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CONFIDENTIAL
12.
A final factor to take into account is that one consequence of the ending of the U.K. quota would be the removal of the "Hong Kong woven" requirement for exports of finished fabrics (and garments and made-ups) to Britain. This would mean that finishers could then turn to the cheapest available source for their grey fabrics.. The relative costs of Hong Kong grey fabrics as opposed to imported grey would be the key consideration here. And again a marginal preference differential of about 21% would probably not be sufficient to encourage finishers to use Hong Kong or other Cormonwealth cloth instead of cloth from other sources. This would seem likely to result in further pressure on the Hong Kong weaving sector.
Piecegoods (Finished)
13.
All the factors enumerated above in relation to grey piecegoods would apply to finished piecegoods as well. To compete in the new situation, therefore, Hong Kong suppliers may again be forced to reduce prices by 30% or more and to maintain quality. A further point to note as regards the finishing sector is that the Textile Council Report (at paragraph 177) claims that the U.K.'s finishing costs are substantially lower than those in Hong Kong. If this is so and the cost of grey to U.K. finishers is reduced then the prospects in the U.K. market for the Hong Kong finishing sector would also appear to be rather bleak. On the other hand, as it would be possible in the new situation to use grey cloth from the cheapest source (provided the marginal Commonwealth preference was not claimed), some of the cost reduction required could be achieved in this way.
Made-ups
14.
The likely effects of the tariff proposal on Hong Kong's exports of made-ups to the U.K. would be similar to those on finished piecegoods. As far as can be ascertained made-ups are not now a very profitable sector and only in towels has performance been consistently good. With a 15% tariff, and on the other assumptions set out in paragraph 3, it seems probable that prices f.o.b. Hong Kong would need to be reduced by not far short of 30% to retain the market. In these conditions it seems that Hong Kong's exports of nade-ups to the U.K. would remain sluggish, if they did not dually decline.
Garments
15.
It should be noted that the U.K. Textile Council's Report does not cover the garment sector (or for that matter made- ups). This is obviously a gap because these sectors are the main users of cloth. Even though the spinning, weaving and knitting sectors in advanced countries are becoming nore mechanised and less labour intensive the same has yet to happen to the garment industry to any extent. The garment industry is thus more labour intensive in all countries but, in the case of Hong Kong, it is also more advanced in terms of quality, fashion and reaction to market demand than are its low cost foreign competitors. The Hong Kong cotton garment industry can also compete in quality with its U.K. counterpart on the basis of lower labour costs.
/16. It ...
CONFIDENTIAL