Kick Hong Kong Out of the WTO? Easier Said Than Done.

Hong Kong isn’t what it used to be. Beijing is moving in. The National Security Law, implemented June 30, 2020, aligns the former British colonial city with that of the CCPs courts on the mainland. Businesses are in as much risk as individuals now. But beyond the case-by-case issues that will arise in conducting business with Hong Kong these days, one macro question really tugs at the minds and hearts of those on the U.S. China Economic and Security Review Commission. And that is: should Hong Kong be subject to Section 301 tariffs? And should it be part of the World Trade Organization under the umbrella of China?

On Wednesday, Commissioner Michael Wessel was first to bring up the issue of treating Hong Kong no differently than Shanghai now that the Chinese Communist Party is on its way to doing just that. Wessel was speaking via webcam during the hearing titled “U.S.-China Relations in 2021: Emerging Risks.”

“I have to say I leave here very uneasy today from this panel,” he said, after roughly two hours of testimony from attorneys and Hong Kongers on how things are deteriorating there, especially for those who opposed CCP rule. “It feels to me a little bit of déjà vu. We continue to hold on to the hope that our continued treatment of Hong Kong in different ways will result in changes of the CCPs actions. It reminds me of the old line that the CCP gets to have their cake and eat ours too,” he said. “We give Hong Kong special treatment in the WTO; we treat them differently in terms of 301 tariffs.  None of us wants to hurt the Hong Kong people, but are we rewarding the CCP? Shouldn’t we be applying the 301 tariffs on Hong Kong? Shouldn’t we eliminate their WTO membership, which gives mainland China additional votes? Shouldn’t we just treat them as part of the mainland, just as the CCP is doing?”

More than being another guaranteed pro-China vote inside the WTO, Hong Kong is also part of the WTO’s Government Procurement Agreement (GPA). That agreement allows Hong Kong businesses to bid on U.S. government contracts. It’s a total back door to CCP entities selling manufactured goods to the U.S. Defense Department. CPA supports removing Hong Kong from the GPA.

In July, CPA wrote a letter to U.S. Trade Representative Katherine Tai on the topic and concern about Hong Kong’s GPA status earlier this year after the Biden-Harris administration announced a new Hong Kong business advisory, making many of these very points about how the U.S. should be wary of doing business there.

As an example of how GPA works, one recent study by a business intel firm called Govini found that the number of Chinese companies in the Pentagon’s supply chain has increased substantially over the last decade. According to the report, Chinese suppliers totaled 655 in 2019, up 420% from 2010. The number of U.S. companies totaled 2,219, up 97%, according to Govini. An article on this was published in Inside Defense, a trade publication for defense contractors.

Tara Murphy Dougherty, Govini’s chief executive, told Inside Defense that she was surprised by the study’s findings. “I don’t think anybody knew this is what the numbers would look like,” she said.

Whether or not they are coming from Hong Kong, we don’t know. But the fact that China can use Hong Kong to its advantage and skirt all sorts of financial punishments for its actions – whether human rights abuses of ethnic minorities in Xinjiang, or tariffs due to IP theft – Hong Kong is China’s best way into the U.S., drama free. Wessel thinks its time to roll up the doormat and put it in the basement to collect dust.

“It’s coming to that,” said Michael Davis, Global Fellow at the Woodrow Wilson Institute for International Scholars. He was part of a four-member panel looking at the U.S. China relationship. The first panel was tasked with how to deal with Hong Kong. He was not keen on adding Hong Kong to the Section 301s. He noted how Hong Kong is changing fast.

“I hate to see it. I’ve lived in Hong Kong most of my life. It’s not like mainland China. The difference is striking. It’s very fundamentally different, an oasis. It’s such a remarkable place. So while I want to try and preserve that, I am fearful that if we overshoot you just turn Hong Kong into another mainland city. Only worse, because China doesn’t have a large city full of people that opposes the ruling regime. So Hong Kong risks becoming another Xinjiang or Tibet rather than just another mainland city. I wish I could say how to convince the CCP to ease up on Hong Kong. I suspect some business methods may get their attention.  You’ve got to regulate businesses, so (American) companies know how we want to be in respect to human rights and how these companies conduct their own record of corporate social responsibility. Just pushing harder just gets harder pushback and I don’t know how to get around it. I think we are all perplexed about it.” – Michael Davis, Woodrow Wilson Institute for International Scholars.

Robin Cleveland, Vice-Chair of the Commission’s report on China ended that topic with an open-ended question: “Is there a course of action we can take, to maybe challenge Hong Kong’s WTO status?” she asked. “We’ve got to pull that together.”

The U.S. has been treating Hong Kong differently for years. After the 1997 British handover of Hong Kong to the CCP, the U.S. began separate customs treaties. Goods were considered non-Chinese. That’s continued to this day with duties on Hong Kong-produced goods coming into the U.S. with near-zero tariff rates.

When President Trump hit China with tariffs-based Section 301 rules of the Trade Act of 1974, there was immediate concern that China would get around them by shipping through Hong Kong.

Maureen Thorson, a partner at Wiley Law and one of the panelists, reporting in via webcam, said there is no evidence that China has used Hong Kong as a means to evade Section 301 duties, or anti-dumping charges. China faces two well-known anti-dumping penalties – kitchen cabinetry and solar panels.

Thorson told the Commission that she reviewed shipments from Hong Kong prior to 301 duties and compared them to later dates. In 2017, U.S. imports were $6.8 billion, falling to $4.6 billion by 2019, and spiking to $7.9 billion in 2020. But most of that was due to hard gold imports and not manufactured goods. Since then, Hong Kong exports to the U.S. have fallen and are likely to end this year at just $3.6 billion, their lowest level since 2009. If China was using Hong Kong as a transshipment zone, we would see a bump. But recent export duties do not show that trend, suggesting that mainland China is perfectly fine with punishing the Hong Kong physical economy – where anti-regime laborers reside.

But while Hong Kong is not being used by Beijing to circumvent tariffs and anti-dumping duties, Thorson  said, “It is a significant problem in Vietnam, Thailand, and Malaysia.”

Recent trends are “indicative of significant transshipment of Chinese goods from there. To combat future transshipment schemes, the United States should consider taking several actions,” she said, naming hiring more Customs workers, expand the scope of the 2015 Enforce and Protect Act

to include evasion of Section 301 and other duties such as Section 232. Over 130 of the investigations under the Act have all involved transshipment schemes. She also recommended amending 19USC-1592a, a U.S. statute that focuses on textile product transshipment fraud. She said it should be widened to include all products.

Commission Report Cycle chairwoman Carolyn Bartholomew said she was still having a hard time grappling with the fact that American businesses don’t realize what’s at stake in Hong Kong. Political and business risks are rising.

“I’m shocked that people in the U.S. business community think they are safe from all this. It’s important for them to know the risks they will be facing.” – Carolyn Bartholomew, Chairwoman, 2021 Report Cycle, U.S. China Economic and Security Review Commission.

Angeli Datt, a Senior Research Analyst for China, Hong Kong and Taiwan at Freedom House let the big business players have it. She singled out Apple, in particular.

“Apple will take action in mainland China sometimes without even government request to remove apps and content,” Datt said about American multinationals and their insta-compliance with CCP rules that go against the corporate values they profess to have in their annual CSR reports to shareholders, in their TV spots, and – more often than not – in making their political views known to an American audience.

But Datt believes times are changing. Washington is getting tougher on China. CPA believes they can be even tougher, as Datt spells out in one of her comments to the Commissioners today. “By enforcing local laws, they may be complicit in some human rights violations and might be subject to sanctions from democratic countries. And now with (CCP’s) ‘anti-sanctions’ law, they may be subject to Chinese sanctions for enforcing (Western) sanctions,” she said. “Companies can’t really sit on the sidelines anymore.”






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