The Party Is Over: U.S. Ends Preferential Treatment for Hong Kong, Marking Major Shift in Trade Relations

4 min

On May 27, 2020, U.S. Secretary of State Mike Pompeo informed Congress that the Special Administrative Region of Hong Kong (Hong Kong) is no longer autonomous from the People's Republic of China and, as a result, "does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997." This pronouncement was followed by President Trump's announcement during a May 29, 2020 press conference that the U.S. will begin eliminating the full range of policy exemptions that give Hong Kong different treatment from that given to China. These moves mark a major shift in how the U.S. government will apply various trade, foreign investment, national security, and diplomatic laws and regulations to entities and individuals doing business in Hong Kong.

Under the United States-Hong Kong Policy Act of 1992, the U.S. president has the right to revoke Hong Kong's special trade status whenever the president determines that Hong Kong is not "sufficiently autonomous" to justify treatment under U.S. law. In his May 29 announcement, President Trump made clear that his decision would affect the full range of agreements that the U.S. has with Hong Kong, including those related to export controls administered by the U.S. Department of Commerce, Bureau of Industry and Security (BIS), which impose various restrictions on U.S. exports, re-exports, and transfers of high-tech products, among others, to end-users in China, as well as the U.S. extradition treaty with Hong Kong. President Trump also stated that his administration would begin imposing sanctions on government officials in Hong Kong and the People's Republic of China who were identified as responsible for eroding Hong Kong's freedom and autonomy, and would establish a working group to study the business practices used by Chinese companies listed on U.S. stock exchanges.

Under the Hong Kong Democracy Act, the president has broad authority to tailor any measure to alter Hong Kong's status under U.S. laws. Rather than using narrowly drawn sanctions or other measures as some expected, President Trump appears to be intent on deploying the full array of available restrictive measures in response to Secretary Pompeo's determination on Hong Kong's autonomy. The scope of and pace at which changes to U.S.-Hong Kong trade relations occur will become clearer in coming days, but businesses can be certain that the numerous restrictions and trade conditions that previously affected only China are now expected to extend to Hong Kong as well, including the numerous and far-reaching trade tariffs imposed by the Trump administration under Section 301 and Section 232 of the Trade Act of 1974. This shift in the U.S. treatment of Hong Kong will also affect the application of Committee on Foreign Investment in the United States (CFIUS) regulations, whose various reporting and declaration requirements are linked to country-specific restrictions, including export controls. Businesses will also need to be aware of their compliance obligations under BIS regulations and be alert for additional sanctions announcements.

Given the hundreds of U.S. companies that have regional headquarters in the territory, the practical impact of this change to Hong Kong's status will be profound for global business. Hong Kong also serves as a global financial hub, and while a major change in U.S.-Hong Kong trade relations will be significant, the territory will still be treated as an independent customs territory by the World Trade Organization, and as a separate entity by other institutions such as the International Monetary Fund and the World Bank. Thus far, other countries that have condemned or expressed concern over China's recent actions, including the United Kingdom, Germany, and several other EU countries, have indicated that they do not intend to impose sanctions or dramatically alter their trade relations with China.

It is critical that U.S. businesses whose supply chains run through Hong Kong understand the full ramifications of this announcement for their operations. We are continuing to monitor updates on this rapidly developing issue. Please contact our International Trade team with any questions you may have.