Trump’s latest move on Hong Kong is bluster

June 1, 2020 1:15 PM
Image credit: 
REUTERS/Bobby Yip

If President Trump follows through on his threat to eliminate Hong Kong’s status as a special customs territory with the United States, separate from China, the economic impact on Hong Kong would be minimal and on China even less.

Under the terms of the 1992 United States–Hong Kong Policy Act, exports of Hong Kong goods to the United States are subject to the very same low most-favored-nation (MFN) tariffs afforded to every other “normal” member of the World Trade Organization. In his announcement on May 29, Trump said he will withdraw Hong Kong’s status as a separate customs territory and treat it as part of China. If he proceeds with this threat, Hong Kong’s exports will be subject to the much higher tariffs that currently apply to Chinese goods exported to the United States. Multiple press reports state that Hong Kong’s exports to the United States are $45 billion, implying that tariffs as high as the 25 percent rate that applies to some Chinese goods would truncate this trade, devastating Hong Kong’s economy.

But these reports overlook an important fact. Only goods produced in Hong Kong are eligible for MFN tariff treatment by the United States.

In fact, 95 percent of all exports from Hong Kong are goods produced elsewhere, exported to Hong Kong and then reexported from Hong Kong to global markets. Of the $45 billion in Hong Kong exports to the United States, only 1 percent or about $450 million is produced in Hong Kong and eligible for MFN tariff treatment. Most of Hong Kong’s exports to the United States are goods produced in China, reexported through Hong Kong. But these goods are already subject to the same high tariffs as Chinese goods exported directly from the mainland to the United States. Similarly, goods from other countries reexported by Hong Kong to the United States are subject to the same duties that would apply if the goods were shipped directly to the United States, rather than reexported by Hong Kong.

The modest exports of Hong Kong produced goods should be no surprise. Decades ago, Hong Kong was a major producer of light industrial goods, such as apparel, toys, and electronics. But, within a decade of China’s opening to foreign investment in 1978, Hong Kong entrepreneurs had moved almost all their production to the mainland, where wages were lower and the Chinese government offered tax and other incentives. In recent decades Hong Kong’s economy has been composed almost entirely of services, especially financial services, logistics, tourism, and professional and other services, which have helped turn Hong Kong into a major commercial hub.

The timetable for the administration’s actions has not been specified. Trump said that his administration would “begin the process” of eliminating various forms of “special treatment” in its relations with the United States. But because exports to the United States of goods produced in Hong Kong account for only one tenth of 1 percent of Hong Kong's output, even if higher tariffs cut this flow entirely, the effect on the Hong Kong economy would be imperceptible.

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Nicholas R. Lardy Senior Research Staff

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