The United States receives 30 billion U.S. dollars of goods from Hong Kong every year. The recent decision of the USA to suspend certain privileges for Hong Kong will not change this key trade relationship, and exports will continue. The move by the Trump administration primarily requires exports of military and dual-use technologies to Hong Kong to obtain a special license, similar to the rest of the PRC. Most businesses in Hong Kong do not rely on these kinds of technologies, and for those that due, alternatives exist. Overall, the economic effects of the change will be small. For now, the action is mostly symbolic. However, if the USA imposes sanctions on other areas of the Hong Kong economy in the future, a range of USA companies, particularly those in the service and financial industries will be negatively impacted.
Before the move by the Trump administration, Hong Kong’s imports of sensitive technology products from the United States were treated more favorably than imports of such technology by other regions of the PRC. Traditionally, Hong Kong fell into Group B of the United States’ export control country classification system, while the rest of the PRC was Group D, reserved for countries considered to be a potential national security risk to the United States However, in practice it has always been difficult for Hong Kong based companies to import cutting-edge and sensitive technologies from the United States. Therefore, the US tightening of high-tech exports to Hong Kong and such technologies have never been a significant part of the Hong Kong economy, which is more oriented toward international finance. Overall, little impact on Hong Kong is expected.
As far as trade is concerned, Hong Kong’s “special treatment” by from the USA is mainly reflected in the fact that Hong Kong has been treated as a separate customs territory for USA exports. The removal of this special status would subject Hong Kong to the same increased tariffs as President Trump has placed on the rest of the PRC.
According to the US-Hong Kong Policy Act the United States respects Hong Kong’s status as a separate customs territory and the status of a contracting party to the General Agreement on Tariffs and Trade. In addition, the United States grants Hong Kong the most-favored-nation status, recognizes Hong Kong’s certificate of origin, and regards it as different from that of mainland China. Due to Hong Kong’s special treatment under this Act, Hong Kong was not affected by the increased tariffs set by President Trump in 2018 and 2019. Once removal of this special status is official, certain exports from Hong Kong will be subjected to high tariffs of 7.5% to 25%.
Many companies from the PRC mainland and many other Asian countries use Hong Kong as an entrepot trading hub. The action by the USA to remove special status for Hong Kong will decrease Hong Kong’s attractiveness as a trading hub. Many investors, will consider shifting operations to Singapore, Vietnam, India, and South Asia. We are already seeing Southeast Asia benefiting from part of the financial and manufacturing industries that have migrated from Hong Kong.
Trade between USA and China may be hurt by the USA removal of recognition of Hong Kong’s special status. However, the PRC will continue to treat Hong Kong as a separate customs jurisdiction with separate laws and regulations. It is likely many countries will continue to benefit from Hong Kong’s status as a trade bridge to mainland China.