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Will US continue to treat Hong Kong as a separate territory from China from the trade and economic perspectives?

 

By Anna Chan and Victor Ng

 

Introduction

Very recently, US Senator Ted Cruz has introduced a bill to amend the US-Hong Kong Policy Act 1992 (the “Amendment Bill”), posing threats to trade and finance ties between Hong Kong and the US.

The purpose of this article is to explore, from a legal point of view, the US-Hong Kong Policy Act 1992 (the “Policy Act”), the Amendment Bill, as well as the potential impact to Hong Kong if any of the Amendment Bill is passed.

 

Background of the Policy Act

Handover of Hong Kong from Great Britain to China in 1997

Following the Sino-British Joint Declaration of 1984 (“Joint Declaration”), the US government passed the Policy Act where it is stated that in recognition of the Joint Declaration and the freedoms and rights guaranteed therein, the US shall seek to form bilateral ties and enter into agreements with Hong Kong in inter alia economic, trade and financial areas.

The legal significance of the Policy Act are as follows:-

  • declaring the official position of US vis-a-vis the status of Hong Kong pre and post 1997;
  • imposing a duty on the US Secretary of State to report to the two US congressional bodies on the conditions of Hong Kong in certain years; and
  • endorsing the Joint Declaration and seeking assurances that the Joint Declaration would be implemented both in spirit and letter.

 

The Policy Act

Key provisions

The Policy Act is divided in four main parts: (1) the Findings and Declarations, (2) Policy, (3) the Status of Hong Kong in US Law and (4) Reporting Provisions.

(1) In Findings and Declarations, the Act declared inter alia the continuation in force of existing agreements with Hong Kong, ICCPR and ICESC as of date of handover, the support for the Joint Declaration, and the constitution of the Hong Kong Legislature by elections.

(2) In Policy, the US guarantees the continual ties with Hong Kong in various areas of cooperation including trade, commerce, transportation, cultural and educational exchanges and in particular the recognition of passports and travel documents issued after June 30 1997 by the Hong Kong Special Administrative Region.

(3) In the Status of Hong Kong in US Law, the Policy Act declared the continual application of US laws with respect to Hong Kong as was the case prior to the handover, approving the continuation of force of all treaties and international agreements entered into between the US and Hong Kong.

(4) In Reporting Provisions, there is a requirement of reporting Hong Kong conditions to congressional committees which may affect US interest in Hong Kong. The reporting period is defined as “not later than March 31 2019, and annually thereafter through 2024”.

Apart from the above, an important point to note is that the Policy Act made provision for a Presidential Order such that the President of the US is given the power to issue an Executive Order suspending the application of the Policy Act or any part thereof if he or she determines that Hong Kong is not or has become not sufficiently autonomous.

 

The Amendment Bill

Timeframe for a bill to become a Law in the US

The Amendment Bill would need to undergo the following process before it becomes a Law in the US:-

  • Review by a committee before the bill is to be sent to the House or Senate floor for debate.
  • Congress debates and votes: Member of the House or Senate is to debate on the bill and propose changes or amendments before voting.
  • Presidential Action: If President signs and approves the bill, the bill is law.

While there is no set timeframe in relation to each step, with currently thousands of bills being introduced in the House and the Senate, it is expected the Amendment Bill will not be passed and implemented very shortly.

Potential implications if the Policy Act has been revoked or if there has been any amendments to the Policy Act

Hong Kong has currently been given a special status under the Policy Act to be treated separately from China including the following:-

  • The US should treat Hong Kong as a separate customs territory.
  • The US should treat Hong Kong as a separate territory in economic and trade matters, such as import quotas and certificates of origin.
  • The US should continue to support access by Hong Kong to sensitive technologies so long as the US is satisfied that such technologies are protected from improper use or export.
  • The continuation of all treaties and other international agreements entered into between the US and Hong Kong or entered into before 1 July 1997 between the US and the United Kingdom and applied to Hong Kong, unless or until terminated in accordance with the applicable law.

Without the shield of the Policy Act, Hong Kong could potentially be affected by the US-China trade war such as the implications of China-specific tariffs on goods exported from Hong Kong to the US:-

  • With the US being the Hong Kong’s second largest trading partner in the world accounting for US$42 billion or 9% of the total value in 2017 and having substantial inward direct investment in Hong Kong (the position of inward direct investment from the US amounted to US$40.5 billion at market price as at the end of 2016), the impact of the revocation of the Policy Act or any amendment to the Policy Act from the economic perspective would be far-reaching.
  • For instance, tariffs of exporting goods from Hong Kong to US could potentially face the same penal rate at 25% as applicable to exported Chinese goods in the US at present. This would hit badly on industries such as electrical machinery, telecommunications, sound recording and reproducing equipment, jewelry, and apparel, which represents Hong Kong's major export items to the US in 2017.
  • Technology companies and companies required advanced technology from US may also take a toll as cloud-based technology,
  • Artificial Intelligence and powerful computer ships may stop being exported to Hong Kong.

 

Conclusion

It remains to be seen whether the Amendment Bill will be passed. Nevertheless, as the consequences of its implementation would have far-reaching detrimental impact on Hong Kong economy at least in relation to the US, close attention should be paid to its continual development.

 

OLN provides a full range of tax and advisory services. If you have any questions on the above or other tax questions, please contact a member of the Tax Advisory Team.

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