HK warned WTO challenge to potential US trade sanctions could be ‘counterproductive’

01-Jun-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Hong Kong has hinted at a potential legal challenge to sanction threats from the United States, stating that it would be “a violation of international law”, as the fallout from China’s decision to carry out a national security law in the city continued.

In a statement released late on Thursday, hours after China’s National People’s Congress approved the proposal for the controversial legislation, the Hong Kong government said that as a full member of the World Trade Organisation (WTO), “we expect to be fairly treated by our trading partners”.

Should the US revoke Hong Kong’s special trading status, the special administrative region could be subjected to the same trade war tariffs imposed on Chinese exports to the US, or even unilateral tariffs against Hong Kong specifically, as well as export controls and potentially greater scrutiny of its financial and payments landscapes, experts said.

In the case of tariffs, analysts said it is “factually possible and legally correct” that Hong Kong could bring a WTO case against the US, given that it retains its own WTO membership and should be treated on a “most-favoured nation” basis, which punitive tariffs would violate.

Hong Kong is really limited in what it can do. Taking a WTO case would be symbolic, and even if Hong Kong prevails, the damages would be very low

Bryan Mercurio

But analysts believe any such future action would be “counterproductive”, since even if Hong Kong was to win a case, it could be allowed to introduce retaliatory tariffs on the US, which would harm Hong Kong’s economy and image as a beacon of free trade.

Furthermore, it is unlikely that a WTO case, which would take years to process, would resonate in a White House which is openly scornful of the Geneva-based trade body.

“Hong Kong is really limited in what it can do. Taking a WTO case would be symbolic, and even if Hong Kong prevails, the damages would be very low. So if Hong Kong decides to put tariffs on the US which would be a first what does it target? Consumer products or food? What kind of message does that send about Hong Kong? Who is that really hurting?” said Bryan Mercurio, a professor covering the WTO at the Chinese University of Hong Kong.

Hong Kong is a free port, with zero tariffs on goods shipped in and out, however, it has very little direct trade of its own. As a entrepot for trade with China, the vast majority of goods passing through are re-exported to and from the mainland.

While Hong Kong was the world’s sixth largest exporter in 2018, according to WTO statistics, just $13 billion of its $556 billion in shipments were domestic exports. For imports, just $155 billion of $628 billion were consumed domestically.

“Removing from US law the commitment to Hong Kong’s non-discriminatory trade treatment would make it easier for the US Trade Representative to defend unilaterally slapping tariffs on the city’s exports. This would most likely violate WTO rules, but this has not deterred the US from placing tariffs on imports from the mainland,” read a Capital Economics research note.

“If this happened, shipments to the US would suffer. Gross exports from Hong Kong to the US are worth 13 per cent of [gross domestic product]. But the vast majority of products are being reshipped through the city. US-bound goods exports, generate under 3 per cent of [gross domestic product], mainly in logistics and postal services rather than manufacturing.”

Hong Kong has been a member of the WTO since January 1995, but it has only brought a single case a complaint against the Turkish garment trade in 1996 that was “largely a matter of principle” rather than economic wrongdoing, said Julien Chaisse, a trade professor at the City University of Hong Kong.

However, Chaisse said that Hong Kong could learn from another historical precedent of a smaller WTO member successfully bringing a case against a more powerful member, but eventually being left dissatisfied with the spoils of victory.

In 2003, tiny Antigua and Barbuda accused the US of discrimination after it was frozen out of the world’s largest gambling market after the Caribbean nation had built up a giant online betting market designed to replace its struggling tourism sector.

WTO judges eventually ruled in its favour, awarding compensation of $21 million per year, but the US refused to pay. Antigua and Barbuda therefore had the right to impose tariffs on the US, but declined to do so, thinking that it would be an act of economic self-harm.

I would not exclude the possibility of, in the future, investors from these places using investment protection courts to sue Hong Kong

Julien Chaisse

“Why would a place like Hong Kong or Antigua impose tariffs on the US?” Chaisse added. “Who would hurt from such action, apart from the domestic middle class?”

Chaisse added that should the national security law lead to an erosion in the “one country, two systems” model under which city is supposed to be governed until 2047, Hong Kong could also find itself on the receiving end of investor disputes and trade lawsuits, especially if the goalposts are moved for investors in the city.

Hong Kong has 20 bilateral investment treaties, more than half of which were signed with developed nations in the run up to the handover from Britain to China in 1997, a means of assuaging fears of changing business conditions.

“I would not exclude the possibility of, in the future, investors from these places using investment protection courts to sue Hong Kong,” Chaisse said.


Category: Hong Kong

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