(Bloomberg) -- Under the United States-Hong Kong Policy Act of 1992, the U.S. treats Hong Kong, a semi-autonomous part of China, differently than the mainland in trade, commerce and other areas. Now U.S. President Donald Trump could rescind that “special status” to punish China for recent moves to tighten its grip on the city amid a resurgence of pro-democracy street protests. In its most extreme form, that would effectively mean treating the global financial hub no differently than any other Chinese city, a seismic shift that could harm both economies at an already difficult time. China has promised countermeasures against any foreign “interference.”
1. Is the special status in jeopardy?
Possibly. The president has long had the power to suspend it with an executive order, yet hasn’t. Then came an added pressure: a U.S. law passed last year requires the secretary of state to certify -- as part of an annual report to Congress -- whether Hong Kong remains “sufficiently autonomous” from Beijing to justify its unique treatment. That includes assessing the degree to which Hong Kong’s autonomy had been eroded by the government of China. (Hong Kong is part of China but has a different legal and economic system, a holdover from its time as a British colony.) On May 27, Secretary of State Mike Pompeo notified Congress that the Trump administration no longer regarded Hong Kong as autonomous from mainland China.
2. So is that the end of the special status?
It’s too soon to say. Pompeo’s decision opens the door for a range of options, from visa restrictions and asset freezes for top officials to possibly imposing tariffs on goods coming from Hong Kong. Other measures could target Chinese Communist Party officials. It’s up to Trump to decide how quickly he wants to move while he’s also threatening consequences for China over its handling of the coronavirus. Hurting China also carries additional risks for the U.S. economy, including the U.S.-China trade deal that Trump had considered one of his biggest achievements, which could affect Trump’s odds of winning re-election. U.S. officials have given mixed signals about what might happen next, and when.
3. What would losing it mean for Hong Kong and China?
While Hong Kong remains a key gateway from China to the rest of the world, it matters far less to the country’s fortunes than it once did. In 2019, 12% of China’s exports went to or through Hong Kong, down from 45% in 1992. China is also far less reliant on inflows of foreign capital and expertise, and has made a much lower priority of making the yuan an international currency. Nonetheless, the city still matters. Hong Kong’s open capital account and adherence to international standards of governance are unmatched by any mainland Chinese city and make it an important base for international banks and trading firms. Revoking the special status would be “the nuclear option” and “the beginning of the death of Hong Kong as we know it,” said Steve Tsang, director of the University of London’s SOAS China Institute.
4. What about for the U.S.?
It has its own reasons for not rocking the boat too much. Hong Kong, the only semi-democratic jurisdiction under Chinese rule, offers U.S. companies a relatively safe way to access the Chinese market and employs a U.S. dollar peg, linking it with the American financial system. According to the Congressional Research Service, the largest U.S. trade surplus in 2018 was with Hong Kong — $31.1 billion. Some 290 U.S. companies had regional headquarters in the city that year and another 434 had regional offices, it said. Hong Kong’s first justice minister after the handover to China in 1997, Elsie Leung, told the South China Morning Post in May that any damage would be mutual: “We are not just getting the benefits – it’s a free-trade arrangement which is good for both sides.”
5. And more broadly?
Pompeo’s decision, let alone any sanctions or move to rescind the special status, will further strain the relationship between the U.S. and China, already under pressure from the coronavirus pandemic, the Hong Kong protests, an ongoing trade war and other issues. In addition to the annual review of Hong Kong’s trading status, the new law requires the president to freeze U.S.-based assets of, and deny entry to the U.S. by, any individuals found responsible for abducting and torturing human rights activists in Hong Kong. Such sanctions could come sooner than a suspension of the trading status, and would obviously complicate things further.
6. How autonomous is Hong Kong?
When Britain handed Hong Kong back to China, the Chinese government pledged that the city would have a “high degree of autonomy” in its legal and economic affairs for 50 years, under an arrangement known as “one country, two systems.” The 2019 U.S. report on conditions in Hong Kong said the city’s autonomy was “sufficient -- although diminished.” After the protests erupted in June 2019, the State Department said that “continued erosion” of Hong Kong’s autonomy put its “long-established status in international affairs” at risk.
7. How has China responded?
“Hong Kong is purely China’s internal affair,” Foreign Ministry spokesman Zhao Lijian said in Beijing on May 27, promising to take “necessary countermeasures” against any “interference” by “external forces.” After the U.S. law was passed last year, China said it would sanction some U.S.-based activist groups including the National Endowment for Democracy, Human Rights Watch and Freedom House, and suspend port visits by U.S. Navy ships to Hong Kong. “China urges the U.S. side to correct its mistakes and stop any words and deeds that interfere in Hong Kong affairs and China’s internal politics,” Foreign Ministry spokeswoman Hua Chunying said then. The official Xinhua News Agency has dismissed as “groundless” accusations about the loss of freedom or human rights issues in Hong Kong. It also noted that the 2018 Human Freedom Index compiled by the Fraser Institute, a Vancouver-based think tank, ranked Hong Kong at No. 3, well ahead of the U.S. at No. 17.
8. And Hong Kong?
The city’s leader, Chief Executive Carrie Lam, has defended the national security law (as has Li Ka-shing, Hong Kong’s richest tycoon). Lam also has said it would be “totally unacceptable” for foreign legislatures to interfere in Hong Kong’s internal affairs, and that sanctions would only complicate the problems in the city. (Lam was selected in 2017 by a committee of 1,200 political insiders overwhelmingly loyal to the Chinese government.) She has sought to reassure investors that the city still adheres to the rule of law and has an independent judiciary. She also has defended police actions.
9. Is this what the protesters have been seeking?
As a largely leaderless movement, the Hong Kong protests have made no official request for international assistance. But some prominent Hong Kong pro-democracy activists including Joshua Wong had testified in Washington in favor of the bill, seeking to put pressure on China. On the streets of Hong Kong, some protesters have made clear their interest in U.S. support by waving American flags, singing “The Star-Spangled Banner” and calling on Trump to “liberate” Hong Kong.
- QuickTakes on Hong Kong’s autonomy and the national security laws Beijing wants to impose.
- The Congressional Research Service fact sheet on Hong Kong.
- China criticizes the U.N. high commissioner for human rights, Michelle Bachelet, for wading into the issue.
- Watch activists Joshua Wong’s and Denise Ho’s testimony via Bloomberg TicToc.
- Hong Kong faces ominous questions about what happens in 2047.
- A Bloomberg Opinion editorial saw a small window for compromise in Hong Kong.
(An earlier version corrected the spelling of Pompeo in question 5)
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