For all the bluster, Donald Trump’s Hong Kong sanctions may not amount to much

A sanctions war seems to be brewing between the US and China. But on closer inspection, some US measures may be rather symbolic. Notably, the Trump administration has decided against a drastic move to undermine the Hong Kong dollar peg

Nick TurnerandJoshua M. Zimmerman

Published: 1:30am, 1 Aug 2020

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With the US-China relationship growing more tense, Hong Kong finds itself caught between superpowers engaged in a game of tit-for-tat escalation. Businesses in Hong Kong are particularly concerned about pending US sanctions and whether they will threaten Hong Kong’s status as a global financial hub.

The current state of play is as follows: on July 14, US President Donald Trump signed into law the Hong Kong Autonomy Act, which authorises targeted sanctions on officials and other “foreign persons” responsible for actions that US policymakers view as contravening Hong Kong’s Basic Law, and the 1984 Sino-British Joint Declaration. The act also includes a menu of sanctions against financial institutions that conduct “significant transactions” with those people.

Trump simultaneously issued an executive order revoking the preferential treatment Hong Kong had enjoyed since the handover.

Widely overlooked was Trump’s invocation of the International Emergency Economic Powers Act, which allows him to declare a “national emergency” with respect to Hong Kong in order to bolster the sanctions laid by Congress in the Hong Kong Autonomy Act.

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This enables the president to direct the State Department and the Treasury Department’s Office of Foreign Assets Control to add Chinese and Hong Kong individuals and entities to the List of Specially Designated Nationals, popularly known as the SDN list.

To put it simply: you do not want to find yourself on the SDN list. Your assets under US jurisdiction are frozen. US citizens are prohibited from dealing with you, directly or indirectly, anywhere in the world. You and the companies you own are economic pariahs, cut off from the US financial system and consequently from most of the international financial system as well.

In other words, the restrictions on “property transactions” that form the backbone of the Hong Kong Autonomy Act sanctions have now been supplemented by the far harsher SDN list penalties. If Congress had community service in mind for Chinese and Hong Kong officials, Trump has just threatened them with hard labour.

In response, China has pledged to impose its own sanctions on the United States. Clearly, a US-China sanctions war is brewing. Will businesses find a way to muddle through?

Consider the following doomsday scenario: the US places a large group of prominent Chinese and Hong Kong officials on the SDN list. Some of these officials beneficially own accounts in the Hong Kong branches of US financial institutions.

Those branches would be forced to freeze those accounts to comply with US law. Non-US financial institutions having significant relationships with those officials (including leading Chinese banks) would be sanctioned as well.

How would China respond? It could take a page from the European Union and enact statutes that block compliance with certain US sanctions. Some commentators have suggested Article 29 of Hong Kong’s new national security law amounts to a blocking statute, although that remains to be seen.

Under those circumstances, financial institutions that are subject to US law would be stuck between a rock and a hard place, and many could decamp to Singapore or elsewhere. Hong Kong’s status as a global financial hub would begin to erode.

But this is not the only possible outcome, and several factors may help contain the damage. First, instead of forcing businesses in Hong Kong to choose between the US and China, Beijing may simply impose retaliatory sanctions against select US companies. China recently announced unspecified sanctions against Lockheed Martin over its arms sales to Taiwan.

US businesses caught in the middle may lobby the US government for a more moderate China policy. It seems unlikely that Beijing would choose to sanction leading global investment banks, which have spent decades helping China.

Similarly, the US may hesitate to sanction China’s big four state banks, jeopardising their combined US$1.1 trillion of US dollar deposits, interbank borrowing and overseas debt.

Second, many global financial institutions have experience navigating conflicting sanctions regimes. The EU blocking statute provides one example.

Third, depending on how the sanctions are applied, non-US financial institutions may be able to ring-fence accounts of sanctioned people.

Fourth, the US may use the threat of sanctions to encourage certain behaviour without actually imposing them. In this regard, the US State Department has indicated it is closely monitoring Hong Kong’s Legislative Council elections.

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Finally, some US measures, while headline-grabbing, appear to have more of a symbolic impact. US tariffs will now apply to Hong Kong exports, but Hong Kong is one of the few trading partners with which the US has consistently enjoyed a significant trade surplus. Trump’s order also targets extraditions, which would affect a grand total of one or two cases a year.

There is some evidence that the US wishes to avoid drastic measures. Case in point: the Trump administration reportedly backed off from plans to disrupt the Hong Kong dollar peg. Even after the signing of the Hong Kong Autonomy Act, the US media reported that Trump was hesitant to impose the act’s sanctions.

A pending presidential order, which reportedly bans all Chinese Communist Party members and their families from entering the US, may serve as a useful barometer. A narrower travel ban, if adopted, may be indicative of a more tailored approach to China sanctions.

The US enjoys some leverage precisely because US institutions play a leading role in Hong Kong, a global financial hub that remains vital to China’s long-term development.

Tens of thousands of Americans live in Hong Kong, and US financial institutions, companies and advisory firms continue to thrive here. Ultimately, crippling sanctions could undermine that leverage by pushing US firms away from Hong Kong.

Nick Turner is a Hong Kong-based registered foreign lawyer whose practice focuses on economic sanctions law. Joshua M. Zimmerman is a former corporate lawyer who has resided in Hong Kong since 1997

David Dodwell is on holiday

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