[Analytics] What it means for investors if Hong Kong loses its special status with the US
On Wednesday, U.S. Secretary of State Mike Pompeo told Congress that Hong Kong was no longer highly independent from China, given that the proposed law would effectively bypass the city’s legislature. Hong Kong’s trade with the U.S. would suffer a significant impact, if tariffs were to be imposed. U.S. goods and services trade with Hong Kong were more than $66 billion in 2018, according to the Office of the U.S. Trade Representative. The international community’s perception of Hong Kong as an autonomous and attractive place to do business could be affected. Weizhen Tan specially for the CNBC.
Hong Kong’s special status with the U.S. now appears to be under threat, as U.S.-China tensions ramped up after Beijing proposed a new security law for the Chinese special administrative region.
On Wednesday, U.S. Secretary of State Mike Pompeo told Congress that Hong Kong was no longer highly independent from China. He pointed to Beijing’s proposed law that would effectively bypass Hong Kong’s legislature, reigniting concerns over the city’s diminishing freedoms.
“No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” Pompeo said in a statement.
A U.S. law, passed last year, requires that Hong Kong retains enough autonomy to qualify for a favorable trading relationship with the U.S. The city has so far been exempted from tariffs that the U.S. has imposed on China as part of the trade war between the two countries.
Here’s what it means if Hong Kong loses its special status.
Impact on U.S. trade with Hong Kong
Hong Kong’s trade with the U.S. would suffer a significant impact if tariffs were imposed.
U.S. goods and services trade with Hong Kong totaled more than $66 billion in 2018, according to the Office of the U.S. Trade Representative (USTR). U.S. exports to Hong Kong were $50.1 billion, while imports were $16.8 billion, according to the data.
Hong Kong was America’s third-largest market for wine exports, fourth-largest market for beef and seventh-largest for agriculture products in 2018, according to the city’s trade and industry department.
Top goods imported from Hong Kong include machinery and plastics, according to the USTR.
“A greater risk is that loss of special status leads the US to restrict sales of sensitive technologies to Hong Kong firms,” Mark Williams, chief Asia economist at Capital Economics, wrote in a note that was sent out on Thursday morning.
“Knowledge-intensive products from the US only make up around 5% of Hong Kong’s total imports. But restricting the ability of Hong Kong-based firms to source sensitive products would remove one of Hong Kong’s distinct advantages as a business location relative to mainland China,” he wrote.
There are more than 1,300 U.S. companies operating in Hong Kong, as well as 85,000 Americans living in the city, according to the U.S. State Department.
The international community’s perception of Hong Kong as an autonomous and attractive place to do business could be affected.
“Recent surveys by the American Chamber of Commerce show that US firms already plan to scale back their investments in the city,” Capital Economics said. “Much of Hong Kong’s success is based on its ability to attract FDI and enjoy the productivity dividends that come from hosting internationally-competitive firms.”
In a statement on Tuesday, the U.S. Chamber of Commerce said that Hong Kong’s autonomy under the “one country, two systems” framework has “long been among its greatest assets” in forming its transparent, rules-based economy.
“It would be a serious mistake on many levels to jeopardize Hong Kong’s special status, which is fundamental to its role as an attractive investment destination and international financial hub,” it wrote, urging the Trump administration to prioritize a positive relationship with Hong Kong.
Currently, Americans also enjoy visa-free travel to the Chinese territory. But visa restrictions could kick in if those tensions worsen, analysts said.
“Pompeo’s decision open(s) the door for possible tariffs on imports from Hong Kong, visa restrictions or asset freezes for top officials. China has previously warned it would retaliate if the US interfered in its affairs,” Rodrigo Catril of National Australia Bank wrote in a note on Thursday morning.
No impact on Hong Kong’s global trade status
While revoking the city’s special status with the U.S. could have far-reaching consequences, doing so “would have no direct impact on Hong Kong’s international status,” said Capital Economics.
The city would 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.
Of course, the U.S. is unlikely to be deterred by those WTO rules if it considers slapping tariffs on the city, the research firm said.
CNBC’s Tucker Higgins contributed to this report.