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Explainer: The US treats Hong Kong as a ‘separate territory’ for trade purposes, but for how long?

Hong Kong and the United States have enjoyed a profitable relationship for decades, but events last year have raised doubts as to whether the love affair will last.

In 2017, the US was the city’s second largest trading partner in the world, with an estimated total trade volume of US$69 billion. The US also had a US$34.7 billion trade surplus in goods and services with Hong Kong – the highest in all of its trade partners.

At its root, the partnership was founded on a mutual understanding: Hong Kong was not China.

housing hong kong skyline city buildings

File photo: Joseph Chan.

Since 1992, the US has treated Hong Kong as a “separate territory in economic and trade matters.” Even after the 1997 handover of sovereignty, the US treats the city as an entity separate from mainland China when it comes to international commerce.

From Washington’s perspective, Hong Kong was economically distinct from China and therefore deserved to have its own set of rules. The United States-Hong Kong Policy Act of 1992 expresses support for the Sino-British Joint Declaration, the treaty which defines Hong Kong’s semi-autonomous nature.

The 1992 Act also states that the US has a “strong interest in the continued vitality, prosperity and stability of Hong Kong.” In particular, human rights were considered essential.

“The human rights of the people of Hong Kong are of great importance to the United States and are directly relevant to United States interests in Hong Kong,” the Act reads.

United States Capitol

United States Capitol. Photo: US Government.

The law also came with an off switch: if the US president finds that Hong Kong is “not sufficiently autonomous” to justify special treatment, the arrangement will be suspended.

To assist this determination, the US State Department reports annually to Congress and describes any significant developments in Hong Kong.

Special status in doubt

Would the US ever revoke Hong Kong’s “separate territory” status? What would it take for the US to pull the plug? Those questions moved front and centre in local politics in late 2018, following a string of high-profile incidents concerning the city’s autonomy.

Last September, the government banned the pro-independence Hong Kong National Party (HKNP) on national security grounds, the first case of its kind since the 1997 handover. A month later, the Hong Kong Immigration Department refused to renew the visa of Financial Times journalist Victor Mallet, making him the first foreign reporter to be de facto expelled from the city.

For local politicians, the tipping point was the annual report published in November by the US-China Economic and Security Review Commission (USCC).

Victor Mallet

Victor Mallet. File photo: Paul Yeung/Pool.

The USCC report is separate from the report required by the 1992 Act: it covers the entirety of China and only mentions Hong Kong in one section.

Nevertheless, the 2018 version included its fair share of warnings related to Hong Kong. The report cited a “troubling trend” of declining freedoms, and said that Beijing’s attempt to exert control has curbed the city’s autonomy.

The 2018 USCC report also took the unprecedented step of recommending that the Department of Commerce review its policy for “dual-use technology” – products and goods normally used for civilian purposes but which may have military applications – in relation to Hong Kong.

The US currently does not impose trade restrictions on dual-use technology for Hong Kong, but does so for mainland China. If this policy was changed, it would not be the same as completely revoking Hong Kong’s “separate territory” status, but it would mean Hong Kong was moving closer to China in the eyes of the US.

Chief Executive Carrie Lam has dismissed the USCC report as applying a “double standard” and using “coloured lenses” to view Hong Kong’s relationship with the central government.

“When members of the US Congress seem to propose taking back [special] treatment for trade for Hong Kong, they are potentially harming US interests,” Lam said.

Carrie Lam

Carrie Lam. File photo: Carrie Lam, via Facebook.

“I believe the US Congress and the government have to think twice when doing something that is harmful to others as well as themselves.”

Ripple effects

While the report’s recommendations have not yet been implemented in the US, the effects have already been felt in Hong Kong politics.

In an awkward episode in November, Liberal Party leader Felix Chung abruptly retreated from what many consider to be a longstanding goal of the pro-Beijing camp: the legislation of a national security law in Hong Kong.

Chung, whose party is pro-Beijing and pro-business, filed a legislative motion on November 13, calling for consultation and debate on a national security law. But less than a week later the motion was withdrawn.

Felix Chung

Felix Chung. File Photo: inmediahk.net.

Chung insisted the U-turn did not imply a change of heart, and had nothing to do with the topic of national security itself.

The problem, he said, was the ongoing trade war between China and the United States.

While the pro-Beijing camp wanted to move forward with national security legislation, Chung admitted such a move may imperil Hong Kong’s special trade status – especially if the national security law was perceived by the US as oppressive.

“I don’t want to add fuel to the fire, or give ammunition or excuses for the US to manipulate the issue… There are risks I can’t take,” Chung said.

Chung, who was elected to represent the textiles and garment functional constituency, said that his friends from the business sector had expressed reservations.

He added: “If Hong Kong is treated as just another city in China, you can say Hong Kong is finished.”

Scorched earth

While some politicians were busy balancing their conflicting loyalties, others gladly invited American intervention.

Supporters of the so-called “scorched earth” theory argued that the US, by virtue of the 1992 Act, had unique leverage over the Hong Kong government and should start using it more.

Independence advocate Andy Chan, who was also convener of the now-banned HKNP, raised this point in his speech at the Foreign Correspondents’ Club in August.

Andy Chan and Victor Mallet

Andy Chan and Victor Mallet. File photo: Pool/SCMP.

“The US, in particular, should review the conditions set out in the [US-Hong Kong Policy Act], and start sanctioning those Hong Kong government officials who trampled on our human rights,” Chan said.

Chan added that this move would also align with the self-interest of the US, given the trade war: “Many of the Chinese already store their actual capital here. If the US truly wish to deal an economic blow to China, the US-Hong Kong Policy Act should not be overlooked.”

Other independence advocates have tried to escalate domestic incidents by arguing that Hong Kong’s autonomy was affected. According to them, if the issue of autonomy was in play, it would force the US to take an active interest.

In October, the Student Independence Union joined a larger protest march to oppose a HK$100 billion land reclamation plan. After the march ended, the group moved to the US Consulate General in Central where they held an overnight petition, arguing that the US should get involved because the reclamation plan was “undemocratic” and violated human rights.

As of the start of 2019, no US report, official or elected representative has openly proposed revoking Hong Kong’s special trade status.

Race to lobby overseas

With the renewed attention on US-Hong Kong trade relations, local political parties and civil society groups have stepped up their lobbying efforts overseas.

Nathan Law and Agnes Chow of political group Demosisto visited Washington DC in early December, and met with lawmakers including Senator Marco Rubio and senior member of the House Foreign Affairs Committee Eliot Engel.

“Demosisto’s advantage is that… it was earlier in realising that international connection was core to Hong Kong’s democratic movement,” Demosisto’s Joshua Wong told HKFP.

Joshua Wong

Joshua Wong. Photo: HKFP.

The group urged US lawmakers to support the Hong Kong Human Rights and Democracy Act, a bill first introduced in 2015 by Rubio and others but has yet to be sent to the House floor.

The proposed Act would grant authority to the US government to establish “punitive measures” against Hong Kong officials who suppress basic freedoms, such as freezing their US-based assets and denying them entry to the country.

Civic Party lawmaker Dennis Kwok also made a lobbying trip to the US in December, but unlike Demosisto, he argued for keeping the existing US-Hong Kong Policy Act of 1992.

“We hope that the US government will not drastically change its policy towards Hong Kong, because to do so will push Hong Kong down the cliff, and that would basically be the end of Hong Kong as an international city,” he said.

Citing sources he met in the foreign policy sector, Kwok said the American “consensus” was that they would re-evaluate Hong Kong’s special status if the situation worsens.

There was also growing American concern about Hong Kong residents or companies being used as proxies for illicit dealings originating from China, Kwok added.

Dennis Kwok

Dennis Kwok. Photo: LegCo.

Both the pro-democracy and pro-establishment camps are gearing up to push their platforms abroad. On December 20, Democratic Party veteran Emily Lau announced that her party would form a new international affairs committee, with the goal of coordinating international outreach within the pro-democracy camp.

In response, the pro-Beijing camp has criticised democrats for “smearing Hong Kong” and asked the government to do counter-lobbying.

But if the escalation of Hong Kong politics continues, occasional trips to foreign capitals may not be enough. Joshua Wong said Hong Kong needs an equivalent of the Formosan Association for Public Affairs (FAPA), a US-based organisation that advocates for Taiwanese interests.

“In the US they have a few dozen offices, and some staff in Washington DC doing long-term lobbying work,” Wong said. “The result is a lot more robust.”

Explainer: The US treats Hong Kong as a 'separate territory' for trade purposes, but for how long?