US move on Hong Kong leaves Trump with tough-or-gentle options

The U.S. finding that China has effectively stripped Hong Kong of its political autonomy leaves President Donald Trump with a difficult choice about how harshly to penalize Beijing.

He could take a lighter touch with modest sanctions aimed at putting China on notice. Or he could unleash a far harsher approach that would curtail the former U.K. colony’s special trading status with the U.S., potentially imperiling its position as a global financial hub.

Secretary of State Michael Pompeo’s announcement on Wednesday that Hong Kong no longer warrants its special treatment under American law has no impact beyond the symbolic. He said “no reasonable person can assert today” that it “maintains a high degree of autonomy from China, given facts on the ground.”

Now it’s up to Trump to take the next step, and to decide how quickly he wants to do it while he’s also threatening consequences for the Beijing government over its handling of the coronavirus. His most powerful option—revoking Hong Kong’s special trading status with the U.S.—would probably reorient global trade, plunge U.S.-China relations even deeper into crisis and scuttle any hope for a new trade agreement.

Hurting China also would carry risks for the U.S. economy, reeling under the pandemic—and to Trump’s odds of winning a second term as president. It could result in the implosion of the U.S.-China trade deal that Trump once considered one of his biggest economic achievements and that would have seen Beijing increase purchases of American goods and services by what the president has said is $250 billion, though the agreement calls for $200 billion.

China promised to retaliate for Pompeo’s finding.

“As for foreign meddling in Hong Kong affairs, we will take necessary countermeasures in response,” the Chinese embassy in Washington said in a statement.

Stripping Hong Kong of its special status would imperil “all of the financial connectivity that China has to the free market,” said Robert Spalding, a senior fellow at the Hudson Institute in Washington who focuses on U.S.-China relations. “Once that goes away, stocks, bonds, financial transactions, SWIFT, all of that is imperiled.”

While Hong Kong remains a major trading hub and a key gateway from China to the rest of the world, it matters far less to the country’s fortunes than it once did. In 2019, 12% of China’s exports went to or through Hong Kong, down from 45% in 1992. China is also far less reliant on inflows of foreign capital and expertise, and has made a much lower priority of making the yuan an international currency.

What’s Next

So far, U.S. officials have given mixed signals about what might happen next, and when. In recent days, they have mulled imposing travel bans and asset freezes on Chinese Communist Party leaders who have played a role in the erosion of Hong Kong’s freedoms, according to people familiar with the matter, who asked not to be identified discussing internal deliberations.

One of those people said before Pompeo’s announcement that it would trigger a monthlong deliberative process. But Chinese moves to assert greater control in Hong Kong may have accelerated that timeline.

The immediate cause of Pompeo’s declaration was the Chinese leadership’s announcement that the National People’s Congress, a rubber-stamp parliament holding its annual session in Beijing, would pass a new national security law that could cut back civil liberties in the former British colony.

China’s new law targets “a very narrow category of acts that seriously jeopardize national security and has no impact on Hong Kong’s high degree of autonomy,” the Chinese embassy said in its statement.

Yet analysts said China has been eroding Hong Kong’s freedoms for years despite promises to grant it self-rule under the “One Country, Two Systems” agreement put into place after taking it back from the U.K. in 1997.

“The U.S. is aligning its policy with facts on the ground that have been a reality for 23 years,” said Kamran Bokhari, director of analytical development at the Center for Global Policy in Washington.

‘Business-Transparent’

Whatever Trump does, the move is certain to escalate tensions between the world’s two largest economies even further. Those strains had grown in recent weeks as Trump, Pompeo and other senior officials accused China of hiding the peril of the coronavirus pandemic that originated in the Chinese city of Wuhan.

It will also send a jolt through the international business community. Companies were already growing concerned about how long Hong Kong would hang on to the relatively free judicial system and regulatory environment it’s enjoyed for decades. On Wednesday, a senior U.S. official warned Hong Kong had already lost that status.

China has suggested it would “respect the economic freedom in Hong Kong without feeling obligated to respect political freedom,” Assistant Secretary of State David Stilwell told reporters. “You can’t have one without the other.”

“Businesses and others would notice these facts as well and make choices as far as whether the environment in a year from now is going to be conducive to fair, business-transparent operations,” he said.

Trump-Xi Relations

Any response will be shaped by Trump’s attitude toward Chinese President Xi Jinping. Before the administration’s shift in tone, Trump had repeatedly praised the Chinese leader, both for his handling of the coronavirus crisis and for signing the first phase of a trade deal with the U.S.

Now, the American president is blaming China for the virus even as his own handling of the pandemic as it spread in the U.S. has become an election-year issue.

In another point of conflict between the U.S. and China, Meng Wanzhou, Huawei Technologies Co.’s chief financial officer, failed Wednesday to persuade a Canadian judge to end extradition proceedings, keeping her under house arrest in Vancouver as the fight against U.S. efforts to prosecute her moves forward.

Yet Trump has voiced little concern about China’s performance on human rights, from the crackdown on protests in Hong Kong to the internment of more than 1 million Uighurs and members of other Muslim minority groups in China’s Xinjiang region.

On Wednesday, the U.S. House voted to authorize sanctions against Chinese officials for human rights abuses against Muslim minorities, sending the measure to Trump.

Democrats say that Trump’s lack of attention to rights abuses has given Chinese leaders a green light to assert even more control over Hong Kong.

“Secretary Pompeo appears to finally be making official what has long been clear to everyone but President Trump: that the United States must take a stand against China’s crackdown in Hong Kong,” Tony Blinken, an adviser to Joe Biden, the presumptive Democratic presidential nominee, said in a statement. “We’ve come to this point in part because President Trump has enabled Xi Jinping’s sense of impunity when it comes to stifling freedom.”

‘Thread the Needle’

The Trump administration will probably focus on financial sanctions and visa restrictions on Chinese officials while holding back on tariffs, export controls and investment restrictions until there’s more clarity on the new Chinese law, according to David Loevinger, a former China specialist at the U.S. Treasury who’s now an analyst at TCW Group Inc. in Los Angeles.

“They have to thread the needle of coming down on Mainland and Hong Kong officials who support this while not being seen as attacking the Hong Kong people,” he said.

Under the U.S.-Hong Kong Policy Act of 1992, Washington agreed to treat Hong Kong as fully autonomous for trade and economic matters even after China took control. That meant Hong Kong was exempt from Trump’s punitive tariffs on China, can import certain sensitive technologies and enjoys U.S. support for its participation in international bodies like the World Trade Organization.

But a finding on Hong Kong’s autonomy was compelled by last year’s Hong Kong Human Rights and Democracy Act. The law signed by Trump requires such a certification each year. It also gives the administration broad authority to impose sanctions or other punishments, including revoking Hong Kong’s special status if it chooses.

“Having decertified Hong Kong’s autonomy, they have choices to make about how to modify all the multitudes of ways in which the U.S. government treats it differently,” said Susan Shirk, chair of the 21st Century China Center at University of California. San Diego. “One reasonable thing to do is decertify Hong Kong but try to limit the damage to the people of Hong Kong and the Hong Kong economy.”