By Chuin-Wei Yap | Graphics by Yasufumi Saito 

The U.S. decision to rescind Hong Kong's status as a largely autonomous Chinese territory opens the way for a range of punitive measures from Washington that may damage Hong Kong's status as a trading and finance hub.

At stake for Hong Kong is a sizable trading partnership and access to some of America's key technology exports, including sensitive ones such as telescopic lenses for guns, satellites and computer chips.

The U.S. is Hong Kong's second-largest trading partner, after China, according to the latest available data. By contrast, the tiny territory was America's 21st-largest trading partner.

The bilateral relationship is at risk after the U.S. State Department certified to Congress that Hong Kong no longer enjoys "a high degree of autonomy" from Beijing, in response to China's approval of national-security laws that override the city's legislature. Such autonomy had conferred on Hong Kong preferential trade and economic status that differentiated it from how the U.S. treats China. U.S. officials are pushing for sanctions on the territory.

Prolonged trade tensions have already gnawed away at the trade relationship, with last year marking a fall to the lowest level in nearly a decade of booming bilateral trade with the U.S. Official data show Hong Kong's total goods exports, including re-exports, to the U.S. amounted to some $40 billion last year, a 15% year-over-year decline that was related to the trade war's global impact and political unrest.

"The short-term economic damage [from the U.S. measures] would be manageable, but it would accelerate the erosion of Hong Kong's status as an international business center," said Mark Williams, chief Asia economist for Capital Economics.

The Hong Kong government has criticized the move as unjustified and warned that American companies will be hurt too. They point to a history of surpluses favoring the U.S. in the bilateral merchandise balance of payments; the surpluses totaled some $297 billion for the goods trade in the decade to 2018, official data show. Hong Kong's Chief Executive Carrie Lam said Tuesday that the U.S. would be hurting its own interests in Hong Kong if it takes measures against trade with the territory.

While Mr. Trump said the U.S. plans to eliminate Hong Kong's trade privileges, he hasn't yet specified which and to what extent.

Trading Places

Hong Kong itself manufactures relatively little. Domestic exports account for only about 1% of its total exports. U.S. action on this front isn't likely to hurt the local economy. The territory's re-exports have never qualified for preferential U.S. tariffs.

It is unclear whether the U.S. will target one of Hong Kong's main economic roles -- which benefits China -- as a re-export hub. Many trading businesses locate in Hong Kong and handle re-exports to and from China, often helping foreign companies get around some Chinese taxes and the need for regulatory approval from Beijing when directly shipped China-bound consignments exceed certain limits. Re-exports refer to imported goods that are largely unchanged, in value-added terms, before being exported again to a third economy.

As a destination, China accounted for 56% of Hong Kong's re-exports last year, or some $284 billion, according to Hong Kong data. The U.S., as Hong Kong's second-largest re-export market, trailed with only about 7.6%. China was also the largest source of Hong Kong's re-exports by far, accounting for 57% in 2018, the data show.

One aspect of Hong Kong's commercial role is in moving merchandise between the U.S. and mainland China. In 2018, around 8% of mainland China's exports to the U.S., or about $37 billion, went through Hong Kong. So did $10 billion of U.S. exports to mainland China that year, official data show.

Sensitive Technology

Among the many exports from the U.S. to Hong Kong is a range of relatively unusual goods that require U.S. regulatory approval, whether in the form of special licenses or export preconditions from agencies including the Bureau of Industry and Security, an arm of the U.S. Commerce Department that deals with the overlaps between national security and high technology. Such items could have sensitive technology or both civil and military uses, known as dual-use technologies.

Mr. Trump singled out dual-use technologies as a potential target last week.

Hong Kong often re-exports many of such goods to China. One example: In the past two years, Hong Kong imported some 42,000 telescopic sights for firearms from around the world -- including 1,776 from the U.S. -- and re-exported about 6,000 to China, official data show.

Some such exports to Hong Kong have helped China skirt U.S. regulations in the past. In 2017, Asia Satellite Telecommunications Co., a Hong Kong-based satellite operator co-owned by China's state-owned industrial conglomerate Citic Group, bought a $164 million communications satellite from the U.S. and shipped it to Hong Kong under license -- despite U.S. rules effectively prohibiting American companies from exporting satellites to China. AsiaSat could buy U.S. satellites because of a U.S. policy treating semiautonomous Hong Kong as separate from mainland China. Hong Kong-based companies on earlier occasions have bought American satellites too.

Shipments of sensitive technology from the U.S. to Hong Kong in recent years have also included semiconductor chips and mass spectrometers, devices that break apart molecules and are useful in high-tech applications such as genetic engineering and environmental analysis, BIS data show.

Hong Kong is an important re-export hub to China for chips from major tech makers around the world. Electronics account for about two-thirds of Hong Kong's total exports, official data show; a substantial portion are high-tech products including semiconductors.

Hong Kong last year re-exported to China some 37,300 thermal-imaging cameras, which are used in civilian work such as firefighting but are also essential to the military. It imported about 48,000, including about 8,000 from the U.S.

Even before last week's ruling on Hong Kong's autonomy, the U.S. in April, wary of unregulated tech transfers to foreign nations, had already moved to tighten controls on potential re-exporters of such merchandise, by requiring of importers an additional U.S. license. The move, targeting tech software and dual-use telecom equipment, was widely viewed by analysts as aimed at containing such flows to strategic rivals including China and Russia.

Squaring Off

U.S. curbs on Hong Kong's commerce would likely exacerbate the twin economic stresses the city faces from the coronavirus and the protests that tipped the economy into recession last year. Trading and logistics have traditionally accounted for the largest share of Hong Kong's economic output. The latest available data show these components in 2018 translated to 21% of Hong Kong's gross domestic output, exceeding other major pillars of the economy such as financial services and tourism.

Some U.S. businesses in Hong Kong are trying to persuade Washington that dismantling the bilateral relationship would hurt Hong Kong and the U.S. -- but not China as much. Should Hong Kong's role wane, other commercial hubs such as Singapore could quickly supplant some of its re-exporting role.

Hong Kong has warned it may hit back at U.S. interests, if that happens. "There are over 1,300 American companies in Hong Kong which have been treated in exactly the same way as a local company in accessing the mainland market," Mrs. Lam said. She added that Hong Kong has always granted visa-free access to American passport holders though it doesn't receive reciprocal U.S. treatment.

"I point out the facts and the figures so that they will do their own calculations," Mrs. Lam said.

Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com

(END) Dow Jones Newswires

June 06, 2020 07:14 ET (11:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.