What will happen if US removes Hong Kong’s special status?

Hong Kong
Anti-government demonstrators scuffle with riot police during a lunchtime protest in Hong Kong. Source: Reuters
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Daily US Times: Top US officials have warned that Hong Kong’s special status is no longer applicable when it comes to trade, and the territory could be treated the same way as mainland China.

Until now, Hong Kong enjoys a favourable trading terms from the US, dating back to the territory’s time as a British colony, but US Secretary of State Mike Pompeo told Congress that the city no longer enjoys a high degree of autonomy from China.

Larry Kudlow, President Donald Trump’s top economic adviser, said Beijing “will be held accountable” for a new security law set to be imposed on Hong Kong.

Mike Pompeo said Hong Kong’s special status is no longer applicable in trade. Source: Getty Images

“If need be, Hong Kong now may have to be treated the same way as China is treated, and that has implications for tariffs”, the National Economic Council Director said.

What will it mean if Hong Kong’s special status is revoked?

With a free economy and a competitive tax regime, Hong Kong is well-known as one of the world’s most important financial centers and it’s attracted many multinational companies to its shores.

It is also an important trade hub, but all of that could be in jeopardy if the US changes the way it deals with Hong Kong.

What is the US threatening?

At the moment, the territory enjoys special trade relations with the US. It operates as a separate customs territory to mainland China. It also has a free port, meaning no tariffs are charged on the export and import of goods.

Those advantages have helped Hong Kong become a centre for global trade. But now the United States is threatening to treat Hong Kong the same as mainland China. That would mean its goods would be subject to additional tariffs, including those extra charges that were introduced as part of the US-China trade war, although some of those have recently been rolled back.

Source: Getty Images

Dr Rebecca Harding, independent trade expert and CEO of Coriolis Technologies, said: “Hong Kong has had a special trading relationship with different types of tariffs and regulations that have allowed it to trade in a freer way, particularly in relation to capital markets.”

She said: “The US has treated it as an ally, if you like. But it’s now saying we are going to treat you in a similar way to how we treat China.”

Where does that leave Hong Kong?

In 2018, Hong Kong was ranked with the 7th highest volume of trade with a total value of nearly $1.2tn. But much of that trade is made up of goods that pass into, or come out of, mainland China.

8% of mainland China’s exports to the US in 2018 and 6% of mainland China’s imports from the US in the same year, passed through Hong Kong.

Source: Getty Images

This role as a gateway between the Chinese market and the rest of the world has put Hong Kong in a unique position, but different trade arrangements could change that.

Dr Tim Summers, a Senior Fellow at Chatham House, based in Hong Kong, said: “If there’s a new trade regime in place, that changes the calculation for companies.”

He said: “The people who are going to get hurt are businesses and consumers.”

Will China be worried?

China has something to worry about US removal of Hong Kong’s special status, but not so much as it might have been at the time of the Hong Kong handover. Hong Kong played a much more significant role in China’s economy back in 1997, accounting for around 18% of China’s GDP.

China has grown massively over the last 25 years. The city now contributes just 23% of China’s GDP.

Dr Summers said: “Put that in context of the ocean of trade coming out of China, it’s not so significant any more. So if President Trump were to act on trade, Hong Kong would suffer, but it’s not a gamechanger for China.”

Source: Getty Images

However, China will want to maintain Hong Kong’s status as a global financial centre. Many mainland Chinese companies are among those which choose to list on Hong Kong’s Stock Exchange because of its access to global capital. Mainland Chinese companies also benefit from Hong Kong’s large financial services sector.

David Webb, a former investment banker who’s lived in Hong Kong since 1991, said: “Shanghai and Shenzhen already have a vibrant financial services sector serving mainlanders.”

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