In today's newsletter, we talk about why the US is threatening to strip Hong Kong of its special status and the economic implications of such a move.


The Story

Before we get to the juicy bits, we need some context. So here's some historical perspective on the matter from another story we did on Hong Kong last year.

Like most stories, this one begins with the British Empire. In 1840, the British went to war with the Chinese over drugs. The English empire grew opium in Bengal and decided they could make a neat profit by selling it elsewhere, like China. The Chinese were incensed because the rampant opium use was affecting social harmony. So like any good principal authority, they clamped down on the opium trade.

But as soon as Britain got wind of this development they decided to take matters into their own hands and declared War on the Qing dynasty (the Chinese Empire).

And inevitably, they won. As part of the settlement offer, China was forced to part with Hong Kong and the territory continued to remain under British control for over a century. In the meantime, the British Government said it would administer Hong Kong for about 99 years (until 1997) and agreed to cede control to the Chinese soon after. In return, China was expected to treat Hong Kong as a special administrative region for the next 50 years.

Meaning Hong Kong would continue to be a bastion of international trade, liberal values, and democracy while China promised to stay on the sideline until 2047. The setup became known as the “one country, two systems”.

The problem is — Ever since the British left Hong Kong, Chinese influence has been on the rise and this has whipped up tension between residents of Hong Kong and Beijing.

And in 2017, the chief executive of Hong Kong Carrie Lam (mostly approved by Chinese loyalists) decided to push for legislation (law) that would have allowed China (and other countries) to extradite prisoners from Hong Kong. The fear was that China would use this as a tool to punish and prosecute people who were critical of Chinese intervention in Hong Kong.

And so the protests intensified. First, it was only peaceful demonstrations. But as the movement gained momentum there were multiple clashes between the police and the protesters and eventually, Carrie Lam was forced to withdraw the extradition bill indefinitely.

But then, Coronavirus took centre stage and the protests simmered down. This provided China with an opening and they wasted no time passing new legislation to tighten Beijing’s grip over Hong Kong. However, back in the US, officials considered this an affront to the autonomy of the region and they decided to punish China by threatening to strip away Hong Kong’s special status.

And this has some serious repercussions— Not just for China and the US. But also for Hong Kong.

So, let’s start with the US.

Now, Hong Kong is an extremely important trading partner for the US. Last year, they carried a trade surplus of $26 Billion with Hong Kong. That means the US exports way more than they import from the region.

It's also a backdoor for the US to enter Chinese markets. Trading directly with China would mean paying costly tariffs. But the US can trade with Hong Kong without incurring this additional cost. So it makes sense to ship the goods to Hong Kong and then get it to China. However, if the special status is revoked, that could put the entire scheme at risk and over 1,200 US companies could end up bearing the brunt of this burden.

Also, we are not sure if this also involves restrictions on the movement of people.

Because right now, Americans enjoy visa-free travel, making it easy for business executives to commute. But if this equation is upended, you’d be subjected to strict Chinese Visa conditions and this could put off business travel altogether.

Things won’t be great for Hong Kong either. Of course, the city would still be considered a customs territory independent from China, and a separate entity for the purposes of international trade. However, if the US starts treating Hong Kong like any other Chinese city, investors and rating agencies might be inclined to do the same. And once rating agencies tell investors its bad for business, they’ll start moving out.

If, they haven’t moved out already that is.

And then there’s the fact revoking Hong Kong’s special status will sour US-China relations even further. The Red Dragon will no doubt take it as a slight to its sovereignty. As Foreign Ministry spokesman Zhao Lijian already noted, China considers the Hong Kong situation to be a strictly internal affair and is more than willing to take necessary countermeasures against any interference by external forces.

All in all, it seems like this move will offer Donald Trump political brownie points. Maybe it’ll seem like he’s tough on China. But the economic impact for businesses in the US and citizens of Hong Kong might be pretty harsh.

Until next time…

Correction: An earlier version of the story noted that a special agreement signed in 1898, allowed the British to to lease Hong Kong for a period of 99 years.  This isn't entirely accurate. And the error is regretted. (Correction made at 4:07 pm, 2nd June 2020).

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