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CvT: Hong Kong – A City Caught in the Middle

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With more than 1,300 American firms that include over 300 regional headquarters, Hong Kong has long been the de facto launching point for foreign businesses that seek riches within the vast Chinese market, but also value the operational familiarity of the former British colony. It comes as an uncomfortable truth to many, then, that the city’s stature as the bridge between the East and the West may be crumbling under the weight of a newly minted national security law (NSL) that threatens to undermine the autonomy that has elevated Hong Kong into a pillar of US-China relations.

Learn the past to understand the present

Hong Kong owes its unique stature to its unorthodox roots. The city was officially ceded to the British in 1898 under the terms of a 99-year lease, expiring on July 1, 1997. During British rule, the city flourished as a primary trading port for goods not only in and out of China, but also across the region. As the handover approached, British and Chinese leaders negotiated terms that the city would return to China under a ‘One Country, Two Systems’ framework, wherein Hong Kong residents would continue to have rights to speech, press, assembly and religious belief, among others—at least until 2047.

The framework also demarcated regulatory, judicial, and business processes between the Mainland and Hong Kong, which poised the city to maintain its competitive edge through the transparency and emphasis on ‘rule by law’ that governed its business environment. The city has since continued to blossom, recently ranking as the #3 financial center in the world after New York and London.

Additionally, Hong Kong has been a staging point for wealth creation in Mainland China. As recently as 2019, approximately two-thirds of all FDI into China came via Hong Kong. In 2018, US$47 billion of US-China trade was transshipped through Hong Kong and, in terms of capital flows, approximately 80% of the IPOs outside the Mainland have been issued in Hong Kong over the last decade.

As a lighthouse for US-China exchange, the question looms large: ‘How will undermining the One Country, Two Systems framework that grants Hong Kong veritable autonomy from the Mainland impact US-China relations?’

Impaired opportunity for economic exchange

First and foremost, economic collaboration has historically been the driving force shaping US-China relations. However, in response to the NSL, the US stripped Hong Kong of its special economic status – introducing punitive trade restrictions that will increase the cost of trade and complicate supply chains on both shores.

Ironically, during previous political flare ups between the US and China, Hong Kong has actually thrived as companies took advantage of Hong Kong’s independent trade status to increase transshipments of goods through the city’s ports. However, with tariffs and other trade controls levied on goods flowing through Hong Kong, these preferential opportunities have disappeared, and few available options remain to reduce the impact of trade barriers.

Furthermore, given the current macroeconomic climate, Hong Kong-based American firms could easily find themselves caught in the crossfire of an escalating tit-for-tat game between the two nations. Given the spiraling business landscape in Hong Kong, a July temperature survey conducted by the American Chamber of Commerce in Hong Kong showed a majority (63%) of respondents were negative about the impact of the NSL on Hong Kong’s business prospects, while 35% of respondents indicated that their companies are planning to shift their operations away from Hong Kong due to political instability and other operational risks in light of the new law.

Looking forward

Hong Kong has long served as a hub for global trade. However, as opportunity for economic exchange through the city diminishes, the anchor for US-China relations will continue to erode, thereby further straining the diplomatic tether between the two nations.

While it may be difficult to understand why China made the decision to introduce the sweeping NSL at this time – whether simply opportunistic action as the outside world reels in the wake of the outbreak or as a heavy handed response to growing support for the city’s pro-independence movement – the move has already set off chain reaction of events that have sunk US-China relations to unprecedented lows and will continue to define the US-China relationship for some time to come.

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