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May 29, 2020

US/CHINA/HONG KONG: How will the US respond to Hong Kong national security law?

BY Gabriel Wildau

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( 5 mins)
  • The State Department’s determination that Hong Kong is no longer autonomous lays the groundwork for the US to impose sanctions on Chinese officials.
  • The US is likely to proceed with more narrow sanctions, given the risk that broader action would inflict more damage on US companies and Hong Kong’s economy than on the mainland government.
  • The “nuclear option” of cutting off Chinese banks from the US financial system looks unlikely for now but cannot be completely ruled out.

The US State Department declared on 27 May that Hong Kong is no longer autonomous from mainland China, in response to China’s decision to impose a new national security law on the city. An earlier note analyzed the likely impact of China’s action on Hong Kong. This note discusses the likely US response.

Framework for US policy towards Hong Kong

The Hong Kong Human Rights and Development Act (HKHRDA), passed by the US congress in November, requires the State Department to certify each year that Hong Kong maintains sufficient autonomy to merit a distinct status from mainland China under US law. This distinct status mainly affects the US trade and visa policies towards the city. The status is defined in the US-Hong Kong Policy Act of 1992 (HKPA), which was designed to ensure that Hong Kong’s status under US law would remain unchanged even after the handover from Britain to China in 1997.

Under the HKPA, the US president already had the authority to rescind Hong Kong’s distinct status “whenever” State determined that the city no longer maintained sufficient autonomy. But the HKHRDA added the requirement that State affirmatively re-certify the city’s autonomy each year. On 6 May State Department delayed issuing this annual certification, saying it wanted to see what actions China might take in the run-up to the National People’s Congress on 22 May.

Outlook for US retaliation

On its own, State’s determination does not change US policy towards Hong Kong, but it does give US President Donald Trump the option to proceed with one or both of the following actions:

  1. Sanction individual officials deemed responsible for “undermining fundamental freedoms and autonomy in Hong Kong,” using asset freezes and visa bans. Senior mainland Chinese officials and possibly also Hong Kong Chief Executive Carrie Lam would be the likely targets. This approach would follow the basic model established by the Magnitsky Act, which targeted Russian officials believed to be involved in a high-profile political assassination.
  2. Revoke Hong Kong’s distinct status under US law. The most important element is Hong Kong’s status as a distinct customs area, exempting the city from the US tariff schedule that applies to mainland China. Revoking this status would subject Hong Kong exports to the US to trade war-related tariffs and Hong Kong residents to tighter US visa requirements.

Option 1 appears likely, perhaps accompanied by some narrowly targeted sanctions on some Chinese banks, security agencies, and other government institutions. The White House may announce such measures at a press conference on China scheduled for 29 May.

But pption 2 appears unlikely for now. Revoking Hong Kong’s distinct status would inflict pain on Hong Kong’s economy and the US companies that operate there, while potentially benefiting the mainland. Given that many trade shipments that now utilize the port of Hong Kong are proceeding to or from mainland China, these shipments could be re-routed through mainland ports. Some multinational companies might also relocate regional operations from Hong Kong to Shanghai or Shenzhen, since these regional hubs largely serve China-focused business operations. Imposing the visa rules governing mainland China to Hong Kong would create new obstacles for average Hong Kongers seeking to visit the US.

Even if the Trump administration proceeds with option 2, the practical impact on foreign business would not extend much beyond tariffs and visas. Other elements of Hong Kong’s distinct status under the HKPA are mostly non-binding. For example, the HKPA says that US “businesses should be encouraged to continue to operate in Hong Kong (after the 1997 handover),” but businesses could still operate legally in the city absent such encouragement.

The nuclear option?

Separate from potential administration action, the Hong Kong Autonomy Act, which has bipartisan support in congress, would impose additional sanctions. Full details are not yet available, but in addition to sanctions on individual officials, the bill would reportedly impose “secondary sanctions” on banks that service those officials. That term suggests that sanctions on banks would be designed narrowly to enforce the “primary sanctions” targeting individuals, rather than to punish the banks themselves. If so, these sanctions would probably impose minimal disruption on foreign banks and companies operating in Hong Kong.

Given the steep downward trajectory of US-China relations, however, a maximalist approach to financial sanctions by either congress or the White House cannot be ruled out. This approach could involve replicating sanctions used against Iranian banks. The Treasury Department’s Office of Foreign Assets Control maintains a Specially Designated Nationals List of entities and individuals that are prohibited from accessing the US financial system. Iran also faces restricted access to the SWIFT system for international payments.

This approach would amount to a declaration of financial war and would impose significant disruption on US banks and companies, who have regular dealings with Chinese banks for trade finance and foreign exchange conversion, among other transactions. This approach would therefore spark significant political opposition from the US business community. From China’s perspective, a maximalist version of financial sanctions could block Chinese banks’ ability to transact in US dollars, which could cripple these banks’ ability to facilitate international trade and investment.

Though a maximalist approach is unlikely in the short term, progressively more impactful sanctions could come over the next several months, as anti-China sentiment continues to build in Washington. But these would probably be clearly signaled in advance to avoid imposing sudden disruptions on US companies.

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