TNAG-1173-FCO40-1465-Future-of-Hong-Kong-special-study-by-FCO-for-the-Prime-Minis-1982 — Page 9

SECRET

(ii)

Wider Trading Issues

4. HK's Trade substantially unchanged terms under option (a) or (b). The

HK could continue to trade with the EC on

EC eg applies the same rate of customs duty on imports from all sources which do not benefit from a preferential rate under, say, the Lomé Convention or the GSP. Option (a) could be less favourable to HK exports in a number of ways eg if it led to HK ceasing to have her own MFA textile trade agreement with the EC but being assimilated to the China/EC textiles agreement: the China agreement is more restrictive in some respects than the HK one, notably in relation to the "basket extractor" procedures for imposing controls on previously unrestrained products. (HK textile/clothing exports to the EC account for about 12% of total HK exports). But there is considerable uncertainty in this comparison, given that the HK/EC agreement expires at the end of December and that the EC is seeking to cut back her imports from HK of the main items under the new agreement. The China/EC agreement expires at end 1983 and the EC's position for a new agreement will not be worked out until next year.

China is a considerably smaller supplier of textiles than HK (about 1:10 in respect of UK imports in 1980): but given the depressed state of the Community industry and its longer term fears about the very sizeable capacity of the Chinese industry it seems highly unlikely that the Chinese will be offered anything but a pretty restrictive post-1983 agreement.

5. In more basic ways option (a), would be the more damaging to HK's trade. An important element in HK's competitive position as an exporter is the benefit she obtains from buying her materials and semi-manufactures in the cheapest markets: these are by no means always Chinese eg for yarns and fabrics to convert into garments. If she were then obliged increasingly to switch to Chinese inter- mediate goods her competitiveness could suffer. It could be argued that the Chinese would not allow this to happen, by manipulating the prices of their intermediates. But that would not necessarily compensate for usually poorer Chinese quality and it could provide extra argument to those countries wishing to restrict imports from

HK.

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