Hong Kong's Textiles Quota Allocation System

Objectives of the Allocation System

Hong Kong's exports of textiles products had been subject to quota restrictions imposed by importing countries since 1959. At present, Hong Kong's exports of textiles products to four overseas markets (i.e. the United States, the European Union, Canada and Norway) are still subject to quota restrictions under the World Trade Organization Agreement on Textiles and Clothing (ATC). In order to ensure that Hong Kong will not export beyond its quota limits, and to ensure the optimum utilization of quotas, the Trade Department operates a textiles quota allocation system. The three main objectives of the system are as follows :

1. to ensure continuity and stability to the trade;

2. to provide flexibilities in quota utilization; and

3. to provide opportunities for companies with insufficient quotas (including new comers) to obtain the necessary level of quotas.

Principle of Quota Allocation

2. Quotas are allocated according to the basic principle of past performance. Traders must therefore maintain their export performance lest their quotas will be lost. Under this basic principle, a quota holder who used 95% or more of its quota holding in a particular category in the preceding year will be offered an allocation equals to 100% of its holding in the category; otherwise, it will be offered an allocation equals to the amount it used. A quota holder who used 95% or more of its quota holding and who did not transfer out on a temporary or permanent basis any of its quota will be offered an additional amount of quota allocation. The amount will be calculated on the basis of the growth factor for that category as provided for in the ATC. This allocation principle of past performance provides certainty and stability to traders which hold quotas since they could expect to receive the same amount of quotas as in the preceding year as long as they are able to keep up their export performance. With such certainty and stability, traders can plan ahead according to their past export performance.

3. Under the quota system, there are other arrangements, like quota transfers, which provide flexible ways of quota utilization and opportunities for traders to obtain additional quotas.

Quota Transfers

4. The main objective of the quota transfer system is to encourage the movement of quotas from the hands of textile traders who are no longer able to use them to those who are, thus facilitating the optimum utilization of quotas by Hong Kong as a whole and providing opportunities for new comers to obtain quotas.

5. There are two types of quota transfers : permanent and temporary transfers. The transferee of permanent transfer obtains the use of quota for the year in question and, based on its performance against the transferred quantity, receives quota allocation in the following year. The transferee of temporary transfer obtains the use of quota for the year in question, whereas the performance against the transferred quantity is attributed to the transferor.

6. Although quota holders may receive quota allocation based on export performance against the temporarily transferred-out quota, its allocation may also be affected if the transferee has not fully utilized the transferred-in quota or has not properly utilized the quota as required.

Rules Regarding Transfers

7. To avoid abuse of quota transfers, all transfer transactions must be registered with the Trade Department. In addition, it is necessary to guard against the improper use of quotas and excessive quota transfer activities. Therefore, the Trade Department has introduced a number of rules regarding transfers. For example, any trader who has permanently transferred in quota in any category is not allowed to transfer out any quota in that category on a permanent basis in the textiles year in which the transfer-in has taken place (Year 1) and in the following year (Year 2). Moreover, any quota holder who transfers out in any group of categories on a temporary basis by 50% or more of its quota holdings in that group within a year will be liable to have its quota allocation in the following year reduced. The maximum reduction is 40% of its total temporary transfers-out in that group for the market concerned. On the other hand, traders who are able to utilize all temporarily transferred-in quotas in addition to their own quotas will be given extra amount of quotas in the succeeding year as an encouragement.

Free Quotas

8. Free quota schemes provide another opportunity for companies with insufficient quotas (including new comers) to obtain quotas and facilitates the gradual movement of quotas to traders with the ability and genuine need to use them. In brief, free quotas are quotas which remain after allocations have been made to all qualified quota holders on the basis of past performance. Traders may apply for free quotas through applications under free quotas schemes operated throughout the year. All applicants under the free quota schemes must demonstrate their need and ability to utilize the quotas applied for and undertake to actually utilize all the free quotas allocated. Other conditions are put in place to govern the use of free quotas such as the requirements that the manufacturers must perform the principal processes of manufacture of the goods and that free quotas obtained may not be transferred out.

9. In the past, traders who utilized free quotas allocated to them will be qualified for quota allocation in the following year. Starting from 1999, such allocation on the basis of free quota performance will cease, so that there will be a bigger central pool of free quotas available for allocation. Traders who are able to demonstrate their genuine need will consequently have a better chance to obtain the free quotas they need.

Quota Transaction

10. The quota transfer system aims to provide the greatest flexibility to the trade and to increase the availability of quotas in the market, so that traders will be able to obtain the quotas they need in the market and there will be optimum utilization of Hong Kong's limited amount of quotas. While the Government does not encourage quota transactions, it does not prohibit such commercial activities as we believe that it is more flexible and efficient for quota transfers to be determined by market forces and such a mechanism is more capable of meeting the needs of the trade.

11. As quota prices are determined by demand and supply in the market place, prices fluctuate according to market trends. In a free market, buyers and sellers have to take into account their own circumstances in assessing whether any price level is reasonable or not. Since quota prices are affected by a number of factors including fashion trend, market demand etc, we do not consider it appropriate for the Government to interfere with the prices of quotas through administrative means.

Conclusion

12. The spirit of the quota allocation system is to provide a stable yet flexible mechanism under which the trade can operate. The existing quota allocation and transfer systems are designed by the Government to fulfill these objectives. We understand that the limited quotas are obviously unable to satisfy all the needs of the traders and that no allocation or transfer system is perfect. Nevertheless, the present system aims to take into account the benefits of all parties, and to balance the needs of all traders in spite of the inherent limitations.

Trade and Industry Bureau
September 1998