Status has its economic advantages: during the US-China trade war, for example, it allowed Hong Kong to avoid Washington’s tariffs on Chinese goods.
“Hong Kong has become one of the last battlegrounds for the US-China power game,” said Ronald Wan, CEO of Partners Capital International, a Hong Kong-based financial services company. “Trade is only a small part of history.”
Trade is only part of it
The United States imported nearly $ 17 billion in goods and services from Hong Kong in 2018, while it exported $ 50 billion – an insignificant amount compared to the nearly $ 740 billion in goods and services exchanged between the United States and China that year. .
Applying Chinese tariff rates to Hong Kong exports “would have a limited direct impact on US businesses operating in the area” due to how little is exported, Eurasia Group analysts wrote in a research note on Wednesday.
They added that the United States is unlikely to completely abandon its relations with Hong Kong.
“US companies are invested in Hong Kong as an access point for the region,” analysts wrote. “Losing its special status would also damage Hong Kong more than Beijing, further straining an already struggling economy and doing minor long-term damage to Beijing’s plans.”
A more worrying risk is that the loss of this special status could lead Washington to limit Hong Kong’s access to sensitive American technology, according to Capital Economics.
These products represent only 5% of Hong Kong’s total imports, the company’s researchers wrote last November. But they said that “limiting the ability of Hong Kong-based companies to source sensitive products would eliminate one of Hong Kong’s distinctive advantages as a commercial location over mainland China.”
This concern also indicates a broader fear: if the United States begins to treat Hong Kong while it is dealing with China commercially, it may eventually reconsider the way it looks entirely at the city.
“Short-term economic damage would be manageable,” said Capital Economics researchers. “But it would accelerate the erosion of Hong Kong’s status as an international business center.”
Turbulence to come
“We see turbulence ahead of the worsening US-China relationship,” wrote strategists for New York-based financial services firm Brown Brothers Harriman in a recent research note.
Strategists have warned that the Hong Kong dollar may come under pressure, even if it is pegged to the US dollar and can only be traded in a narrow band. If the Hong Kong currency weakens, interest rates may rise. Investors may also be required to move their money elsewhere.
“While we expect the peg to hold, a run on the [Hong Kong dollar] would [be] very destabilizing for the economy, “they added.
Any significant degree of instability could also cause foreign companies to reconsider Hong Kong as a hub for their operations in Asia. More than 1,300 U.S. companies operate alone in the city, according to Citi.
“Recent polls by the American Chamber of Commerce show that US companies are already planning to scale back on their investment in the city,” wrote Capital Economics researchers. “Much of Hong Kong’s success is based on its ability to attract [foreign direct investment] and enjoy the productivity dividends that come from hosting internationally competitive companies. “
A complicated relationship
Despite recent fears, entrepreneurs and analysts have pointed out that Hong Kong’s relationship with the West is long and complicated. Undoing completely would be difficult.
Eurasia Group analysts noted that redefining Washington’s treatment of the city “would touch on complicated issues of regulatory cooperation, tax treatment and legal cooperation.”
“These won’t open quickly,” they said. Analysts added that President Donald Trump is unlikely to sanction Hong Kong immediately in a way that would endanger financial stability, for example by making it more difficult for Hong Kong authorities to clear US dollar transactions.
“Companies can move. Capital could escape,” said Partners Capital executive Wan. “But it could take years.”
And although US companies are “assessing the situation” in Hong Kong, this does not necessarily mean they will rush to the exits, according to Tara Joseph, president of the American Chamber of Commerce in Hong Kong.
Beijing also likely considered the impact that the introduction of its national security law would have on businesses in Hong Kong, according to analysts from the Eurasia Group.
“Chinese officials probably determined that most businesses would not leave the city and that all risks to key elements of the Hong Kong financial system, such as the Hong Kong dollar clothespin to the US dollar, were controllable,” they wrote. “For Beijing, the imperative to tighten political authority over Hong Kong overcomes the risks of long-term economic atrophy of the territory.”
– Akanksha Sharma and Kristie Lu Stout contributed to this report.