At a White House press briefing on May 29, President Trump sternly declared that because the Government of the People’s Republic of China announced its intention to enact a national security law for Hong Kong, the Special Administrative Region is no longer “sufficiently autonomous.”  Therefore, the President said, he is instructing his administration to “begin the process” of revoking the “special treatment” the United States has provided to Hong Kong since it was under British control.  Among the treatments the President said he is including in that instruction is recognition of Hong Kong as a separate customs territory.[1]  The sweeping assertion that the United States might treat products of Hong Kong like products of China has sparked considerable concern, and speculation as to whether such a step is legally necessary or appropriate.  On June 17, U.S. Trade Representative Robert Lighthizer, responding to a question from Rep. Kevin Brady (R-TX) during a hearing before the House Ways and Means Committee, correctly signaled that the answer is no.

Lighthizer highlighted the significant annual trade surplus the United States has with Hong Kong — $30 billion – and the “lower tariffs” (actually, make that no tariffs) Hong Kong, as a “free port,” imposes on U.S. goods, compared to the duties China charges imports and the duties the U.S. charges for products of Hong Kong that are imported into the U.S.  He then stated that his office is “continuing to look at what it really means to be ‘treated the same,’” but, he added, it is a “decision the President has made.”[2]

In fact, despite the lack of nuance in the President’s May 29 speech, the law governing U.S. treatment of Hong Kong does not require a single finding regarding the degree of autonomy Hong Kong holds vis-à-vis Mainland China. Instead, the Hong Kong Policy Act of 1992 and the more recent (2019) Hong Kong Human Rights and Democracy Act (HKHRDA), which builds upon the 1992 law, indicates that any analysis of Hong Kong’s autonomy must consider the full range of matters over which the Special Administrative Region’s government has separate jurisdiction and authority. In doing so, the law implicitly recognizes that there may be different determinations on autonomy with respect to each.

The 1992 law, P.L. 102-383, sets forth “the sense of Congress” of what “should be the policy of the United States with respect to its bilateral relationship with Hong Kong.” Issues of commerce, including customs and trade, are addressed in numerous provisions, with Congress making clear that the U.S. has a strong interest in Hong Kong’s success in international trade. Thus, Section 101(1) provides:

The United States should play an active role. . . in maintaining Hong Kong’s confidence and prosperity, Hong Kong’s role as an international trade center, and the mutually beneficial ties between the people of the United States and the people of Hong Kong.

Further, Section 101(2) advises that:

The United States should actively seek to establish and expand direct bilateral ties and agreements with Hong Kong in economic, trade, financial, monetary, aviation, shipping, communications, tourism, cultural, sport, and other appropriate areas.

Moreover, under Section 102, which addresses Hong Kong’s “participation in multilateral organizations, rights under international agreements, and trade status,” Congress states its sense that:

(2) The United States should continue to fulfill its obligations to Hong Kong under international agreements, so long as Hong Kong reciprocates . . . unless and until such obligations are modified or terminated in accordance with law.
(3) The United States should respect Hong Kong’s status as a separate customs territory, and as a contracting party to the General Agreement on Tariffs and Trade {now the World Trade Organization}. . . . (Emphasis added.)

Hong Kong remains an active, independent and compliant member of the WTO.[3]   Further, for the United States to cease fulfilling its WTO obligations to Hong Kong in accordance with U.S. law, for the purpose of ceasing to recognize Hong Kong as a customs territory separate from China, the United States first would have to formally renounce its recognition of Hong Kong as a separate WTO member.  That is a drastic step that would be difficult to rationalize, particularly when Hong Kong is meeting its WTO commitments and has taken positions distinct from China as a WTO member, including taking on obligations not incurred by China.  Moreover, the negative consequences for other U.S. policy objectives, such as support for “Hong Kong’s confidence and prosperity, Hong Kong’s role as an international trade center, and the mutually beneficial ties between the people of the United States and the people of Hong Kong,” would be so much greater than the value of additional Section 301 tariffs the U.S. might collect on whatever small quantity of goods Hong Kong produces that might fall within the tariff classifications subject to the additional duties the United States is now imposing on Chinese origin goods.

Either disavowing Hong Kong’s WTO membership vis-à-vis the United States or blatantly violating WTO rules by imposing the Section 301 duties on Hong Kong products should not be position the United States wants to take, particularly alone. Of course, Hong Kong could initiate a WTO dispute settlement proceeding against the United States for the discriminatory treatment if the U.S. were to apply China Section 301 duties to products of Hong Kong. But that does not provide immediate relief.

In any event, on the issue of “commerce between the United States and Hong Kong,” Congress in Section 103 of the 1992 Policy Act states:

(1) The United States should seek to maintain and expand economic and trade relations with Hong Kong and should continue to treat Hong Kong as a separate territory in economic and trade matters.
(2) The United States should continue to negotiate directly with Hong Kong to conclude bilateral economic agreements.
(3) The United States . . . should treat Hong Kong as a territory which is fully autonomous from the People’s Republic of China with respect to economic and trade matters.
(4) The United States should continue to grant the products of Hong Kong nondiscriminatory trade treatment (commonly referred to as “most-favored-nation status” by virtue of Hong Kong’s membership in the {GATT, now WTO}.

(8) The United States should continue to support access by Hong Kong to sensitive technologies controlled under {the former COCOM, now Wassenaar Arrangement} so long as the United States is satisfied that such technologies are protected from improper use or export.
(9) The United States should encourage Hong Kong to continue its efforts to develop a framework which provides adequate protection for intellectual property rights.

It would be particularly ironic for the Trump Administration to disregard Hong Kong’s separate customs status and separate trade rules to impose Section 301 duties on a few Hong Kong goods when a primary basis for those duties on Chinese products is a finding by the U.S. Trade Representative that China, not Hong Kong, has failed to provide intellectual property rights protections.  The U.S. Trade Representative has simultaneously lauded Hong Kong for its respect for and effective enforcement of intellectual property rights.[4]  Indeed, even U.S. Government career staff with responsibility for China trade-related issues have stated that 1) the United States does not have same trade concerns with Hong Kong as it does with China, citing China’s intellectual property theft, state-owned enterprises, and subsidies and 2) Hong Kong maintains its regulatory integrity.

Title II of the 1992 law specifically addresses “the status of Hong Kong in United States law.” Under Section 201(a), “Notwithstanding any change in the exercise of sovereignty over Hong Kong, the laws of the United States shall continue to apply with respect to Hong Kong, on and after July 1, 1997, in the same manner as the laws of the United States were applied to Hong Kong before such date unless otherwise expressly provided by law or by Executive Order under Section 202.” Obviously, that provides the President with the ability to issue an Executive Order upending the status quo. However, under Section 201(b), to do so the President must first make specific determinations after considering each international obligation:

If in carrying out this title, the President determines that Hong Kong is not legally competent to carry out its obligations under any such treaty or other international agreement, or that the continuation of Hong Kong’s obligations or rights under any such treaty or other international agreement is not appropriate under the circumstances, such determination shall be reported to Congress . . . . (Emphasis added).

Section 202 of the 1992 Policy Act identifies the factors the President should consider in determining whether Hong Kong “is not sufficiently autonomous to justify treatment under a particular law of the United States or any provision thereof, different from that accorded the People’s Republic of China.” These are “the terms, obligations, and expectations expressed in the {Sino-British}Joint Declaration with respect to Hong Kong.” Among those Joint Declaration obligations are:

(6) The Hong Kong Special Administrative Region will retain the status of a free port and a separate customs territory.
(7) The Hong Kong Special Administrative Region will retain the status of an international financial centre, and its markets for foreign exchange, gold, securities, and futures will continue. There will be free flow of capital. The Hong Kong dollar will continue to circulate and remain freely convertible.
(9) The Hong Kong Special Administrative Region may establish mutually beneficial economic relations with the United Kingdom and other countries, whose economic interests in Hong Kong will be given due regard.
(10) Using the name of “Hong Kong, China”, the Hong Kong Special Administrative Region may on its own maintain and develop economic and cultural relations and conclude relevant agreements with states, regions and relevant international organisations.

While we do not yet have the terms of the national security law that Beijing will enact, there is no indication that any of these commerce-related obligations will be compromised by that law or its implementation.

It is significant that the current Congress reaffirmed the terms of the 1992 Act, including the commitment to the “vitality, prosperity and stability” of Hong Kong and to a focus on each “particular” U.S. law under which Hong Kong is treated differently from China.   The 2019 HKHRDA (P.L. 116-76) states most relevantly:

(A) the United States has a “strong interest in the continued vitality, prosperity and stability of Hong Kong”; {and}

(D) Hong Kong must remain sufficiently autonomous under a particular law of the United States, or any provision thereof, different from that accorded the People’s Republic of China.[5]

The 2019 law added a new section to the 1992 Act, Section 205, establishing a requirement of a certification in the annual report to Congress that the State Department must prepare, but Section 205 also makes clear that the report must specifically address each item in a long list of issues, again indicating a recognition that there could be different conclusions reached on different issues.[6]  Among the commerce-related issues listed in Section 205(a)(1)(B), the U.S. Congress requires the State Department to address: commercial agreements, sanctions enforcement, export controls and any formal treaties or agreements between the United States and Hong Kong.  More specifically, under Section 205(a)(1)(C), Congress instructs the State Department to include in its report:

(i) An assessment of the degree of any erosions of Hong Kong’s autonomy in each category listed in subparagraph (B) resulting from actions by the Government of the People’s Republic of China that are inconsistent with its commitments under the Basic Law[7] or Joint Declaration;
(ii) An evaluation of the specific impacts to any areas of cooperation between the United States and Hong Kong arising from erosions of autonomy in Hong Kong or failures of the Government of Hong Kong to fulfill obligations to the United States under international agreements within the categories listed in subparagraph (B).

Thus, the State Department should be separately identifying and evaluating “the degree of any erosions of Hong Kong’s autonomy” with respect to each listed category – and the results of those evaluations may vary.  It is not plausible that an adverse determination could be made with respect to each commerce related category.  At worst, there have been indications that the Trump Administration is broadly concerned about the adequacy of U.S. export controls when it comes to the potential for reexports to China (and to Russia and Venezuela), and not just through Hong Kong.[8]

Thus, even assuming arguendo that there could be U.S. Government determinations that Hong Kong is insufficiently autonomous in some areas, however important, the Trump Administration may still find that Hong Kong continues to be highly autonomous in other areas. So long as the Special Administrative Region’s government functions in the areas of customs and trade retain the high degree of autonomy, and as long as the U.S. Government is not prepared to renounce its recognition of the Hong Kong as a separate member of the WTO, the Trump Administration should not alter its customs and trade special treatment of Hong Kong. While, as Ambassador Lighthizer advised Rep. Brady, the President has the final say, if Hong Kong’s autonomy as a customs territory is revoked, the U.S. Government will have to deal with the consequences to its policy goals for the Hong Kong people and U.S. businesses, along with the legal ramifications.

This information is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.

[1]      Specifically, President Trump stated, “I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment. . . .We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China.”  See https://www.whitehouse.gov/briefings-statements/remarks-president-trump-actions-china/.
[2]      See https://waysandmeans.house.gov/legislation/hearings/2020-trade-policy-agenda, starting at minute 51.
[3]      Macau, also an SAR to China, is a separate WTO member as well, although the United States does not have interests and a stake in Macau comparable to the 85,000 Americans residing in Hong Kong and 1,300 U.S. business operating in Hong Kong. The Trump Administration has given no indication that it is considering revoking Macau’s separate treatment provided under the Macau Policy Act of 2000 (P.L. 101-246). Macau reportedly previously promulgated a national security law.
[4]     See National Trade Estimates Report for 2020 (available at https://ustr.gov/sites/default/files/2020_National_Trade_Estimate_Report.pdf), in which the USTR noted “Hong  Kong generally provides robust intellectual property (IP) protection and enforcement and for the most part has strong laws in place.  Hong Kong also has a dedicated and effective enforcement capacity, a judicial system that supports enforcement efforts with deterrent fines and criminal sentences, and youth education programs that discourage IP-infringing activities.” In contrast, that same report dedicated no fewer than four pages to address U.S. concerns with China’s IPR practices.  In addition, China is on the U.S. “Priority Watch List” for intellectual property rights violations.  See, e.g., https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf.
[5]      Section 3(1).
[6]      Section 205(a)(1)(B).  See https://www.state.gov/2020-hong-kong-policy-act-report/.
[7]      The Basic Law is essentially Hong Kong’s constitution.
[8]      See Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People’s Republic of China, Russia, or Venezuela, Final Rule, Bureau of Industry and Security, 82 Fed. Reg. 23489 (April 28, 2020). Informally, staff in the Commerce Department’s Bureau of Industry and Security have indicated that they do not know the extent of violations with respect to re-exports, noting that is information they hope to gather as a result of the new rules on re-exports and from comments from interested persons.