'One Country Two Systems' principle ends: HK = China Customs Territory - Impact on Trade

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Hong Kong Trade matters for the U.S. and the EU. Hong Kong, a former British colony that returned to Chinese rule in 1997, has seen widespread demonstrations since June, some of which have led to violent clashes between protesters and the police. This provoked a the People’s Republic of China (P.R.C.) National People’s Congress to unilaterally and arbitrarily impose national security legislation on Hong Kong. which resulted in backlash by the U.S. and strong words from the E.U.


What is the US reaction?


President Trump announced May 29 a change in U.S. policy that will have a significant impact on imports from and exports to Hong Kong. The U.S. believes that Beijing’s disastrous decision is only the latest in a series of actions that fundamentally undermine Hong Kong’s autonomy and freedoms and China’s own promises to the Hong Kong people under the Sino-British Joint Declaration, a UN-filed international treaty.


What is the EU's reaction?


The EU expressed its grave concern at the steps taken by China on 28 May, which are not in conformity with its international commitments (Sino-British Joint Declaration of 1984) and the Hong Kong Basic Law. This risks to seriously undermine the 'One Country Two Systems' principle and the high degree of autonomy of the Special Administrative Region of Hong Kong.


"EU relations with China are based on mutual respect and trust. This decision further calls into question China’s will to uphold its international commitments. We will raise the issue in our continuing dialogue with China".


Hong Kong Trade Matters for both the EU and the U.S.

U.S. goods and services trade with Hong Kong totaled an estimated $66.9 billion in 2018. Exports were $50.1 billion; imports were $16.8 billion. The U.S. goods and services trade surplus with Hong Kong was $33.4 billion in 2018. ... Goods exports totaled $37.3 billion; goods imports totaled $6.3 billion.


Hong Kong was the EU's 20th largest trading partner in goods in 2018 and ranked as the EU's 8th trading partner in Asia. The EU is Hong Kong's second major trade partner after China. ... The main areas of EU-Hong Kong trade in services are air transport and transportation, business and financial services.


Who does Hong Kong trade with?

The major trading partners of Hong Kong are China, the United States, Japan, the United Kingdom, and Taiwan. Its main export destinations in 1999 were China (33.4 percent), the United States (23.8 percent), Japan (5.4 percent), and the UK (4.1 percent).


What are Hong Kong's exports?

Hong Kong exports mainly electrical machinery and appliances, textiles, apparel, watches and clocks, toys, jewellery, goldsmiths' and silversmiths' wares, and other articles of precious or semi-precious materials.


What actions are we expecting the U.S. to take?

The President mentioned two initiatives that he would like his administration to take:


1. To revoke the U.S. treatment of Hong Kong as a separate customs territory.


The consequences would, most likely be:


  • The Section 301 additional tariffs on Chinese goods would then apply to Hong Kong, too. Many more product exclusions would not be needed.

  • Hong Kong would be covered by U.S. antidumping and countervailing duties on goods from China.

  • Country of origin labelling on goods made in Hong Kong would need to change

  • The issuance and validation of U.S. statements or certificates of origin and other trade documents issued by Hong Kong authorities may need to change

  • There would also be consequences for banking and finance operations, taxation provisions in place with respect to Hong Kong, and the status of Hong Kong-flagged ships and aircraft.


2. U.S. Export Controls

The U..S. will modify its controls on exports of dual-use technologies to Hong Kong. While the president did not say so specifically, this is expected to mean the imposition of tighter restrictions on such exports.


Other changes

The president also announced other changes that will or may affect travel, visas, university research, Chinese companies listed on U.S. stock exchanges, and Chinese and Hong Kong officials involved in eroding Hong Kong’s autonomy.


Conclusion

Time for businesses that trade with Hong Kong to take a closer look at the impact of bringing Hong Kong back into the customs territory of China on trade flows, customs clearance, trade document validity and export control impact.

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