Hong Kong fuels new crisis for American relations with China

Hong Kong fuels new crisis for American relations with China
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Just when China watchers and trade wonks were happily debating how to implement the phase one trade deal and coronavirus transparency, along came more problems. Congress sent the president a bill on sanctions for Chinese participating in the repression of the Uighurs. There is also a bill for delisting Chinese companies from American stock exchanges if they fail to comply with the federal auditing regulations. Finally, the intention of China to enact a new national security law for Hong Kong amounts to an earthquake that further undermines relations. The developing issues seem to have pushed trade and coronavirus off page one for now.

The Hong Kong action is the most sweeping of the issues. It is important for China because it is clearly a case of breaking its 1998 commitment to respect the autonomy of Hong Kong. It is important for the United States because 85,000 American citizens live there, 1,300 American companies operate there, and hundreds of billions of dollars are under management there. It is of course important for Hong Kong, which has long thrived as an Asian financial center with a rule of law government, an independent judiciary, a strong economy, and a currency pegged to the dollar.

As to what may happen, nothing is automatic. The determination by the United States that it no longer considers Hong Kong autonomous opens the door to some further American actions. Each of these would have to be taken separately. The United States could extend the additional tariffs on China to Hong Kong, withdraw its visa free entry status, and apply the same level of export controls as China. All of these actions would be bad for business in Hong Kong. They would result in more Chinese retaliation that would inevitably hurt the American companies based there.

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The biggest impact, however, may have already occurred, and that is the hit that Hong Kong will take, particularly in the financial sector. Thanks to 100 years of British management and followed by more than 20 years of relative autonomy, Hong Kong has been a safe space for Americans and other Westerners doing business in Asia. The determination that it is no longer autonomous essentially means that idea is no longer true.

The likely consequence is that many Western companies, notably financial institutions, will hedge their bets and move some of their resources and at least some of their physical presence somewhere else. Taiwan has already declared the people leaving Hong Kong will be welcome there. Japan and Singapore will be winners as well. But none of this will happen overnight. This will be like sand leaking out of a bag, though the bag has been torn, and it has become unlikely that it can be stitched back together.

This will not help the Chinese. If they think, as some do, that business will move to Shanghai, they will be wrong. No one goes to a less safe location unless they have no choice. The result is a weaker Hong Kong, a damaged China, and American companies with new problems. This happened now because China is seeking some veneer of legality over this action.

China needed its legislature, which is currently in session, to enact a law. If it did not take action it would have to wait until next year. My colleague Bonnie Glaser had it correct when she suggested the Chinese have likely concluded the relationship with the United States will not get any better as long as Donald TrumpDonald John TrumpDavis: Supreme Court decision is bad news for Trump, good news for Vance Meadows trying to root out suspected White House leakers by feeding them info: Axios Pressley hits DeVos over reopening schools: 'I wouldn't trust you to care for a house plant let alone my child' MORE is president, so they might as well move ahead on their strategic objectives and let the chips fall where they may.

Indeed, there have been more aggressive actions with the Uighurs as well as out in the South China Sea. Hong Kong is part and parcel of this focus of Xi Jinping on enhancing Communist Party control of all elements of its society there, even at the great expense of economic growth. The United States will likely take some of the actions I described above or, if it wants to reflect caution, it will take smaller steps to sanction those individuals taking part to implement the national security law in Hong Kong.

Hong Kong has to build a coalition of support and let the full force of the international community press the Chinese, who dislike being outsiders. Indeed, the United States has had far more success through multilateral action than unilateral action. But the administration has demonstrated a lack of interest in collective approaches. Look out for sanctions of some kind and the resulting economic damage for everybody involved.

William Reinsch is the Scholl Chair in International Business for the Center for Strategic and International Studies. He was under secretary for export administration for the Department of Commerce under President Clinton.