An executive order issued on July 14 by President Trump ends Hong Kong’s special trade status, which has been in effect since 1984 when the territory was still a British colony. Trump said the order was intended to “hold China accountable for its aggressive actions against the people” of Hong Kong.
Under the order, the U.S. will now treat Hong Kong the same as mainland China. There will be “no special privileges, no special economic treatment, and no export of sensitive technologies,” Trump said. “This law gives my administration powerful new tools to hold responsible the individuals and the entities involved in extinguishing Hong Kong’s freedom.”
The move comes in response to China’s imposition of a new security law in the region, which went into effect on June 30, 2020. The law restricts free speech in Hong Kong and undermines the “one country, two system” policy agreed between the UK and China in 1997 during the handover of the territory, which allowed Hong Kong to adopt a political system separate from mainland China. The new security law, which came about as part of China’s crackdown on a year-long pro-democracy protest, threatens Hong Kong’s independence and raises the risk that certain American products will fall into the hands of China’s Ministry of State Security, the Chinese People’s Liberation Army, North Korea, or Iran.
The executive order suspends different and preferential treatment of the region with respect to the Arms Export Control Act and the Export Control Reform Act of 2018, and directs federal agencies to implement any changes necessary to give effect to the order by July 29, including:
- Revoking license exceptions for exports and reexports to Hong Kong as well as in‑country transfers of items subject to Export Administration Regulations (EAR). The Directorate of Defense Trade Control (DDTC) has also advised that there is a “presumption of denial” for export license requests to Hong Kong where: 1) a person in Hong Kong is named as an end-user, licensee (signatory), or sublicensee; or 2) Hong Kong appears as a sales, marketing, distribution, transfer, or re-export territory.
- Imposing additional administrative requirements for export activities related to Hong Kong that were not previously required. One such additional requirement is that exports of over $50,000 which require a license be accompanied by a “PRC End-User Statement” and the prohibition on exports, re-exports or transfers (in-country) of certain “military end-use” or “military end-user” items under EAR Part 744.
- Ceasing exports of U.S.-origin defense equipment to Hong Kong and taking steps to impose the same restrictions on exports of U.S. defense and dual-use technologies that are currently applicable to mainland China.
- Terminating export licensing suspensions under section 902(a)(3) of the Foreign Relations Authorization Act, Fiscal Years 1990 and 1991, as they apply to exports of defense articles to citizens of Hong Kong who are physically located outside of Hong Kong or mainland China and who were authorized to receive defense articles prior to July 14. DDTC will review license applications on a case-by-case basis and said that exporters may continue to rely on available exemptions consistent with the provisions of ITAR section 126.1(a).
- Blocking and prohibiting exports of, and interests in, property to specified persons. Foreign individuals or entities determined by the Secretary of State to fall into this category, including those individuals involved in developing or implementing the new Chinese law or who have undermined the democratic process in Hong Kong, as well as individuals who have aided them, will be blocked from investing, transferring, exporting, withdrawing or dealing with any property or interests in property in the US. Specified persons include.
At this time, the DDTC will not take steps to revoke or rescind previously approved authorizations to export defense articles or services to Hong Kong, and current, valid non-exhausted export authorizations that name Hong Kong as a transfer territory will not be affected by the order. Subject to actual orders, shipments of items that were on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or enroute aboard a carrier to a port of export or re-export on June 30, 2020, may be processed pursuant to the pre-existing license exceptions. Deemed exports and reexports to Hong Kong may similarly continue under these exceptions until August 28, 2020, after which time they will be subject to applicable licensing requirements.
The Department of Commerce has indicated that “further actions to eliminate differential treatment are also being evaluated” and urged Beijing to “reverse course” and fulfill the promises it has made.
Earlier this month, Trump signed the Hong Kong Autonomy Act (HKAA), which passed unanimously in Congress. The HKAA creates a framework for imposing sanctions, including freezing assets, transactions bans, and visa restrictions, on foreign persons that materially contribute to or facilitate China’s failure to preserve Hong Kong’s autonomy. Under the Act, sanctions can be applied to Chinese individuals and government officials determined to be contributing to the erosion of Hong Kong’s autonomy, as well as to banks and other financial institutions which conduct business with Chinese officials who implement the security law.
China Vows to Retaliate
Beijing has condemned the order, vowing to impose tit-for-tat sanctions on relevant people and entities in the U.S.
In a strongly worded statement, China’s Foreign Ministry described the decision as a “gross interference” in its domestic affairs and threatened to impose retaliatory sanctions to “safeguard China’s legitimate interests.” “The US attempt to obstruct the implementation of the national security law for Hong Kong will never succeed… We urge the US side to correct its mistakes, refrain from implementing the act and stop interfering in China’s internal affairs in any way. China will firmly respond if the US goes ahead.”
Potential Impact on Trade
Since 1984, Hong Kong’s special trade status has allowed goods to pass through its borders under different controls than are applied to mainland China. For example, during the U.S.‑China trade war, Hong Kong was not impacted by the Section 301 tariffs imposed on Chinese goods. The new order could put an end to that, as the net effect of the order is to rescind Hong Kong’s status as a separate customs territory.
Multinational companies and global financial institutes with significant business with or operations in Hong Kong should review their potential exposure to the executive order, the HKAA, and the changes to U.S. export control laws and assess whether these developments warrant modifications to existing business practices.
With the escalation of events playing out with China and Hong Kong, we believe there is significant risk of continued efforts by the Trump Administration to impose political and economic pressure on China, as well as retaliatory efforts on behalf of the Chinese government. As such it will be imperative for American companies active in Asia to keep a watchful eye on events in the region in the weeks and months ahead.