Reagan administration efforts to curb sales of foreign-made textiles in the United States have left Hong Kong's industry hanging by a thread, with few orders in hand for the fall season because of uncertainty among buyers and manufacturers over the new rules.
Hong Kong is the world's largest producer of garments and textiles, and industry sources report that the new U.S. regulations could affect as much as half of the $500 million to $600 million in goods produced here each year.
Also in jeopardy are the jobs of 50,000 to 60,000 workers in Hong Kong and another 100,000 in China, who knit panels that later are assembled and finished here for sale in the United States.
Hong Kong's director of trade, Hamish MacLeod, returned home after failing during talks in Washington this week to persuade the Reagan administration to modify its five-month-old order that changed the rules governing "transshipment." This is the common practice of manufacturing apparel in more than one country, but shipping it out under the label of the one country with the largest quota.
Hong Kong, for instance, which ships 70 percent of its knitwear to the United States, routinely does the more skilled jobs of assembling and finishing sweater panels that are knitted in mainland China's Guangdong Province (Canton), a short distance over the border. The sweaters generally would carry a made-in-China label to take advantage of unused portions of China's quota.
The U.S. industry says the main purpose of transshipment is to evade quota restrictions.
The negotiations were ordered by the textile committee of the General Agreement on Tariffs and Trade, which found that Hong Kong's trade had been hurt by the United States' "country of origin" regulations.
Hong Kong officials in Washington complained that the U.S. side refused to conduct meaningful talks. "We made proposals. The United States had no comment, nor counterproposals," said one.
Garments and textiles account for about 40 percent of Hong Kong's total annual exports. Government figures released last month showed that garment and textiles exports rose 33 percent -- to $4.6 billion -- in the first eight months of last year compared with the same period in 1983.
So far, no Hong Kong companies have gone out of business because of the new rules. Lawrence Mills, chief executive of Laws Fashion Knitters, said a handful of large knitwear companies have survived the new regulations by investing in new Japanese machines. These $50,000 machines use computerized programs to knit the sweater panels, thereby replacing Chinese manual workers. According to Mills, a single company may need 50 to 60 machines to get back to previous levels of production.
Mills said he has gone ahead with the new machine, having "made the judgment -- or, more accurately, the guess -- that the Reagan rules won't change." If the Hong Kong team succeeds in reversing the United States' decision when the talks continue next month, "I'll get stung," Mills said.
He added that the many middle-sized knitwear companies, which make up the backbone of Hong Kong's sweater industry, can't possibly afford the new machinery and instead have resorted to producing knitwear not governed by the international multifiber arrangements (MFA), due for renewal next year. Typical of these categories are sweaters of ramie cotton or silk angora mixed with other fibers.
"It's typical of these protectionism measures that in trying to stop what the U.S. calls a loophole, they've created a whole new market. They certainly can't claim now we've disrupted their angora market in the U.S. because they haven't got any angora," Mills said.
These short-term measures are not enough, however, to reassure buyers who are asking factories for guarantees of deliveries.
Three shipments of garments from Hong Kong have been impounded by U.S. Customs in the last few months. Moreover, small companies are encountering new problems in obtaining their usual credit from banks who now are aware of the question mark on their clients' contracts.
"So many orders hinge on the outcome of these Washington talks," Mills said. "We are getting very close to the danger point. Soon we're going to close down for the 10 days of the Chinese New Year, and if there's no change in Washington, we're going to come back to a deathly hush -- or a lot of silk angora sweaters."
Conservative estimates show that even if Hong Kong could find a way to take back the knitting process formerly carried out in Guangdong, it would be hard to restructure the local industry and retrain workers in less than two years. There also is a shortage of workers in Hong Kong, with the local labor force currently fully employed in all manufacturing sectors.
"Even if we were ready to pay the workers, they would not be prepared to do this kind of unskilled work," said Stanilaus Tsao, director of the Lai Sun Garment Co. "Of course, there are machines which can replace man, but the investment in proportion to the production output is prohibitive."
China also is concerned about the loss of contracts on its side of the border. For political reasons, China has supported Hong Kong's position, because in 12 years the Crown Colony will revert from British to Chinese sovereignty.
In September, the Chinese Embassy in Washington expressed "strong dissatisfaction" with the U.S. country-of-origin rules to the State Department, claiming the rules violated the Sino-U.S. textile agreement and the MFA. China has warned that if the rules stand, Chinese imports of U.S. agricultural produce may be reduced.