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US | Asia-Pacific

Implications of US Passing Hong Kong Legislation

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Last week, US President Trump signed the Hong Kong Human Rights and Democracy Act, which had previously passed the US House & Senate. While it could complicate US/China trade talks, Citi analysts believe that negotiations are unlikely to be derailed ultimately.

 

New law has two major components: First, the law stipulates annual reviews/certification by the US State Department for the Congress with regards to both HK’s degree of autonomy and civil liberties record, to justify HK’s special treatment under the US-HK Policy Act of 1992. The second component is possible sanctions against officials seen as responsible for human rights abuses or infringements of HK’s autonomy. In the end, determination of whether HK’s special status with the US will change, or if any sanctions will be imposed, is up to the President – and Citi analysts think it is unlikely for President Trump to take such actions in most scenarios. Citi’s base case is no change to HK’s special status with the US in the foreseeable future given the belief that both the US and China have significant interests in maintaining the status quo in HK.

 

 

What happens in the unlikely scenario if the US revoked HK’s special status? The potential removal of HK from the customs union is unlikely to have a significant impact via the goods trade given that domestically produced goods in HK only account for 1.1% of exports. Goods made in China and transshipped through HK would have been subject to US tariffs anyway. The economic impact is likely to be felt more via services trade. HK runs a services trade deficit with the US, but a large surplus in transport, travel and business services. HK’s logistics/transport sector generated ~27% of GDP in 2017 and ~20% of total employment in 2018. The larger impact is likely to be on business confidence and risks of US businesses interests reducing their footprint in the territory. More than 1,300 US firms operate in HK, with about 300 US firms using HK for their Asian regional operations.

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