Thought July 16, 2020 / 07:33 am UTC

Special No More: U.S. Sanctions Against Hong Kong Lack Bite

By Siew Huay Liang

U.S. President Donald Trump has ordered an end to Hong Kong’s preferential status with the U.S. He has signed a Hong Kong Autonomy Act sanctioning foreign individuals and entities contributing to the erosion of its autonomy. We do not expect the decision to significantly affect Hong Kong’s economy.

The ending of Hong Kong’s special U.S. status would effectively treat the Special Administrative Region (SAR) as the same as mainland China, including ending license exceptions for exports, suspending an extradition agreement and eliminating preferential treatment for Hong Kong passport holders. The U.S. could subject Hong Kong to the same tariffs it imposed on China during the trade war.

While we projected that U.S. tariffs would shave off 0.4-0.5 ppt off Chinese GDP, Hong Kong is not in the same situation, given that it is a highly services-based economy with the services sector accounting for more than 90% of GDP and most of its trade is with the Mainland. Hong Kong’s status as a global financial center, likewise, is not expected to be materially impacted, though the sanctions may undermine some financial services and certain sectors in the SAR. Chief Executive Carrie Lam in late June said that the SAR was prepared for any sanctions and estimated that the impact on Hong Kong would be little, citing alternatives to U.S. technologies. Most importantly, we see the SAR having strong support from China and an enormous hinterland as its market.

Trump said on July 13 that the U.S./China phase-1 trade deal remained “intact,” with China purchasing American goods as set out in the agreement. We believe both sides want to keep the trade agreement despite rising tensions. We feel Trump’s China rhetoric is about domestic U.S. politics, while Beijing sees the agreement benefitting the world. Nevertheless, Beijing will continue to consider the national security law necessary.

Further escalation of U.S./China tensions would prompt some temporary worries in Asian financial markets, though we think this is unlikely to happen.

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I, Siew Huay Liang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.