While China’s support for Russia is widely reported, Hong Kong’s substantial contributions to Russia’s war efforts are less known. Recent reports have identified Hong Kong as a prominent node in Russia’s illicit procurement network, acting as a transshipment hub for diverting Western-made microelectronic components to companies affiliated with the Russian military. Since Russia’s invasion of Ukraine, Hong Kong has doubled its integrated circuits exports to around $400 million worth of semiconductors in 2022, second only to China and far exceeding any third country in the volume of semiconductor trade with Russia. Many of these transactions violate U.S. export control regulations against Russia, and multiple individuals and entities operating from Hong Kong have been sanctioned for their involvement in the Russian military’s procurement network.

Hong Kong’s complicity in sanctions busting is not merely a byproduct of being one of the busiest shipping hubs in the world; it is a direct consequence of Hong Kong’s increased subservience to China, now that Beijing has wiped out the last vestiges of autonomy in the special administrative region. In today’s Hong Kong, the government follows Beijing’s orders in virtually all matters of governance, particularly for issues with geopolitical salience. High levels of semiconductor trade between Hong Kong and Russia, as well as the Hong Kong government’s public scorn for Western sanctions, have made Hong Kong’s allegiance clear: it sits firmly in the camp of an emerging China-Russia axis.

RUSSIA’S SEMICONDUCTOR SUPPLY CHAIN

Numerous reports indicate that despite sweeping Western sanctions, Russia’s defense industrial base has successfully established alternative routes to import dual-use components needed for manufacturing military equipment. Lacking scalable domestic substitutes, Russia relies on foreign-made microelectronic components to produce a range of military gear, including weapons like drones and cruise missiles. Examining Russian weapons captured in Ukraine, the Royal United Services Institute (RUSI) discovered in August 2022 that the majority of microchip components in Russian systems originated from the United States, East Asia, and Western Europe. Tracing the supply chain of microelectronics, RUSI concluded that “third-country transshipment hubs and clandestine networks operated by Russia’s special services are now working to build new routes to secure access to Western microelectronics.”

A leader in low-end microchip manufacturing and the world’s top chip importer, China is now the foremost supplier of semiconductors to Russia. In 2022, as Western countries restricted technology supply, Russia’s semiconductor imports from China skyrocketed, jumping from $200 million in 2021 to well over $500 million in 2022, according to Russian customs data analyzed by the Free Russia Foundation. Importantly, the Sino-Russian technology trade involves not only Chinese-made components but also products manufactured by top U.S. chipmakers such as Intel, Advanced Micro Devices, and Texas Instruments. Nikkei Asia recently reported that exports of U.S. chips from Hong Kong and China to Russia increased tenfold between 2021 and 2022, reaching about $570 million worth. By one figure, China and Hong Kong together accounted for nearly 90 percent of global chip exports to Russia in the period between March and December 2022.

China’s support to Russia’s war effort is unsurprising. The two countries are aligned in their ambition to undermine the U.S.-led international order. Before the war, Beijing and Moscow declared that the countries’ friendship had “no limits,” and a Chinese top diplomat has recently reaffirmed that Sino-Russian relations are “reaching new milestones.” The summit between Chinese President Xi Jinping and Russian President Vladimir Putin in Moscow, held in March 2023, further consolidated the importance of this strategic partnership. Less examined is Hong Kong’s role in Russia’s technology supply chain.

While most countries have begun to recognize Hong Kong’s loss of autonomy following the passage of the Hong Kong national security law in 2020, the city is still often treated as separate from China in economic and trade data. This is as much a matter of convention as an acknowledgement of Hong Kong’s unique function to China: the former British colony is highly integrated into the global economy, serving as China’s window to the world. Hong Kong’s connectivity with the world has allowed unscrupulous actors to hide their footprints amid the busy international flows. Its prominence in Russia’s technology supply chain exemplifies this point. Researchers and journalists have found that some Hong Kong–based companies have diverted significant quantities of Western-made electronic components to Russia since its invasion of Ukraine. Macro-level data bear out Hong Kong’s importance to Russia’s defense-industrial base (although export statistics vary depending on the source). The Free Russia Foundation found that Hong Kong doubled its semiconductors and integrated circuits exports to around $400 million in 2022, putting it second only to China’s $500-million-plus exports. China and Hong Kong far exceed any third country in the volume of microchips trade with Russia.

BEIJING PULLING THE STRINGS

What explains Hong Kong’s prominence in Russia’s effort to sustain war in Ukraine? The most immediate factor is Beijing’s increased control over all aspects of the governance of Hong Kong. Historically, Western countries treated Hong Kong’s exports as sufficiently autonomous from China’s strategic objectives. In 1992, the United States and other former Coordinating Committee for Multilateral Export Controls (COCOM) members designated Hong Kong a “cooperating country,” affirming that it possessed the necessary elements of an effective licensing and enforcement system.

The transfer of sovereignty to China in 1997 prompted fears that Hong Kong would become a hub for technology diversion into China and other so-called rogue states like North Korea. The principle of “one country, two systems” was designed to assuage such anxiety by promising that Hong Kong would continue to exercise independent authority over export controls, which the government interprets as a trade matter, meaning that it falls under the legal bounds of Hong Kong’s autonomy. Under the United States-Hong Kong Policy Act of 1992, after China took over Hong Kong’s sovereignty in 1997, the “United States should continue to support access by Hong Kong to sensitive technologies controlled under [COCOM] for so long as the United States is satisfied that such technologies are protected from improper use or export.” As a result, Hong Kong was eligible to import, without license, extensive categories of U.S.-controlled dual-use items and was eligible for license exceptions for some categories. In contrast, China was required to obtain a license to procure items controlled for U.S. national security and was eligible for a license exception only when the destination was verified as civil end users. A 1997 report by the U.S. General Accounting Office (now Government Accountability Office) bodog poker review characterized Hong Kong favorably for having demonstrated “excellent cooperation with the United States on export enforcement activities, including sharing of information and cooperation on investigations, searches, and seizures of suspected illegal shipments.”

However, as Hong Kong’s autonomy has steadily eroded, so has its willingness to comply with Western export control regimes, especially when they contradict China’s strategic interests. Today’s Hong Kong scorns Western sanctions against Russia. After Russia invaded Ukraine in February 2022, Western governments launched a frantic campaign to seize the assets of Russian oligarchs, hoping to deter elites from aiding Russian war efforts. In sharp contrast, Hong Kong’s Chief Executive John Lee, himself sanctioned by the United States for suppressing the 2019 protests, said that the government would not recognize U.S. sanctions against Russia, asserting that Hong Kong has no legal obligation to enforce “unilateral sanctions” after a Russian oligarch’s yacht was spotted in Hong Kong in October 2022. Furthermore, Hong Kong has become a top alternative for Russian companies shut out of Western financial capitals like New York and London. As Bloomberg reported in October 2022, a number of major Russian companies, including state-owned enterprises, have sought to engage with Hong Kong law firms to help anchor them in a “friendlier jurisdiction.” A local research group later found that between February and October 2022, the number of Russia-affiliated businesses registered in Hong Kong reached thirty-five, more than doubled from the same period in 2021.

DOES THE CHINA FACTOR REALLY MATTER?

It is no coincidence that Hong Kong’s noncompliance with Western sanctions has been simultaneous with Hong Kong’s deteriorating political autonomy. Xi is determined to exploit Hong Kong’s advantages to further his strategic ambitions, even if it means tarnishing Hong Kong’s international reputation.

Some might argue that Beijing’s increased grip on Hong Kong has had little effect on the city’s attitude toward Western sanctions. After all, Hong Kong was already a major transshipment hub, even prior to signs of serious deterioration of its autonomy. The volume of dual-use items transshipped through Hong Kong has contributed to conflict and terrorist activities that had less strategic salience to China than the war in Ukraine has. For example, transshipped U.S. electronics components and devices were used to build improvised explosive devices that were deployed against coalition forces in the Iraq war, a conflict for which China largely stayed on the sidelines.

Additionally, Hong Kong’s status as a busy transshipment port to locations around the world naturally increases the risks of illicit technology diversion. Transshipment is notoriously hard to detect from trade data because it requires visibility throughout multiple stages in the supply chain. Due to the sheer volume of transshipment occurring via Hong Kong, it is hard for export control officials to conduct preshipment screening or postshipment checks. It is particularly easy to set up front companies in jurisdictions like Hong Kong. As a manager at a leading U.S. semiconductor distributor explains, “there are many formless shell companies and small trading companies in Hong Kong that serve as receptacles for secondary sales. . . . If you spot one illegal trade, they can just change their name or use their other trading companies’ names.”

It becomes even more challenging to distinguish between transshipment to sanctioned entities and transshipment to legitimate importers if the importing country has a large existing market for dual-use goods. According to trade data compiled by the Observatory of Economic Complexity, Hong Kong has consistently been the world’s top importer of electrical machinery and electronics since 2004. In the global trade of integrated circuits, for instance, Hong Kong imported 24.3 percent (or $162 billion) of the world’s trade in 2020, exceeding even China’s $114 billion imports.

But this line of argument fails to account for the big picture. While the problem of illicit trade has historically bedeviled Hong Kong, the government’s open defiance against Western sanctions since the Ukraine war signals its commitment to a deliberately lax approach to export controls. The sizeable flow of technology from Hong Kong to Russia is the result of an active political choice. The reactions from other major transshipment hubs, such as Singapore and the United Arab Emirates (UAE), illustrate that it is possible to stem the flow of technology to Russia if there is political will to do so. U.S. authorities have long recognized the prominence of Hong Kong, Singapore, and the UAE in illicit trade networks. The three major transshipment ports reacted to Western sanctions regimes against Russia differently according to their geopolitical interests.

Despite being a U.S. security partner, the UAE has joined other Middle Eastern states in refusing to participate in Western sanctions regimes. It has abstained from voting in favor of a United Nations Security Council (UNSC) draft resolution condemning Russian aggression in Ukraine, allowed Russian oligarchs to launder money through its ports, spurned Washington’s request that it pump more oil to diminish Russian oil revenue by reducing global oil price, and refused to crack down on the reexporting of electronic components to Russia. Data show that exports of electronic parts from the UAE to Russia increased sevenfold within a year to almost $283 million in 2022, while microchip exports rose by fifteen times to $24.3 million from $1.6 million in 2021. The Gulf country also sold 158 drones worth a total of $600,000 to Russia.

If the UAE has allowed tech trade with Russia to flourish out of self-interest, Singaporean leaders have pursued a different calculus—choosing to align themselves more closely with the U.S. position. In a statement made on February 28, 2022, Singapore’s foreign minister said, “Russia’s invasion of Ukraine is a clear and gross violation of the international norms and a completely unacceptable precedent. This is an existential issue for us.” In a rare move, the city-state announced sanctions against Russia that included “four banks and an export ban on electronics, computers and military items,” becoming the only Southeast Asian country to impose sanctions against Russia in the absence of binding UNSC approval. According to the Free Russia Foundation, Singapore is among the countries that have most dramatically curtailed trade with Russia. In terms of semiconductors and integrated circuits, Singapore was the ninth-biggest exporter to Russia in 2021. A prominent node in the global supply chain, Singapore accounts for 19 percent of the global share of semiconductor equipment, providing Russia in 2019 with approximately $10.6 million worth of semiconductor devices. This has shifted since Russia’s full-scale invasion of Ukraine, when Singapore chose to side with Western sanctions regimes. In 2022, exports of semiconductors from Singapore to Russia collapsed dramatically down to a negligible level.

Geopolitical interests explain both the UAE’s spike and Singapore’s plummet in exports to Russia. These cases illustrate that changes in economic and technology ties with Russia are largely driven by the countries’ stances on the Ukraine war, which are in turn motivated by their geostrategic calculus. Similarly, Hong Kong’s permissive stance toward trading technology with Russia is a product of Beijing’s geopolitical calculations. Repeatedly, Hong Kong officials have demonstrated that they have no ability to defy Beijing’s will and no interest in doing so, even if it means alienating the international community. If China is determined to help Russia wage war against Ukraine by extending a technology lifeline, Hong Kong will follow suit.

STILL ASIA’S WORLD CITY?

In July 2020, recognizing Hong Kong’s loss of autonomy, former U.S. president Donald Trump announced that Hong Kong “is no longer sufficiently autonomous to justify differential treatment in relation to the People’s Republic of China.” The United States would “suspend or eliminate different Bodog Poker and preferential treatment for Hong Kong.” Shortly after, the Commerce Department began rescinding Hong Kong’s export licensing privileges, such as by equalizing the availability of license exceptions for Hong Kong and China. In December, the department declared that it would treat exports to Hong Kong as destined for China, effectively ending Hong Kong’s preferential status in the U.S. export control system. Some of the United States’ closest partners have implemented similar changes.

Stripping away Hong Kong’s preferential trading status is a good first step in stopping the leakage of sensitive goods to China and its autocratic allies. But unilateral action from the United States is not enough. While these restrictions have slowed the movement of export-controlled goods in and out of Hong Kong—for example, the Commerce Department detected a 17.4 percent decline in shipments under a Bureau of Industry and Security license exception between 2020 and 2021—Hong Kong on the whole remains relatively interconnected with the global economy.

Russia’s permanent seat on the UNSC has guaranteed the failure of any efforts to push for comprehensive UN sanctions and continues to provide political cover for jurisdictions like Hong Kong and the UAE to resist pressure to cooperate with Western countries. This, combined with Hong Kong’s posture as a busy shipping port that is inherently difficult to monitor, has given the Hong Kong government plausible deniability when accused of supporting Russia’s war machine. There is no clear answer to how Western countries should deal with nonaligned countries in the Global South that wish to stay out of what they perceive as a great power competition, but one thing should be clear: Hong Kong falls outside the nonalignment camp, since it has taken the side of the emerging China-Russia axis.

A wider recognition of Hong Kong as a geostrategic asset of Chinese statecraft is in order. Hong Kong’s government is investing large sums in a charm offensive to rehabilitate its international image and attract international business. In a promotional video for the government’s $2 billion HKD “Hello Hong Kong” campaign, Lee claimed, “Hong Kong is now seamlessly connected to the mainland of China and the whole international world.” But the findings presented in this article show that a portrayal of Hong Kong as a neutral trading hub connecting East and West no longer holds up. Western leaders should be aware of the geopolitical costs of Hong Kong’s position as a major center of global trade and the advantages that subsequently accrue to Beijing.

Correction: This piece has been edited to reflect that Chief Executive John Lee said Hong Kong would disregard U.S. sanctions on Russia, not those on China.

Brian (Chun Hey) Kot is a research assistant in Carnegie’s Democracy, Conflict, and Governance Program.

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As discussed in a recent PIIE Policy Brief, the new Chinese anti-sanctions law bars Chinese nationals from complying with US sanctions. That law, promulgated by the National People’s Congress (NPC) in June 2021, may soon be applied to individuals and firms doing business in Hong Kong. The NPC will shortly consider appending it to the Hong Kong Basic Law, handing a powerful tool against those seeking to maintain Hong Kong as a special administrative region for legal and economic matters. Threats and denunciations in the West have done little to deter China’s growing dominance over Hong Kong’s Legislative Council and legal system, eroding the “one country, two systems” guarantee in the 1984 Sino-British Joint Declaration.

Chinese responses to US sanctions had been relatively low key partly because most US sanctions against China involved violations of US secondary sanctions against North Korea and Iran and were limited to the imposition of fines against the guilty parties. That playbook has changed as Chinese policies in Xinjiang and Hong Kong increasingly have become the primary target of US sanctions. US officials, invoking the Hong Kong Autonomy Act of 2020, the Global Magnitsky Act, and various executive orders, have increased the number of Chinese and Hong Kong individuals and entities subject to trade, finance, and travel sanctions over the past year.

In turn, Chinese officials have begun to upgrade their sanctions arsenal. In September-October 2020, China amplified its existing “Unreliable Entity List” and Export Control Law, akin to those administered by the US Commerce Department and used to restrict trade with Chinese firms. These measures were supplemented in January 2021 with new Chinese sanctions blocking rules, subsequently embodied in the June 2021 anti-sanctions law, to force Chinese nationals not to comply with US and other foreign sanctions. Then soon after the Biden administration issued a business advisory warning on July 16, 2021, about “growing risks” for US companies doing business in Hong Kong, China announced that it plans to incorporate the new anti-sanctions powers into Hong Kong law, which reportedly will be done by the NPC Standing Committee when it meets on August 17–20, 2021.

The prospect for success in changing the other’s policies via sanctions is remote. Sanctions rarely “work” (meaning contribute at least modestly to a change in the target’s policy) in cases seeking major changes in the target regime’s policies. But both the United States and China seem intent on using them with increasing frequency against each other.

HONG KONG: WILL US SANCTIONS BOOMERANG?

Sanctions often generate unintended and costly consequences. Two troubling developments regarding Hong Kong already have arisen in the wake of the tit-for-tat US and Chinese sanctions. First, US sanctions have abetted an accelerated push by Chinese leaders to remove the veneer of independent administrative and legal practices that have provided Hong Kong its special status since China took back control of the territories from the United Kingdom in July 1997. Second, China adopted a new law barring Chinese nationals (including foreign firms invested in China) from complying with foreign sanctions, which will soon be enforceable in Hong Kong.

The Trump administration removed Hong Kong’s special customs status in response to the imposition of the national security law. US officials seemed to have calculated that US trade sanctions would bite and that Beijing would not risk undercutting Hong Kong’s status as an international financial center by imposing more control on its legal and political system. They misread the situation: The US action had minimal impact on US merchandise trade with Hong Kong; US firms don’t buy much that is produced in Hong Kong—most goods shipped from Hong Kong are re-exports subject to US customs duties applied to their originating countries. Moreover, Hong Kong had long since become a services economy rather than a manufacturing hub, and its value as a financial center depends increasingly on access to Chinese capital markets.

Removing Hong Kong’s special status worked at cross purposes to US interests. The US action did little to punish China, and Chinese officials continue unabated in their goal of accelerating Hong Kong’s immersion in the Chinese mainstream.

In addition, US sanctions against Chinese “domestic” policies led China to promulgate its own anti-sanctions law. When annexed under the Hong Kong Basic Law, another area of nationwide Chinese policies will become Hong Kong law without action by the Hong Kong Bodog Poker Legislative Council, just as occurred with the national security law in 2020. And like the national security law, the anti-sanctions law will likely be enforced and litigated increasingly strictly by Hong Kong authorities and courts consistent with policy directives from Chinese Communist Party officials.

Financial firms that fund and help execute trade and investment in China have so far avoided being hit by the sanctions tussle and are surprisingly complacent about the current business climate. But the risk is growing. International financial firms operating in Hong Kong will be increasingly vulnerable to US penalties as more of their Chinese clients are targeted by US sanctions. And then they will also come under the threat of Chinese countersanctions, unless they ignore foreign sanctions targeting Chinese nationals and take their chances with US sanctions enforcers.

CLASH OF THE SANCTIONS TITANS?

Tit-for-tat sanctions are likely to be the new normal in US-China relations. The imposition of sanctions is built into US trade and export control laws, and Congress is in no mood to lessen the pressure of such actions against China. And now China seems determined to reciprocate in kind with the new legal authorities wielded by officials in both Beijing and Hong Kong. And as the sanctions war escalates, so too does the risk that financial institutions will be caught in the sanctions’ web of one or both countries.

Sanctions have made doing business with China more complicated and costly. US sanctions and China’s new anti-sanctions policy are likely to force firms operating in China to pick sides: us or them. Some will comply with Chinese laws and forgo the US market; others will leave the Chinese market. High tech firms already are facing this commercial reality and restructuring their supply chains. If financial institutions are forced to exit the US or Chinese market because of sanctions policies, the collateral damage to trade and investment will increase.

One would presume that neither side wants a sharp decoupling of their economies, though rabid political voices in both countries are trying to incite that outcome. Both are worse off in economic terms with the escalation of tit-for-tat sanctions. But neither side is likely to shift its policies in the face of economic coercion by the other; each will likely accept increased economic costs in defense of its strategic interests.

Can the escalating cascade of sanctions be contained or restrained before the measures rupture economic relations critically important to both countries and their trading partners? More is at stake than bilateral and regional commercial relations; the ongoing sanctions war also complicates the task of the two superpowers working together on climate change, nuclear nonproliferation in Asia, and responses to the current and future pandemics. Thus, a counsel of caution is in order; US and Chinese officials should be very careful about how they escalate sanctions against each other.

Before the two powers embark on another costly clash, they should consider other strategic responses as a complement or substitute for sanctions. China is already doing so by aligning more closely with Asian neighbors in the Regional Comprehensive Economic Partnership and its Belt and Road Initiative. The United States could follow that example and support the accession of more democratic nations to its original Trans-Pacific Partnership and should consider—to strengthen relations with strategic allies in the region—a return to the pact in 2022.

Jeffrey J. Schott joined the Peterson Institute for International Economics in 1983 and is a senior fellow working on international trade policy and economic sanctions. 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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The Press statement is copied below (emphasis added).

“Over the past year, the People’s Republic of China (PRC) has continued to dismantle Hong Kong’s high degree of autonomy, in violation of its obligations under the Sino-British Joint Declaration and Hong Kong’s Basic Law.  In particular, the PRC government’s adoption and the Hong Kong government’s implementation of the National Security Law (NSL) have severely undermined the rights and freedoms of people in Hong Kong.

“Each year, the Department of State submits to Congress the Hong Kong Policy Act Report and accompanying certification.  bodog casino

“This report documents many of the actions the PRC and Hong Kong governments have taken against Hong Kong’s promised high degree of autonomy, freedoms, and democratic institutions.  These include the arbitrary arrests and politically-motivated prosecutions of opposition politicians, activists, and peaceful protesters under the NSL and other legislation; the postponement of Legislative Council elections; pressure on judicial independence and academic and press freedoms; and a de facto ban on public demonstrations.

“I am committed to continuing to work with Congress and our allies and partners around the world to stand with people in Hong Kong against the PRC’s egregious policies and actions.  As demonstrated by the March 16 Hong Kong Autonomy Act update, which listed 24 PRC and Hong Kong officials whose actions reduced Hong Kong’s autonomy, we will impose consequences for these actions.  We will continue to call on the PRC to abide by its international obligations and commitments; to cease its dismantlement of Hong Kong’s democratic institutions, autonomy, and rule of law; to release immediately and drop all charges against individuals unjustly detained in Hong Kong; and to respect the human rights of all individuals in Hong Kong.”

The Report covers a range of issues including discussion of:

• national security law,
• impact on rule of law,
• arrests, bail, and investigations proceedings,
• impact on democratic institutions,
• progress towards universal suffrage and impact on the legislature,
• impact on the judiciary,
• Impact on Freedom of Assembly,
• Impact on Freedoms of Speech and Association,
• Impact on Freedom of the Press,
• Disinformation/Malign Political Influence Activities,
• Impact on Internet Freedoms,
• Impact on Freedom of Movement,
• Impact on Freedom of Religion or Belief,
• Impact on U.S. Citizens,
• Impact on Academics and Exchanges,
• Areas of Remaining Autonomy,
• U.S.-Hong Kong Cooperation and Agreements,
• Export Controls,
• Sanctions Implementation,
• U.S. Sanctions
• Hong Kong Policy Act Findings

The summary of the report is copied below.

“Consistent with sections 205 and 301 of the United States-Hong Kong Policy Act of 1992 (the “Act”) (22 U.S.C. 5725 and 5731) and section 7043(f)(3)(C) of the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2021 (Div. K, P.L. 116-260), the Department submits this report and the enclosed certification on conditions in Hong Kong from June 2020 through February 2021 (“covered period”).

“Summary

“The Department of State assesses during the covered period, the central government of the People’s Republic of China (PRC) took new actions directly threatening U.S. interests in Hong Kong and inconsistent with the Basic Law and the PRC’s obligation pursuant to the Sino-British Joint Declaration of 1984 to allow Hong Kong to enjoy a high degree of autonomy. In the Certification of Hong Kong’s Treatment under United States Laws, the Secretary of State certified Hong Kong does not warrant treatment under U.S. law in the same manner as U.S. laws were applied to Hong Kong before July 1, 1997.

“By unilaterally imposing on Hong Kong the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (NSL), the PRC dramatically undermined rights and freedoms in Hong Kong, including freedoms protected under the Basic Law and the Sino-British Joint Declaration. Since the imposition of the NSL in June 2020, Hong bodog casino Kong police arrested at least 99 opposition politicians, activists, and protesters on NSL-related charges including secession, subversion, terrorism, and collusion with a foreign country or external elements. These include 55 people arrested in January for organizing or running in pan-democratic primary elections in July 2020, 47 of whom were formally charged with subversion on February 28. Additionally, the Hong Kong government used COVID-19-related public health restrictions to deny authorizations for public demonstrations and postponed Hong Kong’s Legislative Council (LegCo) elections for at least one year.”

Ongoing WTO dispute filed by Hong Kong

Hong Kong has filed a request for consultations and a request for a panel at the WTO to contest actions during the Trump Administration which resulted in a requirement that goods from Hong Kong exported to the United States be labeled as manufactured in China because of prior actions by China that limited Hong Kong autonomy. A panel has been established but not yet composed. See WTO, DS597: United States — Origin Marking Requirement, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds597_e.htm. I have reviewed the dispute in prior posts. See February 23, 2021, WTO Dispute Settlement Body meeting of February 22, 2021 — panels authorized in two matters; impasse on the Appellate Body remains, https://currentthoughtsontrade.com/2021/02/23/wto-dispute-settlement-body-meeting-of-february-22-2021-panels-authorized-in-two-matters-impasse-on-appellate-body-remains/; January 16, 2020, Request for the establishment of a WTO panel by Hong Kong, China contesting the U.S. origin marking requirement, https://currentthoughtsontrade.com/2021/01/16/request-for-the-establishment-of-a-wto-panel-by-hong-kong-china-contesting-the-u-s-origin-marking-requirement/.

What is clear from yesterday’s Hong Kong Policy Act Report is that the concerns in the United States on the actions by China to restrict Hong Kong’s autonomy have not gone away with the Biden Administration but have increased with the escalating actions by the Chinese government. While Hong Kong will pursue its challenge, one shouldn’t expect a change in U.S. position nor should one expect a resolution in the WTO in the next several years.

To read the original blog post from Terence Stewart’s Current Thoughts on Trade, please click here 

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One of the actions taken in response to the Executive Order was a change by the U.S. Customs and Border Protection to the country of origin marking required on goods from Hong Kong to indicate such goods were from China. The Federal Register notice of the change was published on August 11, 2020 and is embedded below.

The government of Hong Kong released a statement on the day of the Federal Register notice and has raised concerns with the U.S. government about such change in marking requirements during the intervening months. The August 11 release from Hong Kong is embedded below.

Having been unable to get the United States to modify its position on country of origin marking, on October 30, Hong Kong filed a request for consultations with the United States at the WTO challenging the change in origin marking requirements as violative of a number of WTO obligations the U.S. has (seven alleged violations are listed in the request). See UNITED STATES – ORIGIN MARKING REQUIREMENT, REQUEST FOR CONSULTATIONS BY HONG KONG, CHINA, WT/DS597/1, G/L/1365, G/RO/D/8, G/TBT/D/53 (3 November 2020). The request for consultations is embedded below.

Whatever the technical and legal merits of the Hong Kong request for consultations, this is the type of dispute that will not result in a satisfactory resolution through resort to the WTO dispute settlement system. The underlying dispute is about the actions of China in implementing national security legislation affecting the treatment of those living in Hong Kong which the U.S. (and many other countries) view as contrary to the agreed treatment of Hong Kong by China following the return to China from the United Kingdom. Resolution of the underlying dispute will not be advanced by Hong Kong’s request. Moreover, with the current impasse on the WTO Appellate Body, adding a dispute to the WTO pending cases which in reality involves bilateral differences between the U.S. and China will do nothing to resolve the Appellate Body impasse. Thus, if there is a panel report which finds U.S. violations of existing obligations, the U.S. would almost certainly file an appeal where no functioning Appellate Body is in place. Thus, the dispute will not resolve the matter or result in authorization by the WTO for action by Hong Kong.

While a change in administrations could result in a different approach being taken by the United States (unknown if that would be true), if the Trump Administration continues past January 20, the request for consultations filed by Hong Kong will simply generate paperwork without the possibility of a meaningful resolution.

Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, bodog poker review|Most Popular_Congressional

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But since brokering a trade deal with Beijing in January, he has become one of China’s biggest defenders within the administration, emerging as an obstacle to lawmakers and other top White House officials who want to punish China over its treatment of ethnic Muslims and begin trade talks with Taiwan.

Over the past several months, Mr. Lighthizer has pushed back on several proposed policy measures that rankled Beijing, arguing those efforts could disrupt the U.S.-China trade pact that he and President Trump spent more than two years trying to forge, according to several former government officials and other people familiar with the conversations.

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Lurking at the bottom of a list of laws is the innocuous sounding “section 1304 of title 19, United States Code”. No details are provided.

This seemingly obscure provision in fact ends Hong Kong’s status as a separate entity for country of origin marking purposes.

It means goods made in Hong Kong and shipped to the US in future will need to be marked as “Made in China”, and while details of its implementation are awaited, it paves the way for Hong Kong exports to be subject to the additional customs duties already imposed on Chinese exports as a result of the trade war.

These additional duties go way beyond the US tariff ceilings at the World Trade Organisation (WTO). Hong Kong is a WTO member in its own right, as a separate customs territory and its trade regime is widely recognised as being distinct from the mainland’s.

In the trade sphere, there are three criticisms that might be made.

First, this looks like disgraceful bullying by the most powerful nation in the world against a small, largely defenceless and very open economy.

Second, it is perverse and hypocritical. How can anyone believe the US’ pious homilies about the need for more market-oriented conditions in the world trading system when they then whack an open trading economy like Hong Kong? Hong Kong came top of the Heritage Foundation’s Index of Economic Freedom for 25 years running between 1995 and 2019, and was second in 2020.

Third, and perhaps most importantly, it is counterproductive. It brings about the very situation that the US claims it wants to avoid – namely, conflation of Hong Kong trade policy with that of the mainland, leading to further erosion of the SAR’s autonomy.

According to the executive order, “the situation with respect to Hong Kong” constitutes an unusual and extraordinary “threat”, requiring the declaration of a “national emergency”. The additional customs duties will be justified by the US under the General Agreement on Tariffs and Trade’s (GATT) exception for measures to protect essential security interests, taken during an emergency in international relations.

Quite how normal trade with Hong Kong under the GATT’s “most favoured nation” clause on non-discrimination threatens the US is baffling. We all know how much emphasis the current US administration places on trade balances. In 2018 the US enjoyed a surplus of US$31 billion in its goods trade with Hong Kong – its highest surplus with any economy in the world.

The SAR government’s response remains to be seen. Retaliation against imports from the US may be tempting but seems unlikely given Hong Kong’s long attachment to free trade. The US knows that, which makes its action look even more like a cheap shot.

Another option – after the deed has been done – would be to take the first steps towards formal dispute settlement proceedings in the WTO.

Trade disputes take a long time to come to a conclusion. And the US is currently in no mood to observe WTO niceties – except when it’s the complainant. But at least Hong Kong would have signalled a determination to stand on its principles. That would also shore up its position with other trading partners.

Hong Kong’s trading status with the US is often characterised, even in Hong Kong, as “special” or a “privilege”. That may be the view from Washington but there’s no need for people in the SAR to be so subservient.

Hong Kong has rights under an international treaty called the WTO Agreement. What’s the point of having those rights if you do not invoke them when you need them?

Stuart Harbinson served as a senior Hong Kong government trade policy official and negotiator in the 1980s and 1990s. He was Hong Kong’s representative to the World Trade Organisation (WTO) from 1994 to 2002, after which he became chief of staff to WTO director general Supachai Panitchpakdi and then special adviser to his successor, Pascal Lamy. He is a fellow of the Asia Global Institute and the European Centre for International Economic Policy, and a senior consultant on international trade for Hume Brophy.

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