Hong Kong's strategic value amid the US-China trade war

September 05, 2018 13:17
Operating as a separate customs territory, Hong Kong escapes the trade sanctions imposed by the US on China. Photo: Bloomberg

As US President Donald Trump wages trade wars around the globe, China, the second largest economy in the world, is inevitably at the receiving end.

Hong Kong, meanwhile, continues to operate as a separate customs territory despite its return to Chinese sovereignty in 1997.

Thanks to the city's status as an independent economic and customs entity, Hong Kong is a founding member of the World Trade Organization (WTO) when it replaced the former General Agreement on Tariffs and Trade (GATT) in 1995.

After the 1997 handover, the city remained a member of the WTO as guaranteed under "one country, two systems" principle and Article 116 of the Basic Law, which stipulates that:

"The Hong Kong Special Administrative Region may, using the name ‘Hong Kong, China’, participate in relevant international organizations and international trade agreements (including preferential trade arrangements), such as the General Agreement on Tariffs and Trade and arrangements regarding international trade in textiles.

Export quotas, tariff preferences and other similar arrangements, which are obtained or made by the Hong Kong Special Administrative Region or which were obtained or made and remain valid, shall be enjoyed exclusively by the Region.”

As a matter of fact, Hong Kong became a WTO member before mainland China did.

And since the city is an independent and separate member of the WTO, all the trade sanctions that are currently imposed by the US on China don’t apply to the territory directly.

As such, it appears the ongoing Sino-US trade war hasn't caused any direct damage to the Hong Kong economy.

But even so, whenever I have the chance to meet with US lawmakers either in Hong Kong or in the US, I would always seize the opportunity to convey a message that the US must avoid involving Hong Kong in its trade war against China.

The fact of the matter is that as Hong Kong's economy has become increasingly dependent on the mainland after years of integration, it is inevitable that the territory could become collateral damage amid the escalating US-Sino trade war.

It is estimated that the trade war is likely to affect as much as HK$350.7 billion worth of re-exports of Hong Kong, which could account for up to 4.3 percent of the city's total trade volume, and 9.1 percent of the total export value. The amount involved is so huge that we can't afford to ignore the matter.

Fortunately, even though the US-Sino trade war is underway in full swing, Hong Kong still has both the opportunity and capacity to seek normal bilateral cooperation with other economies, thanks to the city's status as a leading global financial hub and the world’s fourth largest trading market, not to mention the well-established rule of law, as well as high degree of free capital flows, freedom of information, etc.

Hong Kong's unique status will also allow it to become a window for communication among the various opposing parties in the ongoing trade war.

As a matter of fact, over the past several decades, whenever China was at economic odds with other major powers, Hong Kong has always fulfilled the role as the mainland’s window to the outside world.

For example, during the Korean War in the early 1950s and in the aftermath of the June 4 incident in Beijing in 1989, Hong Kong was virtually China's only gateway to the rest of the world amid western economic sanctions on Beijing.

Many commentators have pointed out that the current US-Sino trade war may not be just an isolated incident.

Rather, it could be a prelude to even more frequent and routine trade frictions between China and other industrial powers in the coming days.

It is because, as they explained, years of globalization have started to lead to a pendulum effect, which in turn has given rise to protectionist sentiment in advanced economies.

Despite the volatility in global markets, I believe that as long as Hong Kong finds its position and utilizes its strategic value amid the ongoing US-Sino trade war, the city can not only ride it out intact, it can also play a key part in helping China respond to the crisis.

This article appeared in the Hong Kong Economic Journal on Aug 30

Translation by Alan Lee

[Chinese version 中文版]

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Legco member representing the Legal functional constituency (2016-2020) and a founding member of Civic Party