New Trade Reality: US Termination of Hong Kong’s Differential Treatment

On 14 July 2020 the US President signed into law an amended version of the Hong Kong Autonomy Act (H.R.7440) that expands the range of foreign persons and financial institutions in Hong Kong and mainland China potentially subject to US sanctions. The US Department of Commerce (DOC) also suspended the availability of export licence exceptions for items subject to the Export Administration Regulations (EAR), and an Executive Order on Hong Kong Normalization (EO) was put into effect to suspend the application of section 201(a) of the United States-Hong Kong Policy Act of 1992 with respect to various US statutes.

Additionally, the EO blocks exports of property and interests in property of specified persons who are currently in or come within (i) the US or (ii) the possession or control of any US person. This primarily applies those involved in developing or implementing the new mainland Chinese law, or who have undermined democratic processes in Hong Kong, as well as those who have aided them.

The US President stated that under this EO there will be: “…no special privileges, no special economic treatment, and no export of sensitive technologies…” for Hong Kong, which the US will now treat the same as mainland China. For example, the US State Department’s Directorate of Defense Trade Controls indicated that as a result of these changes Hong Kong is now treated the same as mainland China under section 126.1(d)(1) of the International Traffic in Arms Regulations. This means that there is a presumption of denial for export licence requests where a Hong Kong person is named as an end-user, licensee (signatory) or sublicensee, or where Hong Kong appears as a marketing, transfer, re-transfer, re-export, sales or distribution territory.

Changes that US government agencies will have to make in order to implement the export controls provisions of the EO include revoking licence exceptions for exports to Hong Kong, re-exports to Hong Kong and transfers (in-country) within Hong Kong of items subject to the EAR that provide differential treatment compared to those licence exceptions applicable to mainland China. For example, the DOC had already suspended such licence exceptions as of 30 June 2020. As a result, the following licence exceptions will no longer be available for exports to Hong Kong.

The full impact of the EO will become clearer in the days and weeks ahead as US government agencies begin to implement its various provisions. For example, the termination of Hong Kong’s differential treatment for purposes of US origin marking requirements for imported articles and containers (as stipulated under section 1304 of title 19, US Code) will require goods that originate in Hong Kong to be marked as made in China. It also appears that, as a result of this change, US imports of Hong Kong-origin goods would face the same additional tariffs faced by mainland China-origin goods under Section 301 of the 1974 Trade Act – covering mainly electronics, electricals and machinery from HS Chapters 84 and 85.

The regulations effecting this change have not been issued, so the full extent of the impact is not clear. The immediate impact is not estimated to be significant with regard to trade, given the fact that most of Hong Kong’s exports to the US are re-exports of non-Hong Kong origin products and Hong Kong’s domestic exports (i.e. those bearing a “Made in Hong Kong” mark) to the US accounted for only 0.1% of Hong Kong’s total exports, or around 1% of the city’s total exports to the US in 2019.

As regards the tightening of export controls, such as the suspension of US export licences, the types of products that will likely be most affected include computer chips, encryption items and dual-use technology (i.e., technology that has both civilian and military applications). The new export limitations could have an implication on US semiconductor firms, which will now be barred from sending products to or sharing certain high-tech information with Hong Kong. In a similar vein, the US State Department banned exports of US-origin defence equipment to Hong Kong starting 30 June 2020 and is taking steps toward imposing the same restrictions on exports of US defence and dual-use technologies to Hong Kong as it does for such exports to mainland China, as elaborated in the New Trade Reality: Tightened US Export Controls article.

Below are more details about the major changes stipulated under the EO.

US Executive Order on Hong Kong Normalization

The 14 July 2020 EO suspends the application of section 201(a) of the United States-Hong Kong Policy Act of 1992 with respect to the following statutes, which means that Hong Kong will now be treated the same way as mainland China for purposes of such statutes:

• section 1304 of title 19, US Code – marking of imported articles and containers;

• section 103 of the Immigration Act of 1990 – separate treatment of Hong Kong for purposes for numerical limitations on immigration from foreign states;

• sections 203(c), 212(l) and 221(c) of the Immigration and Nationality Act of 1952, as amended – diversity immigrants visa allotment, Guam and Northern Mariana visa waiver programme, and visa period of validity, renewals and replacements;

• Arms Export Control Act, which authorises the President to control the import and export of defence articles and defence services;

• section 721(m) of the Defense Production Act of 1950, as amended – annual report to Congress on all notices filed and all reviews or investigations of covered transactions completed during the review period; and

• Export Control Reform Act of 2018, which authorises the President to control (i) the export, re-export and transfer of items, and (ii) the activities of US persons, wherever located, relating to specific nuclear explosive devices, missiles, chemical or biological weapons, whole plants for chemical weapons precursors, foreign maritime nuclear projects and foreign intelligence services.

The EO instructs federal agencies to commence no later than 29 July 2020 (i.e. within 15 days of the date of the EO) all appropriate actions to further the purposes of the EO, including by:

• amending any regulations implementing any of the aforementioned provisions consistent with applicable US law and EOs that provide different treatment to Hong Kong as compared to mainland China;

• amending the regulation at 8 CFR 212.4(i) to eliminate the preference for Hong Kong passport holders as compared to mainland China passport holders;

• revoking licence exceptions for exports to Hong Kong, re-exports to Hong Kong and transfers (in-country) within Hong Kong of items subject to the EAR that provide differential treatment compared to those licence exceptions applicable to exports to mainland China, re-exports to mainland China and transfers (in-country) within mainland China;

• consistent with section 902(b)(2) of the Foreign Relations Authorization Act for fiscal years 1990 and 1991, terminating the export licensing suspensions under section 902(a)(3) of such act insofar as such suspensions apply to exports of defence articles to Hong Kong persons who are physically located outside of Hong Kong and mainland China and who were authorised to receive defence articles prior to 14 July 2020;

• giving notice of intent to suspend the US-Hong Kong agreements for the surrender of fugitive offenders and the transfer of sentenced persons;

• taking steps to end the provision of training to members of the Hong Kong Police Force or other Hong Kong security services at the Department of State’s international law enforcement academies;

• suspending continued co-operation undertaken consistent with the now-expired Protocol Between the US Geological Survey of the Department of the Interior of the United States of America and Institute of Space and Earth Information Science of the Chinese University of Hong Kong Concerning Scientific and Technical Cooperation in Earth Sciences;

• taking steps to terminate the Fulbright exchange programme with regard to mainland China and Hong Kong with respect to future exchanges for participants travelling both from and to mainland China or Hong Kong;

• giving notice of intent to terminate the agreement for the reciprocal exemption with respect to taxes on income from the international operation of ships effected by the exchange of notes between the US and Hong Kong governments;

• reallocating admissions within the refugee ceiling set by the annual presidential determination to residents of Hong Kong based on humanitarian concerns, to the extent feasible and consistent with applicable law; and

• proposing any further actions deemed necessary and prudent to end special conditions and preferential treatment for Hong Kong.