Why Hong Kong’s autonomy is important for trade

The United States-Hong Kong Policy Act of 1992

Official relations between the United States and Hong Kong are governed by the United States-Hong Kong Policy Act of 1992 (“Policy Act”), which recognizes Hong Kong as an entity distinct from Mainland China for the purposes of U.S. law. In practical terms, the Policy Act recognizes Hong Kong as a separate territory when it comes to trade and economic relations. Accordingly, Hong Kong receives its own export controls treatment, customs treatment, and is treated separately under U.S. laws and policies governing financial transactions and immigration.

Hong Kong’s unique status under U.S. law depends on the reality of Hong Kong’s autonomy. This recognition provided under the Policy Act rests on both the “one country, two systems” policy established in the Sino-British Joint Declaration, and the high degree of autonomy provided to Hong Kong under the Basic Law. The Policy Act (22 USCS 66 § 5772(a)) allows the U.S. President to unilaterally suspend or change Hong Kong’s status through an Executive Order. Such an Executive Order could also be rescinded by the U.S. President if Hong Kong “regained sufficient autonomy” to again warrant separate treatment (22 USCS 66 § 5772(d)).

Is Hong Kong’s autonomy under threat?

Increasingly, Mainland China and Hong Kong authorities’ commitment to the “one country, two systems” framework is being called into question, given actions that could be seen to undermine Hong Kong’s rule of law and autonomous governance. Significant examples include the 2003 introduction (later recalled) of a national security bill that could have been used to suppress dissent, the 2014 State Council White Paper asserting that all Hong Kong officials, including judges, must display loyalty to China, the 2014 National People’s Congress Standing Committee decision to allow universal suffrage only if Chief Executive candidates are approved by China, the apparent 2015 detentions in Mainland China of several Hong Kong residents because of their activities as booksellers, and statements from Beijing directly calling into question the continued validity of the Sino-British Joint Declaration. The recent attempt by Hong Kong’s leadership to pass a bill that would allow extradition to Mainland China is just the latest example.

The former U.S. Consul General to Hong Kong, Kurt Tong, highlighted “a number of unfortunate ‘firsts’” that occurred in 2018 with respect to Hong Kong’s autonomy – “Hong Kong’s first banning of a political party; the first foreign journalist ejected from the city; and the first time Hong Kong has disqualified a large number of political candidates for their political views.” These incidents are catalogued in greater detail in the U.S. State Department’s 2019 Hong Kong Policy Act Report, which ultimately concluded that “as a general matter, Hong Kong maintains a sufficient — although diminished — degree of autonomy … to justify continued special treatment by the United States.”

What does this have to do with trade and investment?

As the former U.S. Consul General has enumerated,² politicization of immigration and visas, regulation of the Internet and cyber-space to restrict freedom of expression, intervention in financial market supervision, and actions that reduce financial market transparency would all undermine Hong Kong’s strength as a global financial and business center as well as Hong Kong’s own goals of developing a more innovative economy. As the American Chamber of Commerce noted, “without free press, capital markets cannot properly function, and business and trade cannot be reliably conducted. Any effort to curtail press freedom in Hong Kong could damage Hong Kong’s competitiveness as a leading financial and trading center.”

Hong Kong plays a critical role in supporting China’s engagement in the global economy. Hong Kong’s financial system gives Mainland authorities ground to test financial reforms; Hong Kong’s capital markets allow Mainland companies access to global capital markets, and foreign investors access to Chinese bonds. Large percentages of Hong Kong’s trade and foreign direct investment are ultimately destined for, or originate from, Mainland China. Hong Kong plays a key intermediary role in infrastructure investment and financing as part of China’s Belt and Road Initiative. Foreign investors rely on Hong Kong’s legal system to reduce their business risks when investing in China.

What options are available to the United States?

At some point, officials in Washington may determine that threats to Hong Kong’s autonomy are significant enough to prompt action. Most of the tools available through the Policy Act are economic in nature.

Under the Policy Act, the U.S. President could issue an Executive Order suspending separate treatment for Hong Kong with respect to specific laws or regulations. A change in recognition could, for example, render Hong Kong equivalent to Mainland China for the purposes of export controls of sensitive technologies, or even place Hong Kong within Mainland China’s customs territory, meaning that U.S. tariffs on Chinese goods would also apply to Hong Kong exports at the same rates. U.S. officials may also enhance scrutiny of transactions with Hong Kong entities, including investments in the U.S. from Hong Kong companies.

Actions to end Hong Kong’s separate treatment for export controls, for example, may have little direct impact on trade or Hong Kong’s economic growth, as the number of export-controlled goods Hong Kong imports is very small. However, taking any action to change Hong Kong’s status under the Policy Act would have a chilling effect not only on U.S. trade and investment in Hong Kong but would send negative signals internationally about Hong Kong’s trusted position in the global economy.

Congress may also amend the Policy Act to provide the U.S. greater tools to respond to challenges to Hong Kong’s autonomy. One piece of legislation already introduced, the Hong Kong Human Rights and Democracy Act of 2019,³ would add a requirement for the Secretary of State to certify annually that Hong Kong remains “sufficiently autonomous to justify special treatment by the United States,” would require the Department of Commerce to produce annual reports examining whether Hong Kong is deserving of special treatment with respect to export controls, and would allow for financial sanctions against individuals responsible for abductions, detentions, or renditions from Hong Kong to Mainland China.⁴ To date, the proposed legislation has been referred to relevant Congressional committees for further consideration; it is unclear where it will go from there. It could be expedited should events require. Moreover, Congressional action, if or when taken, could build pressure for and help justify actions the President could otherwise take unilaterally to suspend or adjust Hong Kong’s treatment under the Policy Act.

Is U.S. action imminent?

U.S. Congressional leaders have made forceful statements in support of peaceful protests and have introduced legislation to amend the Policy Act in response.

Though these developments should be of serious concern to any government interested in Hong Kong’s long-term stability, it is unlikely that the United States will take significant action to try to influence Beijing’s posture towards Hong Kong at this time. Beyond the significant economic impact of formally determining that Hong Kong is no longer autonomous for purposes of the Policy Act, such an action would ironically have the unintended consequence of strongly countering U.S. interests in seeing Hong Kong retain its autonomy and rule of law. As Former Chief Secretary Anson Chan noted in March 2019, “withdrawal of Hong Kong’s special status under the Policy Act, even if only partially at first, would be a body-blow to Hong Kong’s economy, international standing and perceptions that One Country Two Systems remains a reality.”

Hong Kong, however, is on Washington’s radar now, and U.S. officials may watch even more carefully for signs that Hong Kong’s autonomy is slipping. Beijing’s response to the public demonstrations that continue in Hong Kong to date will be a key test, closely followed by U.S. legislators and other officials.

Hong Kong faces a critical moment. In terms of trade, investment and finance, all sides must recognize that a loss of Hong Kong’s autonomy risks losses for everyone.

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