US Revokes Hong Kong’s Special Status: What are the Implications?

On Tuesday, July 14, 2020, US president Donald Trump took two actions after Beijing’s application of its new National Security Law on Hong Kong – signing the Hong Kong Autonomy Act to impose sanctions on foreign individuals and entities for ‘contributing to the erosion of Hong Kong’s autonomy’ as well as signing an executive order to end the special status given to the former British colony under US law.

“Hong Kong will now be treated the same as mainland China,” Trump told a news conference at the White House. “No special privileges, no special economic treatment, and no export of sensitive technologies.”

In a strongly worded response, China’s Ministry of Foreign Affairs (MOFA) on Wednesday vowed to take necessary retaliatory actions, including imposing sanctions on relevant US personnel and entities. “It is gross interference in Hong Kong affairs and China’s internal affairs,” the ministry said.

What do Trump’s actions mean and what are the implications?

Trade

Trump’s order will end Hong Kong’s special trading status – accorded to it via a 1984 agreement, which was also agreed between China and Hong Kong’s former colonial ruler, the UK, before sovereignty was returned to the city in 1997. The US-Hong Kong Special Policy Act of 1992 allowed Hong Kong to enjoy lower trade tariffs and a separate customs framework in its dealings with the US.

Trump’s order will additionally revoke license exceptions on sensitive exports to Hong Kong, which may hinder US exports of defense equipment, dual-use technologies, and high-technology products to Hong Kong.

Immigration and personnel exchange

The order eliminates US preference for Hong Kong passport holders, which means Hong Kong citizens who wish to visit, study, or work in the US may be treated the same as mainland Chinese citizens and be subject to more vigorous vetting and restrictions.

In addition, the order says it will take steps to suspend the extradition of fugitive offenders between the US and Hong Kong, terminate international educational exchange programs like the Fulbright exchange program with regard to China and Hong Kong, and end the US training of Hong Kong police and security officers.

Sanctions

The US government will place sanctions on foreign individuals and entities that contribute to what it considers to be the loss of Hong Kong’s autonomy, such as human rights violations, limits on independent media, and curtailment of freedom of expression.

The targets of US sanctions could be Chinese government officials who had a direct hand in framing and implementing Hong Kong’s new security law, pro-Beijing Hong Kong officials, and banks that conduct transactions with these people.

The Hong Kong Autonomy Act will enable the freezing of US-based property and interests of the sanctioned individuals, imposes US entry bans on them and their families, and will restrain donations or financial support for anyone found to have breached the order. For financial institutions, the bill also lists 10 possible penalties, together with a ban on getting loans from US banks, foreign-currency offers within the US, and executives entering the country.

How will the loss of Hong Kong’s special status impact foreign trade and business?

Although Trump offered no specifics about the broader impact of his order, the removal of Hong Kong’s special trading status may expose Hong Kong-origin exports to higher US tariffs – as applied to mainland China. This includes higher tariff rates, along with anti-dumping rules and the additional tariffs resulting from the US-China trade war.

However, Hong Kong will not easily lose its status as an independent customs territory, which is recognized by the WTO. “(Hong Kong’s) internationally recognized status is not granted by any state, nor can it be arbitrarily abolished by any state,” said Wu Jing, assistant professor at the Chinese University of Hong Kong.

But the loss of its special trading status with the US could still hurt Hong Kong and mainland China, not to mention US firms.

Hong Kong

According to Hong Kong’s Trade and Industry Department, Hong Kong exported HKD 47.75 billion (US$6.16 billion) in goods in 2019, of which exports to the US accounted for HKD 3.67 billion (US$470 billion), or 7.7 percent. However, Hong Kong’s trade is dominated by re-exports. In 2019, re-exports to the US were worth about HKD 300 billion (US$38.7 billion), accounting for 7.6 percent. Without the lower US tariff exposure, Hong Kong may lose its viability as a re-exporting hub for exports to the US. As a result, Hong Kong’s port and logistics businesses may suffer.

China

For mainland China, the US position on Hong Kong may matter less. While Hong Kong remains an important bridge between mainland China and the rest of the world, it is far less important to China’s imports and exports than it once was. In 2019, 12 percent of China’s exports went to or through Hong Kong – down from 45 percent in 1992. Moreover, China is also less dependent on foreign capital and technology inflows than it used to be.

United States

For the US, removing Hong Kong’s special status is not an all-win situation. According to US Census Bureau data, Hong Kong was the source of the largest bilateral US goods trade surplus last year, at US$26.1 billion. Hong Kong is also a major destination for US financial, legal, and accounting business. More than 1,300 US firms are based there, including some 300 headquarters of American companies, according to the 2019 Annual Survey of Companies in Hong Kong with Parent Companies Located outside Hong Kong (SCoP). Around 85,000 Americans live in Hong Kong as per reporting by the BBC.

Foreign trade and business

For international society, Hong Kong is still not the same as China’s leading financial and technology hubs like Shenzhen or Shanghai, as the former boasts of a much freer economy, competitive tax regime, convertibility of currency, and good geographic location – all reasons why Hong Kong became the financial hub and base for leading international banks and trading firms.

Many western companies have chosen Hong Kong as the location for their regional head offices, covering China as well as Japan, Australia, Indonesia, and India, among others. More than 1,500 foreign businesses have their Asian headquarters in Hong Kong.

Nevertheless, last year, the city saw a dip in its foreign direct investment (FDI) from overseas. According to the United Nation’s Investment Trends Monitor, FDI into Hong Kong fell by 48 percent in 2019. In contrast, rival Asian financial center, Singapore, saw FDI increase by 42 percent.

As incentives to trade via Hong Kong diminish, international businesses looking at non-US markets may increasingly opt for mainland options, like the Shanghai Free Trade Zone.

China has already begun positioning Shanghai and the Lingang New Area of Shanghai’s FTZ as a potential successor to Hong Kong as an international financial hub. New policies introduced by China in the zone to deepen the participation of foreign trade include flexible financial arrangements, offshore trade, and streamlined customs and administration procedures.

Further, if Hong Kong’s politicized role in US-China relations adds risk to businesses operating there, foreign investors could also turn their attention towards Singapore as a jurisdiction for their Asia headquarters, as it boasts a similarly business-friendly environment but is more stable and predictable.

Background

On May 27, US Secretary of State Mike Pompeo certified to Congress that Hong Kong no longer enjoyed a high degree of autonomy from mainland China. Two days later, US President Donald Trump stated that the US would “take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China”. The bill quickly passed through both houses of the highly divided US Congress in just a few weeks due to bipartisan support. To give perspective, the period also witnessed tabling of coronavirus relief bills, police reform legislation, and other contentious discussions in the run up to the November polls.

The bill revoking Hong Kong’s special trading status appears to enjoy unanimous consent in Washington DC – something that Beijing will be examining more closely as the Trump administration runs the last laps before elections in the fall. It may no longer suffice to wait-and-watch in case a new administration occupies the White House next year. Regardless, Beijing has been dialing up its diplomatic efforts in recent years targeting better economic relationships with countries in Africa, Europe, Middle East, and South America, many of whom are participating in the Belt & Road Initiative, besides ASEAN and South Asia.

Moreover, Trump’s renewed opposition to China comes at the heels of his abysmal polling against the Democrat presidential candidate Joe Biden – likely linked to his poor management of the coronavirus outbreak in the US. Following his 50-minute unscripted speech at the Rose Garden conference on Tuesday announcing the measures directed at China, Trump responded to questions from the press, saying he had no plans to speak to Chinese President Xi Jinping and that he held China responsible for the pandemic.

The US is currently the most affected country in the world by COVID-19, with nearly 3.5 million recorded coronavirus cases and more than 138,000 deaths. In contrast, China managed to quickly contain any fresh outbreaks, including the recent one in Beijing. Further, official data from its National Bureau of Statistics showed China’s economic growth has rebounded in Q2, with GDP expanding by 3.2 percent in April-June after contracting by 6.8 percent in the first quarter.

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