Hong Kong's textile industry may face its greatest challenge next year when global quotas are lifted.
Some observers believe the end of textile quotas will eat into Hong Kong's massive textile re-export trade as manufacturers beef up their presence on the mainland.
But for Hong Kong fabric and garment firms invested in mainland manufacturing operations, the lifting of import quotas on Chinese textiles could yield unprecedented opportunities.
The key is the prospect of safeguard quotas. When China joined the World Trade Organisation in 2001, it agreed to allow the United States and other WTO nations to place one-year interim quotas on Chinese textile imports to protect their domestic industries. The agreement remains in force until the end of 2008.
Textile firms want to move more manufacturing to the mainland to take advantage of the end of formal quotas, but still need to hedge against the risk of safeguard quotas over the next four years.
Hong Kong provides a solution. While garments assembled in China might attract safeguard quotas, those assembled in Hong Kong will escape them.
Hong Kong manufacturers plan to increase production capacity in the city and Macau under an 'outward processing arrangement' (OPA) when the quotas are lifted.