The US Position on Hong Kong’s Special Status

Posted by Written by Alexander Chipman Koty Reading Time: 5 minutes

The US government is taking steps towards revoking Hong Kong’s special status, a move that could have significant implications for its role as a global business hub.

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 change in policy comes in response to a controversial new national security law recently approved by China’s central government in Beijing, which critics argue bypasses Hong Kong’s legislative processes and threatens to erode the region’s separate legal status.

The US government has not yet enacted the new measures, and it is unclear how far they will go in altering the US’ relationship with Hong Kong. Regardless of the details, however, the US revocation of Hong Kong’s status could have wide-ranging repercussions for Hong Kong and its leading role in international trade and finance.

What is Hong Kong’s special status?

In 1997, the UK government handed over control of Hong Kong to the Chinese government with an agreement that the Communist Party would rule with the “one country, two systems” policy. According to “one country, two systems”, Hong Kong would be part of the People’s Republic of China and have its defense and foreign policy determined by the government in Beijing, but Hong Kong would be given a “high degree of autonomy” in running its government, legal system, and other areas.

The US officially recognized the difference between Hong Kong and mainland China in its diplomacy, including under the United States-Hong Kong Policy Act of 1992. Accordingly, Hong Kong benefited from arrangements not enjoyed by mainland China in dealings with the US, including lower trade tariffs and a separate customs and immigration designation, among other differences.

The status quo of US-Hong Kong relations began to change in November 2019, when the US passed the Hong Kong Human Rights and Democracy Act of 2019, which amended the 1992 Act. This act was introduced by US legislators wary of the Chinese government’s increasing role in Hong Kong affairs.

According to the new act, the Secretary of State must make an annual certification to Congress that Hong Kong continues to enjoy significant autonomy and warrants special status from the US. This is the Act Pompeo referred to on May 27 when he certified that Hong Kong no longer meets the standards of autonomy.

What could change

The extent to which US policy towards Hong Kong will change in practice as a result of the declaration that the region is no longer autonomous is currently unclear.

Trump has the power to enact the change through an executive order, meaning that he and the Republican Party do not need to negotiate with the Democratic Party to pass a bill through Congress. Despite this power, Trump may not completely reverse US policy to the extent that Hong Kong is treated the same as any other region in mainland China.

While Trump said that revoking Hong Kong’s special status will affect “the full range of agreements” it has with the US, he said this would occur “with few exceptions”. With this statement, Trump revealed flexibility – and a level of uncertainty – regarding how far the US government would go in changing its policies toward Hong Kong.

Areas that could be affected by the change in policy could be trade, immigration, and sanctions.

Trade

The US currently treats Hong Kong as a separate trade jurisdiction from mainland China. In 2018, the US and Hong Kong had US$67 billion worth of trade in goods and services. While Hong Kong itself has a small manufacturing base, many Chinese-origin goods are exported to the US and other markets via Hong Kong.

Going forward, however, the US may apply the same tariff rates to Hong Kong-origin exports as it does to mainland China-origin exports. This means that Hong Kong exports would be subject to higher tariff rates, along with anti-dumping rules that apply to China as well as the additional tariffs resulting from the US-China trade war.

The US may also impose export controls on sensitive technology traded to Hong Kong. Currently, the US allows for the export of sensitive technology to Hong Kong – like dual use technology that could be used for military purposes – on the condition that such items are not re-exported to mainland China.

Immigration

Hong Kong citizens – who have different passports than mainland Chinese citizens – may be treated the same as mainland Chinese citizens for visa and immigration purposes. Hong Kong citizens who wish to visit, study, or work in the US, then, may be subject to more vigorous vetting and more restrictions than before.

For example, also on May 27, Trump announced visa restrictions on Chinese graduate students studying in the US. Per the restriction, immigration officers will deny student visas to Chinese graduate students who have studied at, worked with, or have a relationship with an institution with links to Chinese military or intelligence institutions. In the future, measures such as these may also apply to Hong Kong citizens.

Sanctions

The US government may place sanctions on individuals it deems directly contributed to what it considers to be Hong Kong’s loss of autonomy. Sanctioned individuals may be prohibited from traveling to the US and may have their bank accounts frozen by US financial institutions.

The targets of sanctions could be both mainland Chinese government officials that the government deems to have had a direct hand in the national security law, as well as pro-Beijing Hong Kong officials. The US government’s use of sanctions would be highly provocative, however, making them less likely to be deployed.

How to read the uncertainty in Hong Kong

The US revocation of Hong Kong’s special status could damage Hong Kong’s status as one of Asia’s premier financial centers. If the US removes Hong Kong’s trade privileges, China-based traders would have less incentive to trade via Hong Kong. Instead, they may increasingly opt for mainland options, like the Shanghai Free Trade Zone.

Revocation of Hong Kong’s status may also raise the stature of Shanghai and Shenzhen as financial hubs. However, because mainland China is subject to strict capital controls from the Chinese government, Hong Kong will continue to be important for Chinese finance regardless of US actions. Currently, about half of China’s overseas direct investment flows through Hong Kong, where the US dollar is freely tradeable, and many Chinese firms use Hong Kong for fundraising.

Further, that Hong Kong has become highly politicized in US-China relations adds risk to businesses operating there. Foreign investors may instead 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.

Still, Hong Kong is a member of the World Trade Organization, and other countries have not declared that they will follow the US’ lead and revoke similar arrangements they may have. Hong Kong, then, may still have continuity in its non-US trade relationships.

The US, however, could pressure its allies to enact similar policies towards Hong Kong. On May 28, Australia, Canada, and the UK joined the US in issuing a joint statement regarding concern over the national security law, but those countries have not yet overhauled their relationships with Hong Kong. The UK, though, announced a new policy that will make it easier for Hong Kong citizens to immigrate.

When the US government announces the final scope of policy changes towards Hong Kong, the Chinese government may also retaliate against the US. As a result, the national security law and the US’ revocation of Hong Kong’s special status will have implications not just for US and other foreign businesses in Hong Kong, but also those in mainland China.


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