a greater extent than c.i.f. prices in the U.K. AS against this the present quota premium of 15-20% would be available to act as a cushion over basic costs and normal mark ups.
11.
As regards the trend in Hong Kong costs, present indications are that optimum use is already being made of plant and machinery. Labour costs are also continuing to rise with the expansion of the economy as a whole. This trend is liable to make Hong Kong grey goods less and less competitive in any increasingly competitive British market, unless Hong Kong, in turn, makes considerable investments in more modern machinery. In the face of all these factors it would seem likely that Hong Kong's exports of grey fabrics to the U.K. would fall, although it is difficult to predict to what extent in the absence of a much more detailed (and quantitative) analysis of likely market conditions and Hong Kong costs.
/12. A final
CONFIDENTIAL