Significant Changes Impacting U.S.-Hong Kong Trade
Time to read: 4 minutes
Hong Kong’s long-time special treatment in U.S. trade relations is changing almost thirty years ahead of schedule. In mid-July, Executive Order 13936 suspended Hong Kong’s special status and began the process of reintegrating the territory with mainland China. The rapid unwinding of Hong Kong’s separate treatment will have significant repercussions on all aspects of U.S.-Hong Kong trade. Importers and exporters are likely to confront additional compliance issues and increased risk of import duty liability.
Since China’s reassertion of sovereignty over Hong Kong in 1997, the U.S. had maintained a “one country, two systems” policy with regard to the two territories. The policy recognized that the agreement returning sovereignty from the United Kingdom to China permitted Hong Kong to retain a significant degree of autonomy until at least the year 2047. The U.S. therefore continued to accord Hong Kong separate status from mainland China in U.S. trade regimes. Imports of goods made in Hong Kong were marked as such. The U.S. Department of Commerce considered Hong Kong to be “a separate Customs territory within the [People’s Republic of China]” for the purpose of antidumping and countervailing duty investigations, such that U.S. imports of Hong Kong-manufactured merchandise were not subject to antidumping and countervailing duties imposed on the same products from mainland China. Section 301 duties were not collected on exports from the territory. And economic sanctions and export control laws were applied to Hong Kong differently than mainland China.
However, mainland China’s unilateral imposition of a security law over Hong Kong led the U.S. State Department to conclude in May 2020 that Hong Kong was no longer sufficiently autonomous to warrant continued special treatment. On July 14, 2020, Executive Order 13936 on Hong Kong Normalization suspended application of section 201(a) of the Hong Kong Policy Act of 1992 (as amended by the Hong Kong Human Rights and Democracy Act of 2019), the primary legal provision through which Hong Kong was accorded special treatment. U.S. government agencies were instructed to “commence all appropriate actions to further the purposes of this order” within 15 days.
Despite the clear directive that changes to the Export Control Reform Act of 2018 and accompanying regulations be made within that time frame, Commerce has yet to amend its export regulations, which currently treat Hong Kong as a separate and less-restricted export destination from mainland China. In the import realm, U.S. Customs and Border Protection notified the public that, effective September 25, 2020, “imported goods produced in Hong Kong… may no longer be marked to indicate ‘Hong Kong’ as their origin, but must be marked to indicate ‘China.’” The effective date of that instruction has since been extended to November 9, 2020.
Notwithstanding Customs’ action regarding marking, it remains unclear whether additional duties on Chinese imports will soon also apply to imports from Hong Kong. For the time being, Customs has indicated that although goods will be marked “Made in China,” the goods will still be of Hong Kong origin for the purpose of determining duties under Chapter 99 of the Harmonized Tariff Schedule of the United States. Thus, for now, imports from Hong Kong are not subject to the Section 301 duties currently imposed in amounts up to 25 percent on $550 billion in Chinese exports. However, Section 3(l) of Executive Order 13936 permits Customs or the U.S. Trade Representative “propose for [the Administration’s] consideration any further actions deemed necessary and prudent to end special conditions and preferential treatment for Hong Kong, which could include removing that country of origin distinction in the future. Similarly, Commerce currently maintains more than 200 antidumping and countervailing duty orders on various products from China, with duty rates ranging from de minimis to over 1700 percent. The termination of Hong Kong’s treatment as a separate Customs territory could result in Hong Kong exports becoming subject to those duties.
Of course, “normalization” of the U.S.’s treatment of Hong Kong comes at a time that the U.S.-China trade relationship is anything but normal. U.S. findings of Chinese differential market access, intellectual property theft, and other unfair trade practices led to the imposition of Section 301 duties on Chinese exports to the U.S in late 2018; China retaliated with duties on U.S. exports. The Phase 1 deal reached in early 2020 was intended to alleviate the tension, but China almost immediately fell behind its minimum purchasing commitments, and it is unclear whether China will be able to regain ground and meet those commitments by the end of 2020. The COVID-19 pandemic’s disruption of supply chains and recent U.S. restrictions on Chinese technology giants ZTE and Huawei have further strained the countries’ trading relationship. How the termination of separate treatment for Hong Kong will further affect the two countries’ trade relationship remains to be seen.
September 1, 2020