Leibowitz on Trade: China Events May Portend Changes for U.S. Firms

• On July 14, President Trump signed Executive Order 13936, changing the U.S. treatment of goods from the Hong Kong Special Administrative Region. While some press reports indicated that the changes mean that goods from Hong Kong will now be treated the same as goods from the rest of China, the reality is not so clear.

The Executive Order does not specifically apply the Section 301 tariffs to goods from Hong Kong. In 2018, U.S. Customs and Border Protection announced that the China tariffs did not apply to imports from Hong Kong or Macau, the other Special Administrative Region that was a Portuguese Colony for over 300 years. Hong Kong was a British colony from 1841 to 1997.

Imports to the U.S. of goods made in Hong Kong have declined in recent years, as the Hong Kong economy changed from a manufacturing center to a finance and trade facilitation center. If the China tariffs apply to Hong Kong, the effect on the SAR’s economy would not likely be great.

But the question remains whether the Section 301 tariffs now apply to goods from Hong Kong. The Executive Order does not mention the China tariffs specifically, and the Office of the U.S. Trade Representative has not commented yet on whether the China tariffs will be extended to Hong Kong goods. If they are, the products most affected will be gems and jewelry, which accounted for about $1 billion in 2019.

Ironically, the U.S. has one of the largest bilateral trade surpluses worldwide with Hong Kong (about $26 billion in 2019). There were $4.7 billion of U.S. imports from Hong Kong, compared with about $30 billion of U.S. exports. This could be in jeopardy if China, as promised, retaliates against these U.S. measures.

•  Also, on Tuesday, the president signed the Hong Kong Autonomy Act, which imposes sanctions on Chinese officials that steered that country’s passage of Hong Kong security legislation. That Chinese legislation sparked demonstrations and violence in the SAR beginning last year. China has vowed retaliation against the United States for what China has called interference in Chinese internal affairs. This escalation in U.S.-China tensions bears watching; we have not seen the end of this downward spiral.

• Attorney General Barr on Friday called on U.S. multinational companies to stop doing business with the Chinese Communist Party (CCP) and its officials. Mentioning some international technology and entertainment companies by name (Apple, Microsoft, Disney, etc.), he declared: “The ultimate ambition of China’s rulers isn’t to trade with the United States; it is to raid the United States. If you are an American business leader, appeasing the [People’s Republic of China] may bring short-term rewards. But in the end, the PRC’s goal is to replace you.”

• A bill was introduced in the House of Representatives on Thursday by Democrat Collin Peterson of Minnesota and Republican Jackie Walorski of Indiana that would extend product exclusions under the China tariffs for one year from the date of expiration. The bill would apply to all China exclusions in effect as of July 16, 2020. That means that exclusions expiring before the date would not be resurrected. The bill would require USTR to issue the extension within 30 days after the bill becomes law. This retroactive relief (given that the bill will not become law for a while at best) is unusual but not unheard of with respect to tax legislation. USTR may deny extension for exclusions if the extension would cause serious harm to the United States and is strategically important to China’s “made in China 2025” initiative or other industrial programs.

Clearly, this was a big week for China. Its meaning for U.S. businesses that are active in China is open to speculation. The first three developments portend a worsening climate for China relations. This is not surprising—the pandemic, which started in China, has provided ample cause for concern with China’s practices. Until the pandemic is behind us, the lack of confidence and trust between China and the rest of the world will certainly weigh on all dealings with China, not only with the U.S., but many other countries as well.

There is more going on. The Barr speech last week is part of a steady drumbeat by the administration to urge U.S. businesses to disengage with China. Not all companies are heeding this message and the pressure on them is likely to increase.

A close watch on China developments is critical for businesses, including those that compete with Chinese imports as well as those that rely on China for components or consumer markets for exports. This dispute may deteriorate, perhaps beyond repair.

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