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US-China trade

US moves to rescind special Hong Kong status

Published 01 June 2020 | 3 minute read

President Trump announced on Friday that the US would begin the process of rescinding the special Hong Kong status under US law. This move was in response to China’s approval of plans for a national security law for Hong Kong.

If the national security law China drafts for Hong Kong is similar to the one implemented in Macau in 2009, it would, among other things, criminalize links with foreign political organizations, which is targeted at China’s perception that the US has been fomenting unrest in Hong Kong.

The US concluded that Hong Kong is no longer sufficiently autonomous from China, and there is no longer any basis to afford Hong Kong differential treatment on a range of issues, including trade, customs, travel, and extradition.

While the situation is still fluid, here are two takeaways, one short-term, one long-term:

For the short term, both sides have essentially “given up” on trying to repair the relationship

These latest actions on the part of the US and China definitively close the door to any potential rapprochement between the countries for the remainder of President Trump’s current term and ensures that for the foreseeable future the bilateral relationship will remain mired at its lowest point in decades. 

Both countries have taken these steps with their eyes wide open, fully understanding the repercussions. Neither country was dissuaded by the easily predictable fallout. Neither country feels any short-term urgency to avoid or repair the attendant damage.

Things have gone downhill fast. Only 4 months ago US-China relations were riding a wave of goodwill and optimism, having just celebrated the conclusion of a phase one trade agreement, with high expectations for the next round of phase two negotiations. Shortly thereafter, however, the rapidly spreading coronavirus, with its rising human and economic cost, led to a flurry of pointed accusations and harsh recriminations between the countries.  

Today, the heralded phase one trade agreement is effectively dead in the water. Trade agreements are just words on a piece of paper. In order to be fully implemented in both letter and spirit, the signatories need to have mutual trust, a strong sense of common purpose, and a deep belief in the mutual benefit that derives from cooperation. None of those things exist today between the US and China. 

As China almost certainly comes up short on its purchase commitments, the deal may or may not be terminated. But regardless, China is likely to only implement those provisions which suit its best interests or which it intended to implement in any case. There is no incentive to take difficult steps. The cost of soured trade relations with the US have already been priced into China’s policy calculations.

Looking ahead, the more important phase two negotiations, which were intended to address some of the most consequential issues, are entirely off the table.   

Over the longer term, the lack of details could create wiggle room

Although assumptions are being made about the implications of Trump’s announcement, the reality is that we have very little in terms of factual details. The President merely announced that the US would begin the process of rolling back Hong Kong’s preferential treatment. Although this could potentially mean including Hong Kong in the punitive tariffs and export controls which China faces, the president did not commit to that, and he did indicate there will be exceptions. Ultimately, there is a gamut of actions the US could take, ranging from fairly mild to severe, and it’s unclear at this point which end of the spectrum we’ll finally land.

In terms of China’s action, it’s important to note that China’s National People’s Congress did not approve national security legislation for Hong Kong. It approved a brief plan to move forward with national security legislation, which has not yet been drafted.

Of course, the intended general thrust of the national security law is certainly well understood, as is the US revocation of Hong Kong’s special status. But there is also a fair degree of ambiguity in both actions. As we move forward over the longer term, this ambiguity could create at least some maneuvering room for both countries.

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Stephen Olson

From 2014 to January 2024, Mr. Olson was a Senior Research Fellow of the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international trade negotiator and served on the US negotiating team for the NAFTA negotiations.

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