Hong Kong is set to become the financial battleground over whether US or Chinese dominance will shape the world economy. The Foreign Account Tax Compliance Act will attempt to shake the tree of US expatriates who have failed to pay taxes on, or are hiding, income abroad in 2014.
The US is the only nation in the Organisation for Economic Co-operation and Development that taxes its citizens on their worldwide income. True, China and possibly some others do claim to also tax their citizens on their worldwide income, but they lack the enforcement tools of the US government.
Many Western governments are technically insolvent and desperately need money. The US has decided to go after its expatriate citizens and residents (green-card holders), wherever they may be. Effectively, Washington wants to make foreign governments and banks the agents for its Internal Revenue Service tax collection. If they do not comply, their access to the US financial system may be significantly limited.
China, which looks unfavourably on foreign meddling, takes umbrage at this.
Recently, the US signed several intergovernmental agreements with European countries, with the promise of reciprocity if they turn over US citizens' and residents' financial data. For this law to work, it requires co-operation from unquestioning nations. But the US government may have underestimated the resentment among foreign governments at being given their "marching orders" by the world's lone superpower.
Hong Kong is home to many of the world's biggest banks and insurers and, as an economic juggernaut in rising Asia, cannot be bullied.
China is in talks with US Treasury officials about the issue but has not made any commitments. Further, China insists that any such agreement must be fully reciprocal. However, the US Treasury by itself cannot guarantee that.
China will stand against any agreement unless reciprocity is guaranteed, and most of Asia will follow. This leaves Hong Kong as the litmus test of this coming financial battle. The US government has already begun to bully big banks and insurers in Hong Kong to comply. But as intergovernmental agreements are international accords, and Hong Kong itself cannot endorse any, they are in a legal fog.
To comply would be to break Hong Kong bank privacy laws, and signal a return to historical colonial abeyance, which Beijing would undoubtedly override. To refuse would mean possible fines and sanctions for their subsidiaries operating abroad, and with any US footprint.
Neither the Chinese nor US Treasury can afford to back down. Whoever blinks first in Hong Kong will be the loser.
Dr Will Hickey is an associate professor and chair of global management at SolBridge University