(Bloomberg) -- The Trump administration has promised strong action against China over its national security law in Hong Kong, but its options may be limited because any harsh penalties aimed at Beijing would likely also harm both Hong Kong -- and the U.S.
While Secretary of State Michael Pompeo indicated Friday that the U.S. could reconsider Hong Kong’s special trade status, taking such broad action risks causing harm to U.S. interests. The administration potentially could take a narrower approach, such as sanctioning individuals or businesses involved in curtailing Hong Kong’s democracy, or by maintaining special treatment of the territory for sensitive technologies.
Businesses and investors are anxiously watching the developments, which could have far-reaching implications for the U.S.-China relationship. Earlier this week, China reiterated a pledge to implement the first phase of its trade deal with the U.S. despite setbacks from the coronavirus outbreak, though the January agreement has come under threat as the two nations escalate disputes on many fronts.
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“Beijing’s decision puts the U.S. government in a difficult position, because any policy response against Hong Kong will largely punish the wrong actors,” said Leland Miller, chief executive officer of China Beige Book, a firm that researches China’s economy. “Pulling back its special status will mostly hurt Hong Kongers who overwhelmingly oppose this move, as well as U.S. and other foreign companies based there. Visa restrictions or tariff hikes would be similarly counterproductive.”
Miller said he expects the Trump administration to apply targeted sanctions but in order to turn up the heat the U.S. would have to target Beijing’s interests, not Hong Kong’s.
“And with the phase one deal still technically a go, the administration doesn’t appear to have much appetite for that right now,” he added.
White House economic adviser Kevin Hassett said Friday that President Donald Trump and Pompeo would discuss possible responses over the weekend.
“I can say that the Chinese move in Hong Kong is going to be very, very bad for the Chinese economy and for the Hong Kong economy,” Hassett told reporters at the White House. “Hong Kong has been the financial center of Asia for a very, very long time. I don’t think it will continue to be and so the costs for China and are very, very large” if the government moves forward, he added.
Hong Kong isn’t as important to mainland China’s economy -- the world’s second largest -- as it once was. Yet the territory has remained a “crucial asset” for China, “as a starting point for mainland firms investing overseas, a source of equity and bond finance, and a channel for capital account opening,” Bloomberg Economics said in a report last year.
The Hong Kong Human Rights and Democracy Act, signed into law last fall, requires the secretary of State to certify, no less than annually, whether Hong Kong continues to warrant special treatment -- as defined in the Hong Kong Policy Act -- under U.S. law based on the autonomy of its government.
Pompeo was to submit a report to Congress weeks ago but held off until after China’s National People’s Congress met this week.
Senator Marco Rubio, the Florida Republican who sponsored the bill, said the administration had no choice but to certify Hong Kong is no longer autonomous if the Chinese government implements the proposed national security law. He also said he expected the executive branch to meet its statutory deadlines.
“Beijing’s exploitation of U.S. capital markets in furtherance of the Communist Party’s efforts to undermine U.S. national and economic security -- including facilitating egregious human rights abuses and a range of military activities -- demands a serious response, and I will continue to work with my colleagues to do just that,” Rubio said in a statement.
But a negative determination with respect to the territory’s independence doesn’t mean the U.S. has to revoke the special status entirely. People familiar with the administration’s discussions on its options said officials actually have a lot of flexibility and a spectrum of options, rather than a binary choice to treat Hong Kong exactly like mainland China.
The U.S. treats Hong Kong differently from mainland China on tariffs, technology curbs -- or export control laws -- and on visas.
As one potential option, the administration could impose all tariffs it’s levied against Chinese imports on exports from Hong Kong but maintain special treatment of the territory when it comes to sensitive technologies. The U.S. has enacted license requirements for American companies that want to do business with Chinese technology firms, including Huawei Technologies Co.
The White House could also sanction individuals involved in curtailing Hong Kong’s democracy, or businesses associated with such actions, before it partly revokes the region’s preferential trade status.
Trump, with the November election approaching and the once robust U.S. economy struggling, has regularly blamed China for failing to prevent the coronavirus from spreading beyond its borders after it was first discovered in the city of Wuhan. He has made a get-tough-on-China stance a key element of his campaign.
The American Chamber of Commerce in Hong Kong said Friday that China’s proposed legislation could lead to a tit-for-tat between Washington and Beijing that eventually curtails Hong Kong’s special treatment.
“Hong Kong today stands as a model of free trade, strong governance, free flow of information and efficiency,” said Robert Grieves, the group’s chairman. “No one wins if the foundation for Hong Kong’s role as a prime international business and financial center is eroded.”
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