What Next for Hong Kong-United States Trade?

Over the decades, the trade policy relationship between the US and Hong Kong has had its ups and downs, but there have undoubtedly been many more ups than downs. On the whole Hong Kong has – correctly – been seen by Washington as a bastion of free trade.

Certainly, there have been spats in the past. For Hong Kong, the Multi-Fibre Arrangement (MFA), with quotas on apparel exports, was an historical irritant for many years as was, on occasion, US anti-dumping policy and practice. Both sides, however, were always able to see beyond any immediate short-term issues toward a broadly shared view of a liberal global trading system.

In the late 1980s and early 1990s, Hong Kong and the US took part in a wide range of negotiations in the Uruguay Round of trade negotiations under the General Agreement on Tariffs and Trade (GATT), the precursor of the World Trade Organization (WTO). Whatever the current US administration may think about the WTO now, at the time of establishment it seemed to be a shining example of international economic cooperation.

The United States-Hong Kong Policy Act of 1992

Just prior to the conclusion of the Uruguay Round, the US enacted the United States-Hong Kong Policy Act of 1992. This asserts that “the United States should respect Hong Kong’s status as a separate customs territory, and as a contracting party to the General Agreement on Tariffs and Trade, whether or not the People’s Republic of China participates in the latter organization”. The Act also indicates that, after June 30, 1997, it is the sense of Congress that “the United States should seek to maintain and expand economic and trade relations with Hong Kong and should continue to treat Hong Kong as a separate territory”. 

Of course, Congress is always free to revisit its past actions, but the point here is that the US was very supportive of the continuation of Hong Kong’s role in the trading system. Indeed, this continued well beyond 1997 with a succession of positive US statements when Hong Kong’s trade policies were subject to periodic peer review in the WTO. As recently as 2018, the US commended Hong Kong for its commitment over the years to an open and free-market economy. 

WTO reform

In recent years, the US has become a more strident critic of the WTO. It is now pressing for fundamental reform of its dispute settlement system, revitalization of its negotiating function, and rebalancing of inherited rights and obligations.

While the government of the Hong Kong Special Administrative Region (SAR) may not agree with some of the methods the US is currently employing in pursuit of these objectives, it also wants to see a revitalized WTO with an updated rulebook, moving progressively in a market-oriented direction, and with a dispute settlement system which is seen as fair by all members. 

One of Washington’s major themes, frequently espoused by US Trade Representative (USTR) Robert Lighthizer, has been the need to rebalance WTO market-access commitments. A legacy of successive rounds of ad-hoc tariff negotiations over decades has been that WTO tariff ceilings now vary widely from country to country.  In a recent commentary, Lighthizer called for new baseline tariffs that apply to all WTO Members with minimal exceptions. Hong Kong, with zero tariffs and quotas, should have no problem in principle with that proposition, if implemented progressively.

The current dispute over marking of Hong Kong products

So how is it that we have now come to the stage where the US is singling Hong Kong out for trade discrimination? President Donald Trump’s recent executive order means that, as from November 9, Hong Kong products will have to be marked as “Made in China”. This appears to contradict WTO rules on non-discrimination and significantly modifies the conditions of competition for Hong Kong manufacturers who have invested time and money in building up their brands.

On the one hand it is argued by some that the trade impact is slight since the value of Hong Kong’s domestic exports to the US is not high. This may be true, although of small comfort to the manufacturers concerned. It is also argued that challenging the US could exacerbate the situation and lead to further discriminatory action.

On the other hand, the new measure indicates that the US is moving toward non-recognition of Hong Kong as a separate customs territory – which is a basic tenet of both the 1984 Sino-British Joint Declaration and the Basic Law – leaving the SAR government in an unenviable position. If it does not challenge the measure, that would undoubtedly be noticed around the world and would undermine its distinct trade status as enshrined in the Basic Law and recognized by the WTO. Unless the issue can be quickly resolved through bilateral talks, Hong Kong really has no choice but to go to formal dispute settlement.

Moreover, from a WTO legal perspective, the value of trade affected by a particular measure is of limited relevance. What matters is whether the measure is consistent with WTO rules. The argument that the simple act of challenging the US in the WTO would lead to a furious response from Washington is overblown. The US may be very critical of the WTO but that does not necessarily mean that it does not respect the rights of other members to due process. 

WTO dispute settlement

The US itself has been a highly active user of the dispute settlement system, having been a complainant in 124 cases since the WTO was established in 1995. It is true that the US feels strongly that it has been unjustly targeted in many of the 155 cases in which it has been the respondent. The latter figures are, however, hugely skewed by over 100 cases involving challenges to certain US practices in “trade remedies”.  This is a particularly sensitive area for USTR and the Department of Commerce (but it is not relevant to the current dispute with Hong Kong). Putting these cases aside, the US wins many more cases than it loses.

Overall, in the 25 years since its establishment, the WTO has handled almost 600 disputes, an average of 24 a year, or two new cases every month. Disputes have become routine. At another level, one of the advantages of the WTO’s dispute settlement system has been its success in addressing trade issues arising from politically charged situations, by de-dramatizing them and turning them into a technical/legal process. In the current Hong Kong-US context, referring the matter to the WTO, which takes time to hear cases, would allow both sides to maintain their positions while entering a cooling-off period. 

The fact that – due to the Trump administration’s refusal to appoint members – the Appellate Body is inoperative is of limited relevance to Hong Kong at this stage.  First, it is impossible to know what the situation with respect to the Appellate Body will be in 2022 (when a first-stage panel report might be issued). The Body may have been reconstituted by then. Second, even if the Body remained inoperative and if the US appealed into a legal void following a first-stage setback, Hong Kong would have secured its point of principle. 

Admittedly Hong Kong trade is caught in the middle of a much larger geopolitical and geo-economic struggle. Whatever Hong Kong does is not likely to affect the outcome. In the meantime, however, all it can do is to fight its own corner.

Lessons for Hong Kong?

I was taken aback recently when a senior US trade official asked me what the difference was between Hong Kong’s trade policy and China’s. The answers were obvious so it was not an innocent enquiry. There had to be a message in the question itself.

Hong Kong is almost unique among Chinese cities in having an international profile in its external commercial relations. We see this primarily in the WTO, in its membership of the Asia-Pacific Economic Cooperation (APEC) forum and in the fact that, as authorized under the Basic Law, it can negotiate its own free-trade agreements.

Without doubt – and understandably – Hong Kong’s commercial priorities in the past 23 years or more have been in developing ties with mainland China. In the light of geo-economic developments, no one could argue that that is not sensible. However, it may also mean that ties with the wider international trading community can no longer be taken for granted.

It is all very well pointing the finger at the US’s disregard for international norms. But this might also be an opportune moment for Hong Kong to take stock of its trade relations. Could it have done anything differently that would have averted the current squabble? Perhaps not, given the wider forces at play, although in my view the context might have been subtly altered.

A 2019 US initiative criticizing self-declared developing-country status in the WTO provides a modest illustration. For historical reasons, Hong Kong has long been attached to “developing” status in the WTO although in practice it has never used the related “special and differential treatment” in past negotiations, nor is it leveraging this status in ongoing talks. It takes a pragmatic view that it is the result of negotiations rather than simple categorization that matters.

Some comparable Asian economies, however, have gone further. In September 2019, Singapore announced that it will not seek special provisions in WTO negotiations that it is entitled to under its developing-country status. In a clear nod to the US, Minister for Trade and Industry Chan Chun Sing said that this is part of Singapore’s efforts to “support, uphold and update WTO rules”.

In October last year, Deputy Prime Minister Hong Nam-ki announced that the Republic of Korea would also not seek “differential treatment given to developing countries” in future WTO negotiations, while not foregoing its developing-country status. This is not uncontroversial, given its sensitive agriculture sector.

It would cost Hong Kong nothing substantively to follow Singapore’s and South Korea’s lead since it never has, and hopefully never will, invoke a need for special and differential treatment. The question in the minds of US trade officials is probably: why has it not done so?

Subtle recalibration of the detail of trade policy such as in this one example may not in the end count for much in the wider context.  That said, Washington would almost certainly take such matters into consideration in the overall balance when evaluating its trade relationship Hong Kong.   

The US action on marking of products could have gone further – by for example applying its punitive tariffs on Chinese products to Hong Kong as well. It very carefully did not do so, which could indicate that Washington is testing Hong Kong to see how it reacts.

The broader point is that questions are now being asked about the direction of Hong Kong trade policy. There will be increased scrutiny in the light of ongoing major regional projects. This is not to argue against such projects but merely to point out that it may no longer be enough for Hong Kong to rely only on familiar mantras such as “free trade, zero tariffs, zero quotas”. 

While remaining fully faithful to these tenets, Hong Kong needs to develop and project an updated narrative on its place in the global trading community. This is admittedly no small task given the considerable background noise. The recent US trade action, unjustified as it is, could be taken as a wake-up call.