China’s latest encroachment could risk Hong Kong’s special trade status with U.S.

On Thursday, one day before the National People’s Congress gathering of China’s political elite, Beijing said it would bypass Hong Kong’s legislature and introduce national security laws that would ban sedition, secession, and subversion of China’s central government—the clearest sign yet of Beijing’s intent to dampen political dissent and further exert its influence in semiautonomous Hong Kong.

U.S. politicians responded swiftly, launching bipartisan measures that oppose Beijing’s proposal and signaling that political tensions between the U.S. and China—already strained by the coronavirus pandemic and the trade dispute—may get even worse.

“[A] further crackdown from Beijing will only intensify the Senate’s interest in re-examining the U.S.-China relationship,” Senate Majority Leader Mitch McConnell (R–Ky.) said on Thursday after the announcement.

That re-examination may come sooner than later. Hong Kong enjoys a special trade status with the U.S. that treats it differently from China. A review of that status is overdue and could be an opportunity for Washington to rebuke Beijing for its recent move.

Under review

The annual review of Hong Kong’s autonomy will be the first one since President Donald Trump signed the Hong Kong Human Rights and Democracy Act (HKHRDA) into law on Nov. 27.

On May 6, U.S. Secretary of State Mike Pompeo said he was postponing this year’s review until after the NPC so the U.S. could account for any decisions Beijing makes about Hong Kong during the gathering. At a May 20 press conference, before the national security law was announced, Pompeo said the review on Hong Kong’s autonomy was “still pending.”

“We’re closely watching what’s going on there,” Pompeo said, without setting a specific date for the review.

Chinese delegates wait for the opening of the National People’s Congress at the Great Hall of the People on May 22, 2020 in Beijing. The central government introduced a national security law for Hong Kong that’s seen as curbing the city’s democracy and risking its special trade status with the U.S.
Kevin Frayer/Getty Images

The 1992 U.S. Hong Kong Policy Act, drafted in preparation for the 1997 handover of the region from Britain to China, laid out the possibility that diminished autonomy in Hong Kong could lead to a revocation of its trade status. The HKHRDA added an annual review process to the existing stipulation. It also permits the U.S. to place sanctions on anyone it sees as contributing to the erosion of Hong Kong’s autonomy and bar them from entering the United States.

If the review finds that Hong Kong is not sufficiently autonomous from China, the U.S. can revoke Hong Kong’s special trade status. The revocation would hit bilateral trade—Hong Kong would be subject to U.S. tariffs, sanctions, and export restrictions on China—but Hong Kong and the U.S. only account for a small percentage of the other’s exports.

Reputational damage

The biggest injury would be to Hong Kong’s standing as a global financial hub. When the HKHRDA passed the Senate in November, the American Chamber of Commerce in Hong Kong released a statement warning that the measure could ultimate jeopardize American business in Hong Kong and “damage Hong Kong’s role as an international business center.”

Stocks in Hong Kong plunged on Friday after Beijing announced the plan, displaying investors’ widespread fear of the increased risk from political instability in Hong Kong and the worsening U.S.-China relationship.

“The implementation of the new security law will weaken the confidence of the foreign investors in Hong Kong,” said Yifan Zhang, an associate professor of economics at the Chinese University of Hong Kong.

The Heritage Foundation, a conservative think tank, has rated Hong Kong the world’s freest economy in the world every year since 1990. It had downgraded the city to the No. 2 spot this year, even before Beijing proposed the new law.

“Hong Kong’s traditionally open and market-driven economy has become increasingly integrated with the mainland through trade, tourism, and financial links. Risks to Hong Kong’s economic freedom have grown correspondingly,” the foundation wrote of Hong Kong for its 2020 ranking.

“No matter how tense the U.S.-China relations become, it would be a mistake for the U.S. to withdraw Hong Kong’s special trade status,” said Li Chen, an assistant professor of Chinese studies at the Chinese University of Hong Kong.

“Hong Kong has unique advantages in bridging China’s huge and rapidly growing markets with the rest of the global economy,” Li said. “As far as the Chinese markets remain open and attractive, I think the majority of global companies will not be pushed away from Hong Kong by the unilateral changes of the U.S. trade policies.”

‘Wait and see’

American and other foreign companies in Hong Kong will likely take a “wait and see” attitude towards developments in Hong Kong, said Willy Wo-Lap Lam, an adjunct professor at the Center for Chinese Studies at the Chinese University of Hong Kong.

Lam said that the U.S. may threaten to revoke Hong Kong’s special status but will “think very carefully” about whether to actually do so, since such a move would harm U.S. businesses. Still, Lam said, revocation remains “a possibility.”

U.S. lawmakers have proposed other means of rebuffing Beijing’s new encroachment on Hong Kong.

U.S. Sens. Pat Toomey (R–Pa.) and Chris Van Hollen (D–Md.) said on Thursday they will introduce a bill in which the U.S. could sanction Chinese officials and entities that enforce the new national security laws in Hong Kong. The bill seems to build on last year’s HKHRDA, which allows the U.S. to sanction individuals involved in human rights violations in Hong Kong. The new measure goes further—it would also penalize any banks that do business with entities that enforce the new laws.

For Toomey and Hollen’s legislation to become law, it will need Congressional approval and President Donald Trump’s signature.

There is a prevailing, bipartisan anti-China attitude in Washington at the moment, amid a global blame game over the coronavirus pandemic and long-simmering trade tensions. But that’s still no guarantee Congress and the White House have the political appetite to take action that could ultimately compromise American business interests.

For now, Lam anticipates “massive demonstrations in the coming days” in Hong Kong, and the passage and implementation of Beijing’s national security law within the next few months.

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