IN an effort to defend its vital flow of foreign trade, Hong Kong is investigating local companies that have allegedly trafficked in goods made by prison inmates in China.The investigations are aimed at ensuring Hong Kong commerce is not harmed by foreign outrage over China's export of products made in labor camps. Recent reports overseas have revealed that the web of exports from China's prison factories extends through Hong Kong. The human rights organization Asia Watch last month said the First National Trading Company of Hong Kong had traded $3.5 million in machinery for cotton cloth from a prison in China's Jiangsu Province. The claim followed reports in the United States that the Winmate Trading Company Ltd. in Hong Kong has dealt in goods from a "reform through labor" prison in Qinghai Province. The reports have provoked bitter condemnation from legislators in the US, which bans the import of goods made in foreign prisons. US congressman Sam Gejdenson (D) of Connecticut submitted a resolution on Oct. 8 calling on Hong Kong to prohibit imports of "forced labor products" and investigate companies suspected of dealing in such goods. The resolution is likely the harbinger of legislation aimed at supplementing current laws barring imports of prison-made goods to the US. The legislation will probably go before the House Foreign Affairs Committee before the end of the month, says Peter Yeo, a staff member on the subcommittee for international economic policy and trade. Hong Kong executives fear the disclosures might hurt Hong Kong's image and hinder their effort to persuade the US Congress to sustain preferential tariffs for goods made in China. The executives have told US lawmakers that Hong Kong, Asia's hub of laissez-faire capitalism, would be severely hurt by revocation of most-favored-nation trade status for Beijing. The colony handles 70 percent of China's exports and has invested billions of dollars in mainland factories. "It's not good for Hong Kong to have a slur on its trading name," says James McGregor, a legislator representing the Hong Kong General Chamber of Commerce. In order to maintain a sound reputation for the free port, "the government is conducting investigations into the accuracy of the reports" about the alleged export of prison-made goods, Mr. McGregor says. "It was rather a shock to learn of this trade; what's not clear is how much there is of it." Hong Kong investigators are hobbled by a critical detail: As in many countries, trading in goods made by foreign prison inmates is not illegal in Hong Kong. Indeed, the department of trade is reluctant to characterize its inquiry as an "investigation" because the word implies some measure of wrongdoing by the companies in question. "We are looking at the allegations that Hong Kong companies are involved, but so far there is no indication that any Hong Kong company has violated our laws," says Percy Ho of the Trade Department's North America division. Hong Kong is also assisting the US in its inquiries, Mr. Ho says. "We see this as primarily a matter between the United States and China." Hong Kong could see its reputation as a port and manufacturing center decline if the government overlooks the trafficking in prison products, says McGregor. The government should engage in "administrative guidance" of trading companies, he says. "The government has a a lot of authority here. If the government were to investigate, find that companies were dealing in prison-made goods, and frown on the practice, I don't think any company would fail to recognize the government advice."