On May 29, 2020, the president announced in a White House press conference the Administration’s determination that Hong Kong is no longer sufficiently autonomous from the People’s Republic of China (“PRC”), and that the US Government would take “strong and meaningful” steps to “begin the process” of reviewing and revoking the “full range of agreements” that currently provide Hong Kong with preferential treatment under US law. This determination follows Secretary of State Michael Pompeo’s certification to Congress on May 27, 2020, that Hong Kong no longer maintains a sufficient degree of autonomy from the PRC to warrant special treatment by the United States. The president’s announcement and Secretary Pompeo’s certification were made in response to the May 28, 2020, decision of the PRC National People’s Congress to draft national security legislation for Hong Kong.
These actions by themselves do not have any immediate impact on the treatment of Hong Kong for trade or other purposes and there is no timeline for further action. However, there are several key areas that could be implicated in the coming months as a result of this determination.
Under the United States-Hong Kong Policy Act of 1992 (the “Hong Kong Policy Act”), Hong Kong is provided “different” treatment by the US Government than that of the PRC so long as Hong Kong remains “sufficiently autonomous” under the “one country, two systems” principle. This includes special treatment in areas including but not limited to customs tariffs, export controls, immigration, foreign investment, and extradition. The Hong Kong Policy Act directs the US Secretary of State to submit annual reports to the appropriate congressional committees on conditions in Hong Kong of interest to the United States, including matters relevant for the purposes of determining whether Hong Kong remains “sufficiently autonomous” from the PRC. In conjunction with the annual report and pursuant to amendments to the Hong Kong Policy Act made by the Hong Kong Human Rights and Democracy Act of 2019 passed into law in November 2019, the Secretary of State is also required to issue an annual certification to Congress that indicates, amongst other things, whether Hong Kong continues to warrant its preferential treatment under US law.
Secretary Pompeo delayed submitting the annual report this year to allow him time “to account for any additional actions that Beijing may be contemplating in the run-up” to the PRC’s May 22 National People’s Congress “that would further undermine the people of Hong Kong’s autonomy.” Then, on May 27, 2020, Secretary Pompeo certified to Congress that Hong Kong no longer warrants different treatment from the PRC. On May 28, 2020, the State Department issued the 2020 Hong Kong Policy Act Report, which, among other things, concluded that “China has shed any pretence that the people of Hong Kong enjoy the high degree of autonomy, democratic institutions, and civil liberties guaranteed to them by the Sino-British Joint Declaration and the Basic Law.”
No Immediate Impact or Timeline
The president’s statement and Secretary Pompeo’s certification by themselves make no immediate change to Hong Kong’s status under US law. Under section 201(a) of the Hong Kong Policy Act, US laws will continue to apply to Hong Kong in the same way as before the transfer of sovereignty over Hong Kong in 1997 unless expressly changed by “law or executive order.” Pursuant to Section 202 of the Hong Kong Policy Act, whenever the president “determines” that Hong Kong is not sufficiently autonomous to justify different treatment from that accorded the PRC under a particular US law, the president “may” suspend the application of such law or part thereof through executive orders. Any executive order must be published in the Federal Register specifying the law or provision of law being affected by the order.
The Hong Kong Policy Act does not provide a timeline for issuance of any executive orders following a presidential determination. Executive orders, if and when issued to effect changes, may be issued with immediate effect (although an order may include a “savings clause” window to complete transactions in progress) or to take effect after a certain period of time.
Potential Actions Affecting Hong Kong
The president has full discretion as to whether and to what extent to reduce Hong Kong’s special status. Possible options under the Hong Kong Policy Act and under other US measures based on their explicit mention in the president’s statement include the following:
- Stricter Export Controls: Hong Kong’s status under US export controls could potentially be changed to align, in whole or in part, with that of the PRC. For example, if Hong Kong is moved into Country Group D:1 (alongside the PRC) for purposes of the US Export Administration Regulations (“EAR”), the stricter EAR restrictions currently in place for the transfer of US-origin/content controlled goods, software and technologies to the PRC would then apply to Hong Kong. In addition, exports/reexports to Hong Kong would no longer qualify under certain license exceptions in the EAR, in particular, License Exception TSR (for certain National Security-controlled technology and software), License Exception APR (for certain reexports from Hong Kong) and License Exception GBS (for certain National Security-controlled items). Hong Kong could even be caught up in the upcoming elimination of License Exception CIV (which authorized exports/reexports of certain items for civil end-users and end-uses in the PRC), as described in our previous blog post. Deemed export licensing burdens could also increase for Hong Kong residents. Exports to Hong Kong police and other “military end users” or for “military end uses” would also be prohibited under the EAR’s prohibitions on exports/reexports to Chinese “military end-uses” and, from June 29, 2020, “military end-users.” Further, the arms embargo on the PRC under the US International Traffic in Arms Regulations could also be extended to Hong Kong.
- Customs Duties and Import Quotas for Imports from Hong Kong/Section 301 Actions: If the United States were to treat Hong Kong and the PRC as belonging to the same customs territory, US imports of Hong Kong-originating products (being products that undergo substantial transformation in Hong Kong that results in the assignment of Hong Kong origin, which is not necessarily coextensive with Hong Kong exports), could become subject to the same tariffs applicable to imports into the United States of PRC-originating products, most notably the additional Section 301 tariffs. If the Phase One deal signed by the US and the PRC in January 2020 ultimately fails, this could have expanded implications for imports from Hong Kong into the United States of targeted originating products. In addition, certificates of origin issued by the Hong Kong Special Administration Region (“HKSAR”) may no longer be recognized and import quotas, when applicable, could be aligned with those for the PRC.
- Imposition of Sanctions and Visa Ban against Persons Undermining Hong Kong’s Autonomy: The Hong Kong Policy Act already requires submission of reports to Congress identifying persons responsible for undermining fundamental freedoms and autonomy in Hong Kong. The president has a mandatory obligation, with limited exceptions such as for intelligence activities, to impose sanctions on such persons under the International Emergency Economic Powers Act (50 U.S.C. §1701 et seq.), including to block and prohibit all transactions in property and interests in property (i.e., designation as a Specially Designated National) of such persons and rendering them ineligible for immigration visas or admission to the United States, potentially even revoking existing visas. Waivers may only be granted based on a presidential certification that a waiver is in the national security interests of the United States. Given the president’s express reference to these types of sanctions in his press statement, such sanctions may be imminent.
- Increased Blacklistings under US Export Controls: The US Government has already indicated that it may imminently “blacklist” additional companies, including certain Hong Kong companies, threatening US national security under the EAR, specifically by adding such parties to the Entity List. Numerous PRC companies have been added to the Entity List in recent years, including Huawei. In a press release issued by the US Commerce Department on Friday, May 22, 2020, 24 entities, including Hong Kong and PRC entities were named as likely targets. A separate press release cited nine additional PRC entities to be blacklisted on the Entity List for activities in the Xinjiang Uighur Autonomous Region, although, as of the date of this alert, these designations have not yet been effected. Such Entity List blacklistings would have the effect of prohibiting both US and non-US companies from sending any US origin/content goods, software and technologies to those Entity List parties.
- Tighter Immigration, Particularly in Academic and Research Fields: A change in the United States’ recognition of passports and travel documents issued by the HKSAR under the Hong Kong Policy Act could affect the ability of Hong Kong residents to obtain non-immigrant and immigrant visas for the United States. Indeed, on the same day as his press conference, May 29, 2020, the president issued a proclamation suspending the entry of certain PRC nationals seeking to enter the United States pursuant to an F or J visa to study or conduct research in the United States if they are associated with entities in China that implement or support China’s Military-Civil Fusion (MCF) strategy. As further explained in a press statement issued by Secretary Pompeo, the proclamation is stated to target the PRC’s acquisition of sensitive United States technologies and intellectual property. It also requires the US Secretary of State to identify affected individuals pursuant to standards and procedures to be established; thus, further steps are necessary before this requirement will be implemented, but this will no doubt have an immediate impact by further delaying the review of visa applications currently in process. It remains to be seen if and how this may be extended to Hong Kong residents.
- Loss/Reduction of Preferential Treatment in Other Areas: Though not explicitly mentioned, other areas currently afforded special treatment under the Hong Kong Policy Act that could be affected include agreements with respect to financial and monetary matters, investment, shipping and air transport, communications, tourism, culture, sport, academic research, and educational exchanges.
We continue to monitor developments in the US, including proposed legislation before the US Congress related to these developments. These include measures to target foreign persons and foreign financial institutions for actions that result in the inability of the people of Hong Kong to enjoy certain freedoms or “otherwise take action that reduces the high degree of autonomy of Hong Kong”, as well as measures that could potentially see the delisting of PRC companies that fail to abide by US listing rules. We are also monitoring developments and responses in Hong Kong and the PRC and are available to answer specific questions.