Products transshipped through Hong Kong must still bear the country of origin, meaning products shipped from China through Hong Kong to the US must still pay applicable tariffs.

How big a deal for businesses is the Hong Kong Human Rights and Democracy Act?

Hong Kong enjoys special status with the US, thanks to the United States–Hong Kong Policy Act, passed in 1992, which treats Hong Kong as a special customs territory separately from mainland China.

The law comes amid nearly six months of social unrest. The protests began in June sparked by a now-withdrawn extradition bill that would have allowed the transfer of criminal suspects to mainland China among other jurisdictions.

“[The US government] have rushed this act a bit to put pressure on China or for optics. I don’t think anyone has weighed it up properly to see what the impact on Hong Kong will be,” said Chris Chan, head of shipping at law firm Holman Fenwick Willan.

Chan noted that while there will be little short term impact on Hong Kong’s transshipping sector, longer term prospects remain to be seen as the US presidential election in 2020 adds to the uncertainty.

Hong Kong’s shipping and logistics sector is a major employer and contributor to the city’s gross domestic product. The industry employed 474,758 people and accounted for 17.5 per cent of GDP in 2017. In 2018, 12.1 per cent of mainland China’s exports – about US$301 billion – and 13.8 per cent of imports were handed via Hong Kong, while 57 per cent of Hong Kong re-exports originated in the mainland.

But as these products originate in China, there is little benefit to importers by transshipping through Hong Kong as tariffs are still applicable.

Direct shipping exports from Hong Kong to the US in 2017 amounted to just 2.8 per cent of the total volume.

Some larger exporters may use a technique called “first sale”, to avoid or pay lower tariffs on products by shipping through Hong Kong. This involves having a separate company in Hong Kong buy products from a Chinese factory at a low price and pay tariffs on that price, before exporting the goods to the US and avoid tariffs on the higher price.

“Rescinding the US-Hong Kong Policy Act of 1992 will not diminish or eliminate first sale eligibility,” said John Kwak, vice-president of customs consulting and compliance at Sandler, Travis and Rosenberg, an international trade law firm. “I believe the value of goods transshipped through Hong Kong under first sale is significant in absolute dollars but small on a percentage basis compared to the overall transshipment of goods.”

On December 15, President Donald Trump will decide whether to add more tariffs on Chinese products, escalating the US-China trade war that most experts say is responsible for the decline in trade and shipping volumes in Hong Kong over the past year.

 

Global shipping body comes to Hong Kong as China’s power rises

Sunny Ho, executive director of the Hong Kong Shippers’ Council, a traders’ association, said that while the short term impact of the law on the city was likely to be minimal, the US-China trade war was a much bigger concern.

Ho pointed out that the sources of transshipments were likely to play a greater role in Hong Kong’s evolution into a port hub for the region. Smaller “feeder” ships, which bring containers from the dozens of small ports on the Pearl River Delta, could more easily stop at Hong Kong’s port in Kwai Tsing, to be loaded on to major cargo ships headed for Europe, Southeast Asia or Japan.

Ho said that the threat to Hong Kong’s feeder transshipment business was actually coming from ports in Nansha and Shenzhen, which were offering incentives to traders and shippers to move their business there.

Ho added exporters and importers would continue to prefer to use Hong Kong for transshipments and logistics because of simpler customs procedures compared to the mainland, among other benefits.

For example, exporting from China requires stating which ship or plane the goods will go on, and changing that can be difficult. In Hong Kong there is no such requirement, which means flexibility for exporters during rushed times such as the Christmas season.

Ho also said the development of ultra-large container cargo ships was accelerating the development of port hubs linked to feeder ports, and that Hong Kong would evolve to serve China, the Philippines, Vietnam and North Asia.