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31 July 2020
In view of the recent action taken by President Trump in an executive order regarding Hong Kong's status, US importers should prepare for increased risk exposure in US-Hong Kong trade.
Although Hong Kong technically continues to be treated as its own separate customs territory by multilateral agreements, the commitments undertaken by the United States with regard to the original 2047 timeline for Hong Kong's full reintegration into China are being rapidly accelerated. This raises additional compliance issues and could significantly increase the duty liability on many goods produced in Hong Kong when imported into the United States.
One key question for importers is whether Hong Kong will remain a separate customs territory from China for purposes of importing from Hong Kong into the United States or whether the United States will terminate this special treatment.
On 14 July 2020 the president issued an executive order on Hong Kong normalisation which directly affects imports from Hong Kong. Section 2(f) of the order suspends the application of Section 201(a) of the Hong Kong Policy Act 1992, as amended, to Section 1304, Title 19 of the US Code. This means that every article of Hong Kong origin that is imported into the United States will now be subject to the same marking requirements as goods from China. Although the order does not specify an effective date for these new marking requirements, based on Section 3 of the order, Customs and Border Protection will likely take additional actions in furtherance of the order within 15 days.
One aspect of the order is that goods exported from Hong Kong could face the full array of anti-dumping duties, countervailing duties and Section 301 tariffs that apply to country-of-origin goods from China in the near future. At present, there are more than 200 anti-dumping and countervailing duty orders on various products from China, with duty rates ranging from several percent to more than 1700%. There are also approximately $550 billion worth of Chinese products subject to Section 301 safeguard tariffs. Such Section 301 duties could apply to these same products where they are produced in Hong Kong and exported to the United States. It appears that the administration needs to take additional action before products from Hong Kong will be assessed for duties in the same manner as when from China. However, the expectation is that such action will be taken soon.
Given the executive order's impact, importers of goods made in Hong Kong must ensure compliance with actions taken by the administration or Congress that affect the status of such imports.
Since 1992, US policy towards China has been based on several guiding policy positions, including that "the United States should respect Hong Kong's status as a separate customs territory and as a contracting party to the General Agreement on Tariffs and Trade". However, the executive order represents a significant shift in terms of the marking requirement for products from Hong Kong and a potential seismic shift in terms of duty liability for companies exporting goods from Hong Kong.
The below discussion considers the issues which companies that do business in Hong Kong may face even if it retains separate customs territory treatment.
Prior to the return of Hong Kong to China in 1997 under the 'one country, two systems' principle, the US-Hong Kong Policy Act 1992 (USHKPA) came into force. This statute assured that US laws and treaty obligations with respect to Hong Kong would continue despite the change in sovereignty unless the president determined that Hong Kong had become insufficiently autonomous to merit that treatment and issued an executive order terminating such treatment.
In November 2019 Congress passed and Trump enacted the Hong Kong Human Rights and Democracy Act (HKHRD), which amended the USHKPA by requiring the secretary of state to annually certify Hong Kong's autonomy. Section 7 of the HKHRD includes a sanctions provision requiring the president to submit by 26 May 2020 and annually thereafter a report identifying foreign persons determined to be responsible for certain "extrajudicial rendition, arbitrary detention, torture... or other gross violations of internationally recognized human rights in Hong Kong" and to place blocking sanctions on those persons and prohibit their entry into the United States.
On 27 May 2020, following China's actions to pass a national security law that erodes liberties in Hong Kong, Secretary of State Pompeo reported to Congress that Hong Kong no longer has a high degree of autonomy. On 29 May 2020 Trump announced that recent developments made clear that "Hong Kong is no longer sufficiently autonomous to warrant the special treatment that [the United States has] afforded the territory since the handover". The president also announced that he was directing the administration "to begin the process of eliminating policy exemptions that give Hong Kong different and preferential treatment".
The HKHRD provides for limited exceptions to sanctions for imported goods. As defined by the HKHRD, a 'good' is defined as an "article, natural or manmade substance, material, supply, or manufactured product, including inspection and test equipment, and excluding technical data". However, at the end of June 2020, Congress passed the Hong Kong Autonomy Act, which the president signed into law on 14 July 2020. Under this act, the president may prohibit any person from:
Thus, the Hong Kong Autonomy Act presents a significant new risk for importers despite the exception previously provided for imported goods under the HKHRD.
For further information on this topic please contact Teresa Polino or Natan Tubman at Arent Fox LLP by telephone (+1 202 857 6000) or email (firstname.lastname@example.org or email@example.com). The Arent Fox LLP website can be accessed at www.arentfox.com.
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