America’s declaration that Hong Kong is to lose its special status is a setback for the industry

By Carly Fields,

The US Secretary of State’s proclamation that Hong Kong will no longer benefit from autonomy from China delivers a blow to port, shipping services and logistics, according to ING’s chief economist in Greater China, Iris Pang.

Last week, Michael Pompeo announced that, under US law, Hong Kong should not be treated the same today as it was when those laws were first applied. The US-Hong Kong Policy Act of 1992 gave Hong Kong favourable trading terms with the US through an act that identified Hong Kong as a separate customs territory from Mainland China.

 

Mr Pompeo’s declaration was based on China’s National People’s Congress’ stated intention to unilaterally and arbitrarily impose national security legislation on Hong Kong, a “disastrous” decision that he saw as “only the latest in a series of actions that fundamentally undermine Hong Kong’s autonomy and freedoms”. The move also, in his view, flies against China’s own promises to the Hong Kong people under the Sino-British Joint Declaration, a United Nations-filed international treaty.

 

“No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” he said. “While the United States once hoped that free and prosperous Hong Kong would provide a model for authoritarian China, it is now clear that China is modelling Hong Kong after itself.”

 

Trade detail

 

While the details of the move currently lack detail, ING’s Ms Pang says that port, shipping services and logistics will certainly be affected by the removal of the special status, although she caveats that they were already in “bad shape” as a result of the trade war between China and the US.

 

As Hong Kong has virtually no manufacturing sector one of the most critical impacts on trade relate to Hong Kong’s role as a re-export centre.

Ms Pang explains how this important trade could be affected by the removal of the special status.

 

“There is a ‘first-sales rule’ that makes Hong Kong more important to Mainland China during the trade war. According to the Hong Kong Trade Development Council, the use of the first-sales rule has risen a lot since the trade war between the US and China,” she says.

 

“With the first-sales rule, exports to the US that go through more than one location will be charged duties based on the price of the initial sales. For example, when a Chinese exporter sells goods to a Hong Kong re-exporter at a lower price, then the Hong Kong re-exporter (eg, a subsidiary of the Mainland China company located in Hong Kong) sells at a higher price to a US importer, the tariff will be based on the first transaction. As such, the tariff paid could be lowered when there is a throughput via Hong Kong.

 

“When Hong Kong’s special status is removed, a Hong Kong re-exporter might not be treated as a ‘second leg’ of the export to the US. Mainland China’s exports will search for another ‘second leg’.”

 

The Hong Kong Trade Development Council calculated that around 8% of Mainland China’s exports to the US, and around 6% of Mainland China’s imports from the US, went through Hong Kong in 2018.

 

Seeking Retribution

 

A second concern for trade is how Mainland China might shape its retaliation. ING moots the possibility of a mix of economic and political policies toward the US in reprisal. There is still also an unknown on how the US will shape its own policies towards Hong Kong after the removal of the special status. And the ongoing US-China trade war will also continue to damage trade relations with Hong Kong.

 

Hong Kong’s exports to the US were around US$39 billion in 2019, amounting to 7.6% of Hong Kong’s total exports, according to ING data. This was already down 15% of the total in 2018. On the flipside, US imports into Hong Kong were around US$27.3 billion, equivalent to less than 5% of Hong Kong’s total imports in 2019, and down about 8% from 2018. “These falls in trade flows were mostly due to the trade war between China and the US,” says Ms Pang.

 

In a brighter note, Ms Pang said she did not believe that the removal of special status would have a meaningful impact on US companies setting up regional offices in Hong Kong – US companies are currently at the top of the list of businesses with regional headquarters in Hong Kong. ING states that in 2019, Hong Kong had 278 regional headquarters of US companies, equivalent to 18% of Hong Kong’s total regional headquarters. However, Ms Pang notes that “an intensification of the trade and technology war” between China and the US could gradually change this landscape. The trade war has already increased the hurdles of US companies doing business with Mainland China, reducing the need for a treasury centre in Hong Kong. That gap is expected to be filled by Mainland China companies. “In this sense, the trade war could lead to the Hong Kong economy relying more on Mainland China. In a few years’ time, there could be more Mainland China companies headquartered in Hong Kong than US firms,” she predicts.

 

While Mr Pompeo’s statement was lacking in operational detail, the special status removal is illustrative of the increasingly fractious geopolitical tension between the US and China. And trade, and by association shipping, looks set to be the victim once again.