In amongst all the economic gloom of the last few years here in Hong Kong, one bright spot has been the garment industry. Exports to the United States and Europe have growing rapidly, and 2002 was a particularly strong year for many companies. Not that they do much manufacturing in Hong Kong (too expensive), and neither will you have heard of most of the companies - they're not Hong Kong brands, but international brands that sub-contract manufacturing to this part of the world. These days the factories are across the border in Guangdong province, usually owned by a Hong Kong company that retains an office here that deals with the buyers in the States and Europe.

One of the more confusing aspects of this industry is the way that tariffs and quotas influence the business decisions. Why should Mauritius have dozens of garment factories? Or the Maldives? Simply because it is possible to export garments more freely from those countries, whereas exports from Hong Kong and China are subject to quotas and tarrifs. If you are a long-established garment manufacturer you will have a certain quota of garments that you can export each year, and as long as you carry on exporting you will keep the quota for future years.

Each different type of garment is subject to different conditions, and for some reason lingerie (underwear) has been exempt from quota. However, with an election coming up in the States, concern about loss of manufacturing jobs has prompted the Bush administration to impose quota on imports from China. Apparently this is specifically allowed under the agreement that was made when China joined the WTO (the exact words are "if the President believes that he can win a few extra votes by clamping down on imports from China, that's fine by us."). China was so desparate to be accepted into this international club that they agreed to almost everything that the USA wanted in return.

The next problem for the garment companies is that they don't know how these rules will be operated. Who will get the quota, and how will it be managed? Will local companies be favoured? Until they have some answers it is very difficult for them to plan future growth.

Some companies are already operating (and expanding) in countries such as Thailand and the Philippines, which don't seem to be perceived as such as a threat by the Americans, and so are not subject to these new restrictions. These countries look like being the big winners, and although they are all worried that when the Multi-Fibre agreement expires in 2005 they will be unable to compete with China, this week's developments reinforce my view that the US will continue to find ways to limit imports from China regardless of the WTO or any other international agreements.

It was a long time ago when I studied Economics, but isn't it generally accepted that international trade is a good thing and that protectionism helps no-one?