TOH HAN SHIH

Goodbye to a rotten system. The textile quota system set to end on Friday bred abuse, fraud and inefficiency, and its abolition will improve the transparency of the global rag trade, industry players say.

Common abuses included counterfeit quotas, shady practices among quota traders and faking the country of origin.

"With the end of quotas, it will be a much healthier system where everybody gets a fair chance to trade," said a European textile trader. "The global trade will be more transparent, and buyers will know where the garments are made at what cost."

Some Hong Kong garment manufacturers unwittingly bought fake quotas from mainland brokers, said Peter Liu Sin-shing, chairman of the textile and apparel committee at the American Chamber of Commerce in Hong Kong.

"They would buy a US quota from a trader, but the quota was not real. So their products were not allowed to be shipped to the US," said Mr Liu.

"Just as if you got caught with fake money, you can't buy anything. It is difficult to verify quotas in China."

Hong Kong and Chinese manufacturers would often secure quotas from brokers. The trade was essentially unregulated. After a manufacturer put down a deposit, nothing would stop the broker from selling the quotas to other manufacturers at a higher price, said the European trader.

Speculators discovered the quota system, and began trading them like properties or stocks.

It was not unusual for the price of a legitimate garment quota to cost as much as the garment production, said Willie Fung Wai-yiu, chairman of Top Form International, a Hong Kong brassiere manufacturer. "This encouraged companies to sell quotas as they could make easy profits."

In China, quotas were allocated mostly to state-owned enterprises, which would sell them on to Hong Kong companies like Top Form.

"State-owned garment makers made more money selling quotas than operating a garment business," said Mr Fung. "Some Chinese companies with garment quotas don't even produce garments. Sometimes even food companies had garment quotas to sell."

The inefficiency and corruption created by the quota system was not limited to China.

On November 14, Vietnamese police arrested a Chinese citizen for allegedly creating bogus papers related to the selling of textile quotas, according to press reports.

Zeng Fabao, general director of Bao Phat Vietnam Garment and Textile Development, has been accused of belonging to a graft ring involving the Vietnamese Trade Ministry, where officials allegedly solicited bribes from garment and textile exporters to obtain export quotas for the US.

Also arrested was former Vietnamese deputy trade minister Mai Van Dau and his son Mai Thanh Hai, as well as several officials and businessmen.

Another common abuse in the quota system involved garment manufacturers using quotas for one country to produce garments in another.

"Chinese companies would use Cambodian quotas while manufacturing in China," said the European trader. "Hong Kong companies would use Filipino quotas while producing in China. Everybody played that game across Asia."

US customs officials estimated 28 per cent of garments shipped to US from Asia were labelled with the wrong country of origin last year, according to press reports. US Customs and Border Protection is currently investigating bra shipments from Macau and Hong Kong over the past year, after finding numerous articles that were actually from China despite documentation claiming otherwise.

Fraudulent country-of-origin documentation may be even more common in the European textile import trade, as traders believe European officials are much more lax than their US counterparts in inspecting Asian shipments.

Another thing manufacturers will not miss about the quota system was the way regional governments would try to use them for internal political objectives, often by requiring garment production in non-optimal locations.

Sri Lanka, for example, reserved quotas for companies willing to set up in regions where it was waging war with the Tamil Tigers.

In countries such as Bangladesh, the government allocated quotas to favoured domestic firms, undermining the competitiveness of its own garment industry.

The Bangladeshi textile sector was kick-started by Hong Kong and South Korean investors, but over time foreign investment dropped as the government allocated quotas to domestic producers, according to an International Monetary Fund report.

By restricting foreign investment, Bangladesh cut itself off from technology and management skills, the IMF said.

"The quota-allocation system has benefited large and established exporters, encouraging rent-seeking activities and corruption."