The US Administration has taken a series of actions in recent days to tighten US export controls for Hong Kong and to sanction Chinese government officials in response to the decision of the Chinese Communist Party (“CCP”) to impose a new national security law for Hong Kong. Most significantly, these actions put Hong Kong on a par with China with respect to license exception eligibility under the US Export Administration Regulations (“EAR”) by suspending all EAR license exceptions for Hong Kong to the extent different from those available for China. This will increase the need to obtain individual licenses for controlled dual-use exports/reexports to and transfers within Hong Kong. In addition, all defense exports to Hong Kong are being halted on the basis that the US Government “can no longer distinguish between the export of controlled items to Hong Kong or to mainland China.” Finally, visa restrictions will be imposed on certain Chinese government officials determined to be undermining Hong Kong’s autonomy and human rights. These changes mark the most significant step yet in the revocation of Hong Kong’s preferential status under US law.
- Hong Kong’s Status Under US Law
Under the United States-Hong Kong Policy Act of 1992 (“Hong Kong Policy Act”), Hong Kong is provided “different” treatment by the US government as distinct from the People’s Republic of China, 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. In May 2020, after Secretary of State Pompeo certified to Congress that Hong Kong is no longer sufficiently autonomous from China to warrant its preferential treatment under US law, the President announced that his Administration would begin reviewing and revoking Hong Kong’s special treatment. For detailed information on the developments in May 2020, please see our prior blog post here.
- The New HK National Security Law
On June 30, 2020, the Standing Committee of the National People’s Congress passed the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (the “HK National Security Law”). The objectives expressed in the HK National Security Law include safeguarding national security, preventing, stopping and punishing crimes endangering national security, ensuring the implementation of the “One Country, Two Systems” policy, maintaining the prosperity of Hong Kong, and protecting the rights of Hong Kong people. The HK National Security Law established four crimes: secession, subversion, terrorist activities and collusion with foreign countries or external forces to endanger national security. The HK National Security Law urges the Hong Kong government to implement further legislation for safeguarding national security as stipulated in the Basic Law of Hong Kong and requires the Hong Kong government to submit an annual report on national security issues to the Central Government of China. The HK National Security Law also established several governmental bodies to advance, implement, and enforce national security related legislation. The HK National Security Law, comprising six chapters and 66 articles, has been inserted into Annex III of the Basic Law of Hong Kong, the semi-autonomous region’s mini-constitution. A summary of the HK National Security Law can be found here.
US Government’s Latest Actions and Potential Impact
- Suspension of EAR License Exceptions for Hong Kong
On June 29, 2020, US Secretary of Commerce Wilbur Ross announced that China’s heightened security measures on Hong Kong increase the risks that sensitive US technology would be diverted to the People’s Liberation Army or Ministry of State Security. Following this announcement, on June 30, 2020, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a notice suspending Hong Kong’s eligibility to receive exports, reexports, and transfers of items subject to the EAR under license exceptions that provide differential treatment than those available to China.
This action was taken pursuant to Section 740.2(b) of the EAR, which provides that all license exceptions are subject to revision, suspension, or revocation, in whole or in part, without notice. Hong Kong’s position in Country Groups A:6 and B on the Country Group chart in Supplement 1 to Part 740 of the EAR has not changed, i.e. Hong Kong has not been moved to Country Group D:1 alongside China.
As a result of the suspension, no items subject to the EAR may be exported/reexported to or transferred within Hong Kong based upon an authorization provided by a license exception, unless the items would otherwise be eligible for a license exception if exported to China; in other words, Hong Kong is now on a parallel footing with China for purposes of determining license exception availability. Companies that currently rely on EAR license exceptions to make exports/reexports of items subject to US jurisdiction to Hong Kong must carefully review the relevant license exceptions to determine if they remain available for China. If not, companies must obtain a license before engaging in exports/reexports or in-country transfers involving Hong Kong. Potentially relevant key EAR license exceptions with differential treatment include: license exceptions LVS, GBS, TSR, APP, GOV, TSU, APR (which an April 28, 2020 proposed rule seeks to remove for China and other D:1 countries), and STA.
While the rule is effective immediately, it provides a savings clause for items that, pursuant to actual orders, were on dock for loading, on lighter, already loaded, or already en route aboard a carrier on June 30, 2020.
There is also a 60-day transition period for deemed export/reexport transactions involving Hong Kong persons authorized under a license exception prior to June 30, 2020. Such deemed exports and reexports transactions are authorized until August 28, 2020, so long as proper documentation is maintained showing the Hong Kong person was hired and provided access to technology eligible for Hong Kong before June 30, 2020.
This suspension of EAR license exceptions only affects the availability of license exceptions for Hong Kong; it does not alter the underlying controls for Hong Kong (for example, it does not extend to Hong Kong the recently-expanded military end user and end use controls applicable to China in Part 744.21), nor does it appear to change the license review policies or supporting documentation requirements for Hong Kong in Part 748 of the EAR.
- Ending Controlled Defense Exports to Hong Kong
On June 29, 2020, the State Department announced that, effective immediately, it would end exports of US-origin defense equipment to Hong Kong and would take steps toward imposing the same restrictions on US defense and dual-use technologies to Hong Kong as it does for China. This likely means Hong Kong will be considered as part of China, or be separately added to the list of proscribed destinations, in Section 126.1 of the International Traffic in Arms Regulations (“ITAR”). Under the ITAR, it is the policy of the United States to deny licenses and other approvals for exports and imports of defense articles and defense services destined for or originating in countries included in Section 126.1 of the ITAR, including China. Certain other restrictions (e.g., duty to notify of a proposed, final, or actual sale of defense articles or defense services) also apply.
- Visa Restrictions on Chinese Communist Party (“CPP”) Officials
On June 26, 2020, the State Department announced visa restrictions on CPP officials believed to be “responsible for, or complicit in, undermining Hong Kong’s high degree of autonomy” or “human rights and fundamental freedoms in Hong Kong.” The visa restrictions apply broadly to “current and former CCP officials,” and potentially to family members of such persons.
Hong Kong Strategic Commodities Regulations Circular
The Hong Kong Trade and Industry Department (“TID”) released Strategic Trade Controls Circular No. 5/2020 (“Circular“) on 2 July 2020. Notwithstanding changes to the US rules, the TID emphasized that there would be no change to Hong Kong’s autonomous strategic commodities regime. The Circular also reiterated the announcement by the US BIS that US export authorization (usually in the form of a BIS-issued individual validated license) would now be required for various US-origin items. It also highlighted a non-exhaustive list of Export Control Classification Numbers (“ECCNs”) that require US authorization, including 3A001, 3A002.h, 3B001, 3B002, 3C002.a, 3C005, 3C006, 5A001, and 5B001.
Furthermore, as Hong Kong also independently requires licensing for strategic commodity imports, in-territory transfers and exports (with TID generally requiring demonstration of US authorization before it will grant the Hong Kong license), the Circular also specifically advised that Hong Kong licenses granted on the basis of US Licence Exception GBS will now be unavailable, and that the TID would liaise with relevant Hong Kong licensees for the cancellation of unused licenses.
What To Expect Next
In response to the above actions by the US government, the Ministry of Foreign Affairs of China stated that China opposes such actions and will take necessary countermeasures. Details of such countermeasures are still to come.
In addition, we may see additional actions against China/Hong Kong from the US government as it calls upon China to “honor its commitments and obligations in the Sino-British Joint Declaration” with respect to Hong Kong. Both State and Commerce have indicated further actions are being evaluated. Please refer to our prior blog post for a discussion of potential additional measures that have been explicitly mentioned by the US Administration. This is a rapidly evolving landscape, and we will continue to monitor developments in both the United States, China and Hong Kong.