Top three ways revoking Hong Kong’s “Special Status” impact U.S. entities doing business in the territory
ComplianceJune 19, 2020

Top three ways revoking Hong Kong’s “Special Status” impact U.S. entities doing business in the territory

Serving as a gateway to Asia, the former British colony of Hong Kong provides unrivaled access to a variety of lucrative markets in China and across the Asia-Pacific region. The U.S. government has long granted Hong Kong a “special status” on trade and other matters due to its favorable business environment and its independence on administrative matters from mainland China.

However, the passing of the national security law by the Chinese government to gain more control over the territory’s affairs – triggering a wave of unrest – has thrown Hong Kong’s relative autonomy from China into question and jeopardized the territory’s status as a global business capital with its own laws and economic freedoms. These actions raised concerns among business leaders about the potential removal of the city’s "special status" by the U.S. and how that would affect global trade.

On July 14th, 2020, the U.S. government officially announced that “Hong Kong is no longer sufficiently autonomous to justify differential treatment” under the United States – Hong Kong Policy Act of 1992. Therefore, Hong Kong will be treated similar to other cities in mainland China.

In this article we explore three areas in which this announcement impacts U.S. companies currently doing business in Hong Kong.

Trade benefits

With little to no tariffs on trade or other administrative fees, Hong Kong has been an extremely attractive business hub with approximately $67 billion in annual trade volume between the city and the U.S.

By revoking its special designation, U.S. entities will see higher tariffs, higher corporate tax rates, and corporate structures, similar to those seen in mainland China. Removing those benefits compromise Hong Kong’s status as a gateway between the Chinese market and the rest of the world.

More rigorous export controls will follow, especially those over hi-tech goods that have both military and commercial applications and has been a point of contention between the U.S. and China.

Furthermore, the free currency exchange between the U.S. dollar and the Hong Kong dollar, which has made it easy for American companies to do business there and provided some currency stability, would come to an end. If and when Hong Kong moves towards adopting the Chinese Yen, fluctuations in its value due to political and economic factors increase foreign currency exchange risks.

Travel requirements

U.S. citizens were able to travel to Hong Kong without a visa making it easy for business executives to move freely to and from the territory. With the removal of the "special designation", executives will need to follow Chinese requirements for travel and obtaining work permissions and visas. Chinese immigration rules are strict and can be harder to obtain entry permissions. This could potentially limit the number of work permits and visas that are granted and could restrict business travel opportunities on both ends, as Hong Kong executives will now need to meet new requirements when entering the U.S.

Entity relocation

Hong Kong is used by many global companies as a regional headquarters, including for some of the largest U.S. financial institutions. With the change in the city’s status and the benefits it provides multinational corporations doing business in the region eliminated, companies may begin to consider relocating their entities to other attractive locations in the region such as Singapore, Tokyo, Seoul, Indonesia, Bangkok, etc. Additionally, many governments across the region may begin enacting policies to incentivize business development and attract foreign investment that may be moving out of Hong Kong. Nevertheless, as Hong Kong moves towards a more homogeneous administrative system with China, companies will have to weigh whether it makes strategic sense to remain in Hong Kong or relocate their entities to another jurisdiction.

Conclusion

As the situation continues to develop, U.S. entities who do business in Hong Kong must ensure they stay up to date on changes that may impact their operations in the city. Companies must gauge the risks to their entities and operations across the region and have a plan in place to mitigate any adverse impacts. Working with a trusted global partner that can help understand what the implications of new regulations in Hong Kong can potentially mean for your company is key to safeguarding an entity's interests.

As the U.S.' executive order removing the city’s “special status” begins implementation, CT will continue monitoring the commercial and regulatory landscape between the U.S. and Hong Kong and provide updates as it evolves.

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