On July 14, 2020, President Trump signed into law the bipartisan Hong Kong Autonomy Act of 2020 (the Act) and issued an executive order (E.O.), The President's Executive Order on Hong Kong Normalization. These actions are another step in the escalation of tensions between the U.S. and the People's Republic of China (China or the PRC) over multiple issues, including the ongoing U.S.-China trade war; China's treatment of ethnic Uyghurs in China's Xinjiang region and recently imposed U.S. sanctions; China's territorial claims in the South China Sea; and the potentially far-reaching Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Administrative Region (National Security Law) imposed by China on Hong Kong.
We consider how the Act and the E.O., both intended to address the National Security Law, may affect U.S. interests going forward.
Hong Kong Autonomy Act of 2020
The Act imposes sanctions on foreign individuals and entities that materially contribute to China's failure to preserve Hong Kong's autonomy, as required by the Joint Declaration, a 1984 treaty pertaining to the United Kingdom's transfer of Hong Kong's sovereignty to China, and by Hong Kong's constitution (the Basic Law).
Under the Act, the U.S. Department of State is required to report annually to Congress information about (1) foreign individuals and entities that materially contributed to China's failure to comply with the Joint Declaration or the Basic Law and, importantly, (2) foreign financial institutions that knowingly conducted a significant transaction with such identified individuals and entities. The Act mandates the president to impose blocking sanctions on individuals or entities named in the report, and to impose sanctions on financial institutions that knowingly conduct transactions with the blocked entities.
While the Act allows the president to waive or terminate the imposition of sanctions, it permits Congress to override such a waiver or termination by passing a joint resolution of disapproval, which must pass both the House and Senate by a veto-proof two-thirds majority. Concurrent with the Act's signing, the president also issued a statement, signaling that the congressional veto provision would be treated solely as "advisory and nonbinding."
The Act is expected to create significant challenges for non-U.S. financial institutions with a presence in Hong Kong and China. Such institutions may be faced with "secondary sanctions" imposed by the U.S. for dealing with designated individuals and entities. Simultaneously, the institutions may be prohibited from cutting ties with such designated persons pursuant to the National Security Law, which prohibits receiving "instructions, control, funding or other kinds of support from a foreign country" if pursuing actions against the interests of China and Hong Kong.
Executive Order on Hong Kong Normalization
The July 14, 2020 E.O. on Hong Kong Normalization follows a May 29, 2020 E.O. wherein the president directed various U.S. executive departments and agencies to begin the process of eliminating policy exemptions under U.S. law that had given Hong Kong preferential treatment versus that afforded to China.
This new E.O. further underscores and reaffirms that it is now "the policy of the United States to suspend or eliminate different and preferential treatment for Hong Kong to the extent permitted by law and in the national security, foreign policy, and economic interest of the United States," i.e., Hong Kong will receive the same treatment under the law as China.
The E.O. announces that the U.S. will no longer adhere to the U.S.-Hong Kong extradition agreement, in effect since 1998, and will also move to eliminate preferences for Hong Kong passport holders, as compared to those holding Chinese passports, in visa and immigration matters.
Importantly, within 15 days, the heads of federal agencies must commence actions to:
- Amend U.S. regulations, including the International Traffic in Arms Regulations and Export Administration Regulations, among others, which provide different treatment for Hong Kong as compared to China;
- Revoke license exceptions for exports to Hong Kong, reexports to Hong Kong, and transfers (in-country) within Hong Kong of items subject to the Export Administration Regulations, 15 CFR Parts 730-774, that provide differential treatment compared to exports and reexports to China; and
- Terminate the export licensing suspensions insofar as such suspensions apply to exports of defense articles to Hong Kong persons who are physically located outside of Hong Kong and the PRC and who were authorized to receive defense articles prior to the date of the order.
Additionally, under the E.O., blocking sanctions shall be imposed on any foreign persons determined to be or have been involved, directly or indirectly, in the development and implementation of the National Security Law or have taken actions to undermine democratic processes or institutions in Hong Kong. These determinations will be made by the U.S. Secretary of State in consultation with the Secretary of the Treasury, or vice versa.
What's Next?
As previously noted, given the significant number of U.S. companies that have regional headquarters in the territory, the practical impact of the change to Hong Kong's status will be far reaching. Furthermore, China has announced that it intends to retaliate against the U.S. over these measures, but no details have yet been announced. Retaliatory Chinese actions could also likely affect U.S. businesses operating in China and Hong Kong.
To date, these steps by the U.S. appear to be unilateral. While other countries, including EU member countries, have condemned or expressed increasing frustration over China's recent actions, there does not appear to be a consensus with regard to imposing sanctions or altering trade relations with China. However, recent actions may signal a change, as noted in the reversal from prior policy by the United Kingdom, which announced it is banning Chinese tech giant Huawei from its 5G telecom network.
We continue to monitor updates on this rapidly developing issue. If you have questions as to how these changes may impact your global operations, please contact our International Trade Group. We stand ready to assist you in analyzing the possible impact on your business and to develop solutions to address these changes.