China Power | Diplomacy | East Asia

What Trump’s Latest Moves on Hong Kong Really Mean for the City

Withdrawing Hong Kong’s special status under U.S. law will hurt the city itself far more than it will hurt China.

Brian Wong
What Trump’s Latest Moves on Hong Kong Really Mean for the City
Credit: Pixabay

At a press conference on Friday, U.S. President Donald Trump made a series of unprecedented – albeit expected – remarks on the Hong Kong situation. After denouncing what he viewed as Beijing’s assertion of more control over and interference in Hong Kong’s internal affairs, Trump turned to declaring a series of proposed changes to U.S.-Hong Kong relations (as well as abruptly announcing the United States’ withdrawal from the World Health Organization). Besides calling for sanctions on mainland Chinese and Hong Kong officials deemed to be affiliated with the planned national security law, Trump also called for the removal of Hong Kong’s special status – increasing tariffs on imports from Hong Kong and treating it as a homogenous entity with the rest of China in terms of customs and travel restrictions.

Trump’s statement followed stern remarks and rebuking from both sides of the Pacific. Secretary of State Mike Pompeo declared on May 27 that “Hong Kong does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997.” These statements have culminated from escalating tensions between China and the United States, which range from the lengthy trade war to new questions over China’s alleged responsibility for the COVID-19 outbreak, as well as concern over Hong Kong’s level of autonomy and judiciary independence. On the other hand, Chinese diplomats and bureaucrats have retaliated, alleging that Pompeo and Trump’s statements were “arrogant” and “hysterical,” as well as an unjust interference with China’s domestic affairs.

Trenchant advocates of Trump’s move have posited that this is a timely and necessary reaction to China, as well as a much-needed response to Hong Kongers’ political demands and past decades of democratic activism.

On the contrary, irrespective of where one stands politically on the U.S.-China or China-Hong Kong issues, one should be troubled by Trump’s statements. Should his words translate into reality, Hong Kong is likely to further decline – at least in the short to medium term – as the first casualty in a brewing New Cold War.

There are plausible reasons to think that Trump is bluffing, or that his pronounced moves would not materialize. After all, the president is renowned for his mercurial, flip-flopping nature, and his statements could be viewed as a well-planned distraction from the surging COVID-19 death tolls and the ignominious murder of George Floyd in his own country – and resulting mass protests, coupled with violent police response. In the end, cooler heads within the China lobby could prevail, calling for a more restrained and conciliatory approach in mediating the country’s differences with China. Furthermore, the results of the 2020 presidential election remain up in the air, and Trump may well find limited incentive to follow through on his bluffing as he redirects his attention to mollifying disillusioned voters. It is worth noting that very little concrete substance came out of Trump on Friday, beyond a rhetorically flourishing section dedicated to the United States’ ostensible concern for the city’s autonomy.

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Yet suppose Trump does indeed follow through. There are many reasons China is unlikely to bulge on Hong Kong, particularly in relation to the specific “threat” of revoking Hong Kong’s trade status.

First, China has substitutes that are – while inferior in some regards – collectively capable of “holding the economic fort” for the country as it enters the new Cold War. A popular defense of revoking Hong Kong’s trade status is that this would allegedly force China to the brink of economic collapse and thereby necessitate “compromise” on the issue. Yet this view relies upon heavily outdated and erroneous empirical assumptions. Shenzhen and Shanghai have emerged as regional initial public offerings (IPO) hubs. The past two decades of rapid economic reform and modernization have enabled China to cultivate robust, well-connected commercial hubs in Shanghai and Shenzhen, with other coastal cities – such as Guangzhou or Qingdao – playing critical supplementary roles. Hong Kong’s status as once the world’s busiest port has been supplanted by mainland rivals such as Guangzhou and regional competitors such as Singapore and Shanghai. Hong Kong’s separate customs and tariffs arrangements currently render it a more attractive intermediary and gateway to China than many of the above cities, yet given China’s population and consumption power (even despite the escalating tensions around the world), businesses are not about to simply abandon the country. It is likely that once Hong Kong’s special arrangement with the United States is voided, American trade would simply be rerouted and redirected through cities that are, if anything, more tightly controlled parts of mainland China.

Perhaps the argument in favor of revoking Hong Kong’s status stems from brinkmanship considerations – that the United States is calling China’s bluff, and hoping to secure some incentive to compromise on the part of Chinese diplomats. Yet this argument ignores several critical dimensions. The first is that Chinese politicians are likely to have accounted for the likely fallout and international backlash stemming from the national security law, and took on what they viewed as calculated and tolerable risks.

The second is that – as precedents in Chinese political history have shown – Chinese bureaucrats are devout adherents to “baseline mentality.” Compromise on most areas is plausible, yet compromise on certain political baselines is deemed as impermissible. Hong Kong had historically been at the penumbra of China’s baselines – limited democratization and selective devolution had been on the table, but instantaneous universal suffrage, let alone independence, certainly is a red line that Beijing would, at all costs, maintain. In the eyes of Beijing’s administrators, to capitulate, at this moment, on an issue as critical as this, not only jeopardizes the country’s national security (by incentivizing internal rebellions and copycat secessionist movements), but would also be lethal to the country’s international credibility and the regime’s internal legitimacy. Behaving in a way that comes across as kowtowing to American bluffing would severely undermine the administration’s ability to bargain for better trade terms and post-COVID diplomatic relations in Europe, Middle East, and Africa. At home, given the overwhelmingly anti-Hong Kong sentiments on the mainland, Beijing has little choice but to adopt a stern stance over Hong Kong so as to quell internal dissent and disillusionment. It suffices to say that Hong Kong’s economic offerings to the mainland following from its relationship with the United States – while certainly non-trivial – are weighed as far less significant than the above considerations.

Finally, the “bluff” argument assumes that China could not make do under a more economically and politically integrated Hong Kong with “dissipating civil and political autonomies.” Chinese bureaucrats do not view these freedoms as instrumentally necessary for economic prosperity, and it is apparent that the decoupling of the United States from Hong Kong (in visa arrangements and science-technological terms) would only accelerate the city’s integration within Greater China. Worries over capital flight are valid but overstated – capital may well be escaping Hong Kong over the political uncertainties and turmoil of the city, but is likely to return to the city or enter the mainland in the medium to long run. To the extent that investors are shunning China for broader ideological considerations, the transformation to U.S. relations with Hong Kong would have little to no effect on their investment decisions. The above demonstrates – as any well-informed, phlegmatic China watcher should know – that the United States’ move on Hong Kong is no act of “solidarity with the activists.”

What, then, are the specific harms that would be imposed on Hong Kong by Trump’s latest moves? The city may undergo significant capital flight in the short run, as investors flee, with fear of political uncertainty and instability induced by the heightening aggression from the United States. Local residents may also leave the city as they perceive it to be no longer a welcoming environment for international investment. More substantively, American corporations that had historically based their operations in Hong Kong – largely for reasons pertaining to the ease of arranging visas and trade with the country – may find themselves departing for more suitable substitutes to the city, whether it be leading mainland Chinese cities (with greater proximity and political stability than Hong Kong) or regional hubs such as Tokyo and Singapore. Hong Kong’s low tax rates may render the city an attractive choice for large, multinational corporations, but its attraction as a corporate nexus is likely to be dented.

Furthermore, the city’s trade in goods and services with the United States would inevitably be adversely affected, albeit to a lesser degree than pundits predict – after all, Hong Kong’s unique geographical positioning and mature legal infrastructure render it a highly attractive trading partner. Hong Kong exported $16.8 billion to and imported $50.1 billion from the United States in 2018, and its total trade for the first quarter rose to $7.32 billion (despite the global pandemic) in the first quarter of 2020. Perhaps most ironic is that the United States itself may well emerge inadvertently incurring significant losses from the raised tariffs on American firms seeking to tap into the Chinese market for goods and services. Concurrently, domestic manufacturers and producers in Hong Kong are likely to undergo a “double whammy” – of both heightened prices associated with tariffs placed on U.S. imports and decreased access to the American markets. The relatively affordable prices of luxury merchandise (imported from the United States) have historically rendered Hong Kong a palatable spot for tourists entering from the mainland; revoking the city’s special status may well put a further dampener on the city’s already hard-hit retail and tourism sectors.

Finally, and perhaps as an indirect affront to the celebratory comments from many Hong Kong netizens, the revocation of Hong Kong’s status may well indirectly reduce American investment and funding in civil society or nongovernmental organizations. Beijing would certainly welcome this move, as it views the past two decades of political and civil unrest in the city as the product of foreign interference and American funding. From Beijing’s perspective, new restrictions upon American private equity and capital, coupled with its national security legislation, will pave a critical path toward what Beijing deems as the restoration of political order to the city.

Perhaps what is really at stake here isn’t Hong Kong’s special trade status, but its historical role as a mediator, a confluence where East meets West, and as a site where investment, regardless of its origins or identity, is welcome. As the new Cold War escalates, it is likely that neither China nor the United States has incentives to back down, without a substantial upshot to exiting the quasi-security dilemma. Trump’s statements only signal the beginning of a persistent war of attrition – one that may well accelerate Hong Kong’s decline.

What the city should count on and hope for, perhaps, is that a critical mass within it could recognize the need for a modus vivendi – a new arrangement – that enables it to exist and operate as a part of China, while preserving cultural, political, and institutional autonomies in a way that is conducive toward Beijing’s interests. Many have alleged that “one country, two systems” is dead – now is the right time to re-imagine and re-articulate it, to demonstrate to Beijing that liberalization and reforms within the city need not come at the expense of Beijing’s desire for certainty.

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Brian Wong is a Rhodes Scholar-Elect from Hong Kong (2020), upcoming DPhil Candidate at Oxford, and a current MPhil in Politics at Wolfson College, University of Oxford. They are the Founding Editor-in-Chief of the Oxford Political Review; Founding Secretary of Citizen Action Design Lab, Founding Fellow of Governance Partners Yangon, and a frequent contributor to media and academic publications.