Pompeo’s Hong Kong Threats Won’t Damage China, but They Will Hurt the US. Here’s Why.

May 28, 2020 Posted by China Briefing Reading Time: 4 minutes

Removing the US-Hong Kong Special Policy will only boost Shanghai and reduce US-China trade influence.

Op/Ed by Chris Devonshire-Ellis

The recent social protests in Hong Kong, sparked in part by Beijing’s stated intent to introduce national security laws in the territory have resulted in United States trade officials to consider moves that could threaten Hong Kong’s future as an international financial services hub.

Hong Kong has enjoyed decades of special treatment from the US under the United States-Hong Kong Special Policy Act of 1992, under which the US has continued to treat Hong Kong separately from mainland China for matters concerning trade exports and economic control after the 1997 handover of Hong Kong from Britain to China. The Act was amended just six months ago by the United States Hong Kong Human Rights and Democracy Act.

That requires the US government to impose sanctions against Chinese and Hong Kong officials considered responsible for any human rights abuses in Hong Kong, and requires various US agencies to conduct an annual review to determine whether changes in Hong Kong’s political status – meaning its relationship with mainland China – justify changing the unique, favorable trade relations between the US and Hong Kong.

The US Secretary of State, Mike Pompeo, said he certified to Congress yesterday, May 27 that Hong Kong no longer enjoyed a high degree of autonomy from China – a decision that could result in the loss of Hong Kong’s special trading status with the US.

President Donald Trump and Congress will decide what actions to take as a result of Pompeo’s stand at a time of increased tensions with Beijing as the two countries trade insults over responsibility for the COVID-19 pandemic. If Trump decides to end the US-Hong Kong special relationship it will end an agreement that has existed for nearly 30 years. What will this mean?

Massive US withdrawal from the Hong Kong market economy

Should Washington pull the plug on the US-Hong Kong Special Policy, it will remove considerable incentives for US businesses to be based there. About 1,300 US companies have their Asian HQ in Hong Kong, employing roughly 85,000 American citizens. Despite the social problems in the territory, Hong Kong still uses a British-based business law system, which many US businesses are familiar and comfortable with and which affords them more protection and certainty than courts in mainland China. US export control and quality assessment facilities currently based in Hong Kong would close, while visa access for American citizens could fall in line with protocols for mainland China. So, no more just flying into Hong Kong and being stamped in on arrival, for US nationals at least.

With no incentives for US companies to be based in Hong Kong and given the territory’s high cost base, American bankers and financial institutions will instead refocus on mainland China and have to compete with a far wider playing field for that market. The effect of dropping the Special Policy will be to reduce American influence in Hong Kong and make Washington D.C. less able to influence overall China trade, economics, and business.

Costs to US businesses, economy, and jobs

In 2018, US foreign direct investment in Hong Kong stood at US$82.5 billion, an increase of US$1.2 billion that year, according to US Commerce Department data. Hong Kong’s investment in the US rose U$3.5 billion in 2018 to U$16.9 billion. US$67 billion in annual Hong Kong-US trade of goods and services would be put at risk as Hong Kong would lose its preferential lower US tariff rate and businesses would relocate instead to mainland China, where costs are lower, which somewhat defeats the object of punishing Beijing.

Hong Kong was also the source of the largest bilateral US goods trade surplus last year, at US$26.1 billion, according to the US Census Bureau. The US sells far more to Hong Kong than vice versa. All that would be destroyed.

According to Hong Kong’s Trade and Industry Department, in 2018, Hong Kong was the US’ third-largest export market for wine, its fourth-largest for beef and seventh-largest for all agricultural products. Should preferential import duties for these goods disappear as a result of the demise of the US-Hong Kong Special Policy, the US production base of these products will be negatively impacted with lower export sales, ultimately leading to US domestic job losses.

China already has a plan to deflect US actions

While a US withdrawal from the Hong Kong Special Policy will undoubtedly have a serious impact on Hong Kong, the downside for the US is it will also lose significant trade opportunities and shoot itself in the foot concerning influence. That will also hurt China, but really only impact Hong Kong – the very territory the US is supposed to be standing up for. Mainland China will largely remain unaffected, and some areas, especially Shanghai, will receive an immediate boom should the US bring about Hong Kong’s demise.

This is because China amended its foreign investment law last year, which contained a series of significant and wide-ranging reforms to its financial services sector. This is especially true of the Shanghai Free Trade Zone and its Lingang New Area, which have policies in place and working now that can take the place of Hong Kong as a trade hub. That region was intended in fact to be a China competitor to Singapore but could be fast tracked to take over from Hong Kong as well. The Shanghai Free Trade Zone has already signed up an impressive early list of clients, covering banking, securities, funds, insurance, and asset management. Among them, a batch of landmark projects have already been launched in Shanghai:

The first wholly foreign-owned insurance holding company – Allianz (China) Insurance Holding Company Limited;
The first foreign-owned securities JVs – Nomura Orient International Securities Company Limited and JP Morgan Securities (China) Company Limited;
The first foreign-owned wealth management JV established by Amundi Asset Management and Bank of China Wealth Management;
The first foreign-owned investment management JV – Vanguard Investment Management (Shanghai) Limited; and
The first foreign-invested banking agents being granted type-A lead underwriting licenses – Deutsche Bank (China) and BNP Paribas China.

All these are subject to mainland Chinese and not Hong Kong laws. Closing the US-Hong Kong Special Policy will, as stated before, result in American businesses and the US government, having less influence on China, its legislature, and policy making. It will irreparably signal a dramatic decline in Hong Kong and US business, result in less US exports, and inadvertently relocate US businesses based in Hong Kong both now and in the future to Shanghai.

Shanghai’s Mayor is Mr Ying Yong. He’ll be looking at Washington’s upcoming policy decision as concerns Hong Kong very carefully indeed. Washington needs to be very sure it understands that what it could be about to do to Hong Kong would in fact give Shanghai, and the Communist Party of China, real cause for celebration.