Hong Kong’s Special Status: What’s Happening and What’s Next
June 15, 2020
On May 29, President Trump announced that the United States would be revoking Hong Kong’s special status. As a result, the United States may begin to extend the same measures applied to mainland China to Hong Kong. This change follows Beijing’s decision to introduce a new national security law in Hong Kong. While the president has yet to propose a detailed plan and timeline for specific action on Hong Kong, any new restrictions will impact the complex and interconnected trade relationships between the United States, China, and Hong Kong.
Q1: What was the previous status of the U.S.-Hong Kong trade relationship?
A1: Since 1997, Hong Kong has occupied a unique position outlined by the 1984 Sino-British Joint Declaration and the United States-Hong Kong Policy Act of 1992. The former agreement ended Britain's colonial rule of Hong Kong in 1997 and defined its future under China's control. Per the declaration, Hong Kong was granted significant authority and autonomy over its governance for 50 years under the “one country, two systems” policy. This degree of separation between China and Hong Kong allows countries to give Hong Kong special treatment and work with the territory independently on several issues while providing Hong Kong the policy space to establish a more open economy and society compared to mainland China.
The latter policy agreement defines U.S. relations with Hong Kong. Sections 102 and 103 of the law establish Hong Kong’s trade status as "fully autonomous from the People's Republic of China" and treat it as a separate territory when considering "import quota and certificates of origin." This policy has allowed for the development of separate U.S.-China and U.S.-Hong Kong trade relationships since 1997.
Q2: What triggered President Trump’s decision on Hong Kong?
A2: While “one country, two systems” does not expire until 2047, there is growing concern that Beijing has overstepped the letter and spirit of that policy. Beijing’s influence can be found in the now-withdrawn bill to support extraditions to mainland China, which sparked massive protests last year, the denial of entry to Hong Kong for Western journalists, and the recently passed Hong Kong law that makes disrespecting the Chinese national anthem a crime. These actions point to China’s growing influence in Hong Kong’s affairs and call into question the validity of the Basic Law constitution that gives Hong Kong autonomy over local issues. Over the last few weeks, fears regarding the end of “one country, two systems” have been further raised with Beijing’s liaison office claiming Beijing was “authorized by the central government to handle Hong Kong affairs.”
The most dramatic development was the recent decision by the National People’s Congress to move ahead with the drafting of a national security law that would make any act of secession, subversion, terrorism, or interference by foreign forces—as defined by Beijing—in Hong Kong illegal. While Hong Kong’s Basic Law can be amended to include Chinese law, the national security law will be introduced by the decree of the National People’s Congress in Beijing to bypass Hong Kong’s Legislative Council. As a result, the national security provisions have been opposed as a violation of Article 23 of the Basic Law, which states that Hong Kong must draft its own national security policy. Hong Kongers wary of China’s growing influence believe that this law will be used to limit free speech and the right to protest, freedoms that Chinese citizens do not have, and push back against the anti-China sentiment present over the last few years.
In response to these actions, the Trump administration announced on May 27 that Hong Kong’s autonomy had been undermined to the point where it “does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997.” The implications of this announcement were clarified two days later, when the president said the United States will remove some of Hong Kong’s privileges, such as its special customs status, given the evolving situation there.
Q3: How will this change affect U.S. trade relations with Hong Kong and China?
A3: Stripping Hong Kong’s special trade status will have a significant impact on U.S. economic relations with Hong Kong and China. The president has the authority to end Hong Kong’s status through an executive order. This power is specified in Section 202 of the U.S.-Hong Kong Policy Act of 1992. In addition, Congress passed the Hong Kong Human Rights and Democracy Act in 2019, which requires the Department of State to annually reassess Hong Kong’s autonomy from China and determine whether developments that year warrant changing the territory’s treatment under U.S. law. Secretary of State Michael Pompeo used this authority to justify the May 27 announcement that Hong Kong, due to the impending national security law, would no longer be considered autonomous from China.
A recent survey by the American Chamber of Commerce in Hong Kong found that 30 percent of the business community is moderately concerned and 53 percent very concerned about the national security law’s implementation. Further, 60 percent of these respondents, a majority of whom are U.S. companies, believe that this move will harm their business operations. On the other hand, 70 percent of respondents said they have no plans to move from Hong Kong. While the actual law still needs to be written, its implementation could significantly degrade the “one country, two systems” policy with Beijing potentially acquiring control over Hong Kong’s legal and security institutions.
While the United States’ decision to remove Hong Kong’s trade status is an attempt to punish China for its infringement of Hong Kong’s autonomy, Hong Kong will be the primary victim of the U.S. action. In the past decade, Hong Kong’s ability to connect the Chinese economy with the Western world relatively restriction-free has made it a global business hub. With Hong Kong’s special status currently in place, the United States and Hong Kong share a fruitful trade and business relationship with free exchange of the U.S. dollar and Hong Kong dollar, virtually no tariffs, and visa-free travel between the United States and Hong Kong. Along with these benefits, the United States treats Hong Kong separately from China when administering export controls.
If and when Hong Kong’s special status is removed, Hong Kong could be placed under the same restrictions as China by the United States, potentially including the implementation of higher tariff rates resulting from the trade war and stricter controls on access to U.S. technology and deemed exports like know-how and personnel. Likewise, the Committee on Foreign Investment in the United States may view investments from Hong Kong into the United States as indistinct as those from China, which would result in more rejected investments from Hong Kong on national security grounds.
These changes would also inadvertently hurt U.S. businesses in Hong Kong, as higher tariff rates and restrictions on travel and investments will make it increasingly difficult to sustain their existing business, trade, and financial relations.
In addition to the collateral damage to Hong Kong, the president’s decision will also punish China. Under the Sino-British Joint Declaration, Hong Kong is a Chinese special administrative region (SAR) and has both an independent economy and independent executive, legislative, and judicial powers from mainland China. Like the United States and Hong Kong, China and Hong Kong have a dependent and interconnected relationship. Although Hong Kong is still partially autonomous from China, China utilizes Hong Kong’s financial and business status to move money in and out of China. This is crucial to China, as Beijing places significant restrictions on financial flows.. In addition, China uses Hong Kong as a “staging post” for foreign investment in Chinese companies because of its preferential terms and ability to move money more freely. Since 1997, Chinese companies have raised $335 billion on the Hong Kong stock exchange, roughly 80 percent of the total capital raised by Chinese companies in non-Chinese equity markets. By comparison, Chinese companies have raised $268 billion on the Shanghai stock exchange over the same period. About two-thirds of China’s inbound and outbound direct investment moves through Hong Kong. In addition, China uses Hong Kong’s open financial system to influence the value of the renminbi.
With the removal of Hong Kong's special status and a more restrictive financial relationship between the United States and Hong Kong, Hong Kong and China could see significant financial shortcomings in the future, including a decrease in foreign direct investment, limited access to overseas equity markets, and less room to influence the offshore exchange rate of the renminbi.
Along with the potential financial effects, the U.S. decision may also affect the U.S.-China trade agreement. China may pursue retaliation, as it often does. Beijing officials have already ordered Chinese companies to halt the import of U.S. agricultural and farm goods like soybean and pork. If sustained, these retaliatory measures could jeopardize the Phase One agreement and result in a resumption of tit for tat trade escalation.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Carlota Martinez-Don and Patrick Saumell are interns with the CSIS Scholl Chair.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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