US Says Goodbye to Hong Kong’s Separate Customs Territory Status – What Is the Impact on Importers?

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 regards to the original 2047 timeline for Hong Kong’s full reintegration into the PRC are being rapidly accelerated. This raises additional compliance issues and could have the effect of significantly increasing the duty liability on many goods produced in Hong Kong when imported into the US.

Will Hong Kong Lose Its Special Customs Territory Treatment by the US?

One key question for importers is whether Hong Kong will retain its separate customs territory from the People’s Republic of China for purposes of importing from Hong Kong into the United States, or will the US terminate that special treatment?

On July 14, 2020, the President issued an Executive Order on Hong Kong Normalization. This Executive Order has direct impacts on imports from Hong Kong. The Order at Section 2(f) suspends application of section 201(a) of the Hong Kong Policy Act of 1992, as amended, to section 1304 of title 19, United States Code. In plain English, this means that every article of Hong Kong origin that is imported into the US will be subject to the same marking requirements of goods from the PRC. Although the Order does not specify an effective date for these new marking requirements, based on Section 3 of the Order, it is likely that additional actions will be taken by Customs and Border Protection in furtherance of the Order within 15 days.

One aspect of the Order is when goods exported from Hong Kong could face the full array of antidumping duties, countervailing duties and Section 301 tariffs that apply to country-of-origin goods from China in the very near future. At present there are more than 200 antidumping and countervailing duty orders on various products from China, with duty rates ranging from several percent to over 1700%. There are also  approximately $550 billion in Chinese products that are subject Section 301 safeguard tariffs. Such Section 301 duties could apply to these same products are produced in Hong Kong and exported to the US. It appears that additional action is needed to be taken by the Administration before products from Hong Kong will be assessed duties in the same manner as when from China. However, the expectation is that such action will be taken in the near future.

Given the impact of the Executive Order on US-Hong Kong trade, it is important for importers of goods made in Hong Kong to ensure compliance with actions taken by the Administration, the Congress that  affect the status of such imports.

Since 1992, US policy toward 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 on US-Hong Kong trade 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

Provided below is further discussion of that companies doing business in Hong Kong’s may face even if the city retains separate customs territory treatment.

Legislative Background

Prior to the return of Hong Kong to China in 1997 under the “one country, two systems”, the United States-Hong Kong Policy Act of 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 determines that Hong Kong becomes insufficiently autonomous to merit that treatment and issues an Executive Order terminating such treatment.

In November 2019, Congress passed and President Trump enacted the Hong Kong Human Rights and Democracy Act (HKHRD), which amends the USHKPA by requiring the Secretary of State to annually certify as to Hong Kong’s autonomy.  Section 7 of the HKHRD included a sanctions provision requiring the President to submit by May 26, 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.

Following China’s actions to pass a national security law that erodes liberties in Hong Kong, Secretary of State Pompeo reported to Congress on May 27 that Hong Kong no longer has a high degree of autonomy.  On May 29, President 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, goods is defined as “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 (HKAA), which the President signed into law on July 14, 2020. Under the HKAA the “President may prescribe, prohibit any person from:

1. acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property that is subject to the jurisdiction of the United States and with respect to which the foreign financial institution has any interest;
2.  dealing in or exercising any right, power, or privilege with respect to such property; or
3.  conducting any transaction involving such property.

Thus, the HKAA presents a significant new risk for importers despite the exception previously provided for imported goods under the HKHRD.