“No More Special Treatment”: The Likely Legal Effects of Hong Kong’s Loss of Preferred Trading Status with the United States (Summary)

In May, President Trump announced plans to withdraw certain “policy exemptions that give Hong Kong different and special treatment.” One month later, the People’s Republic of China (“PRC”) passed national security legislation for Hong Kong. Both announcements could dramatically impact the legal terms of the U.S.-Hong Kong relationship.

Three potential changes stand out: (1) Termination of the extradition treaty; (2) Extension of U.S. export controls; and (3) Emergence of trade and commercial disputes. Hong Kong-based entities should brace for a significantly altered legal landscape subject to the effects of U.S.-China developments, especially U.S. regulatory and enforcement responses. Hong Kong-based operations must learn to anticipate, prepare, and pivot to satisfy both U.S. and PRC legal requirements.

Potential Termination of U.S.-HK Extradition Treaty

In 1996, the U.S. and Hong Kong signed the Agreement for the Surrender of Fugitive Offenders, obliging them under certain conditions to turn over fugitives. However, Hong Kong’s autonomy in mutual legal assistance has been eroding and the slow deterioration may accelerate, with the announcement that the U.S. would “begin the process” of revoking the extradition treaty. 

The implications of this are dramatic. First, it shrinks the threat of extradition, potentially causing fugitives to view Hong Kong as a safe haven. Second, it may eliminate future cross-border law enforcement cooperation, including MLAT requests, as other treaties may also be revoked or modified. Third, there may be a lack of regulatory clarity due to reductions in information sharing. These developments may also embolden PRC officials to use Hong Kong to avoid U.S. scrutiny, and diminish Western influence in the region.

Extension of Export Controls on “Dual-Use” Technologies

The U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) has far-reaching powers to regulate the international trade of U.S.-origin goods, software, and technology. BIS also controls dual-use items (those with both military and civilian applications), assigning controls, restrictions, and licensing requirements.

Hong Kong had enjoyed preferential trade treatment, free from the strict export controls on the PRC, but that is now changing. The U.S. announced new regulations for Hong Kong on dual-use technologies, the end of exports of defence equipment, and the suspension of preferential treatment for exports to Hong Kong. Hong Kong license applications will likely face the more stringent “presumption of denial” standard applied to the PRC. Companies with these items in supply chains that touch Hong Kong must be ever-vigilant to these changes.

This re-alignment comes as the U.S. further tightens controls it applies to the PRC—and now likely for Hong Kong too—for certain products and entities. Hong Kong may also face the same stepped-up enforcement actions the U.S. has used to target PRC entities in recent years, such as adding companies like ZTE and Huawei to the Entity List, Denied Persons List, and the Unverified List, which effectively cripple the global operations of the targeted company. 

Emergence of Increased Trade and Commercial Disputes

Historically, the U.S. has viewed Hong Kong as a separate commercial and customs hub, benefiting businesses on both sides. Both the U.S. and Hong Kong therefore have much to lose. The 1,300 U.S. companies in Hong Kong may consider renegotiating contractual terms, re-adjust mergers and acquisition plans, or altogether cease operations in Hong Kong. Breach of contract disputes and company dissolution/insolvency considerations may emerge. Rescission may disrupt financial outflows and create an environment ripe for litigation and arbitration due to legal uncertainties.

Conclusion

If the U.S. rescinds Hong Kong’s preferential status, then entities operating out of Hong Kong must prepare for a significant shift in the legal and regulatory landscape. While formal channels of communications through MLAT and extradition requests may recede, the U.S. possesses numerous tools, including export controls, to impact operators in Hong Kong. Risks also include the rise of private, commercial disputes that will likely increase the cost of doing business in Hong Kong.

To prepare, entities in Hong Kong should perform a comprehensive review of business practices and assets from a U.S. regulatory perspective, getting ahead of issues by developing/refining compliance programs, determining if products could be subject to BIS controls, and ensuring business partners are compliant with U.S. regulations. High-risk businesses, such as those dealing with military and dual-use items, should formulate contingency plans that include compliance with license requirements, responding to BIS inquiries, and diversifying their supplier base.

Should the U.S. government impose export controls or sanctions, businesses must retain experienced outside counsel immediately to avoid potentially long-lasting crippling effects. Regarding private, commercial implications, operators in Hong Kong should anticipate how commercial dealings might be affected and what legal risks most affect their bottom line. Quick action and experienced outside counsel should be top of mind.

Regardless of the specific consequences of the U.S.’s policy shift, there is little doubt that we are entering a new chapter for trade relations between the “Fragrant Harbor” and the U.S.

– Wade Weems
– John Han 
– Jan Van Der Kuijp

Editorial Note: This is a summary of the article ““No More Special Treatment”: The Likely Legal Effects of Hong Kong’s Loss of Preferred Trading Status with the United States” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in July 2020.

Jurisdictions: 

Partner, Kobre & Kim

A former U.S. Department of Justice (DOJ) prosecutor, Wade Weems counsels corporations and individuals with Asia ties in cross-border criminal cases and internal investigations stemming from U.S. government enforcement actions, particularly those alleging bribery or Foreign Corrupt Practices Act violations, theft, fraud and money laundering. Mr. Weems also advocates for clients affected by export control restrictions and sanctions issued by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. Department of Commerce.

Before joining Kobre & Kim, Mr. Weems was a prosecutor and trial lawyer with the DOJ in the National Security Division in the Counterintelligence and Export Control Section, where he handled highly sensitive national security cases involving economic espionage and trade secret theft, export control violations and violations of U.S. economic sanctions regimes.

Partner, Kobre & Kim 

John Han is admitted as a Solicitor Advocate in Hong Kong, in the United States, and in the Dubai International Financial Centre Courts. He is an accomplished litigator and advocate who helps clients achieve business objectives in matters involving Greater China, the U.S., and English common law jurisdictions including the British Virgin Islands. Clients rely on his deep regional business knowledge and bilingual language capabilities.

Mr. Han has acted as lead counsel in a wide range of cross-border disputes involving monetization and demonetization of US $100M+ judgments and arbitration awards both against and on behalf of governments, state-owned enterprises, and multinational corporations. The matters often involve fraud or misconduct. He regularly leads large-scale cross-border matters to monetize substantial defaulted PRC loan and guarantee portfolios where assets are concealed through complex offshore structures, trusts, and foundations, and where debtors and decision-makers are found in Europe, EMEA, and the U.S