Legal Sidebari
Revoking Hong Kong’s Preferential Trade
Status: Legal Framework and Implications
Updated January 12, 2021
On July 14, 2020, the President issued an executive order finding the Hong Kong Special Administrative
Region (Hong Kong) “no longer sufficiently autonomous to justify differential treatment in relation to the
People’s Republic of China” (China) with regard to specific laws listed in the order, and suspending
differential application of those laws to Hong Kong. One of the relevant laws, 19 U.S.C. § 1304, sets out
how products from other territories must be marked to indicate their country of origin. In response to the
executive order, U.S. Customs and Border Protection (CBP) issued a notice requiring all goods previously
marked with “Hong Kong” to indicate “China” as their country of origin. Since this action, Hong Kong
has initiated a World Trade Organization (WTO) dispute by requesting consultations with the United
States, arguing the new marking requirements violate several WTO agreements.
This Sidebar presents the legal framework that applies to Hong Kong’s status as a separate customs
territory from China, and analyzes the implications of the U.S. actions as well as Hong Kong’s decision to
initiate WTO proceedings. Although the President’s executive order suspended a number of statutory
provisions that gave preferential treatment to Hong Kong and invoked authority to declare a national
emergency with respect to the situation in Hong Kong, these actions are beyond this Sidebar’s scope.
Background
On May 28, 2020, the National People’s Congress of China approved a decision authorizing its Standing
Committee to enact laws to prohibit acts and activities in Hong Kong it considers to undermine national
security. The same day, Australia, Canada, the United Kingdom, and the United States issued a joint
statement expressing “deep concern” about China’s decision, suggesting that such a law would
“dramatically erode Hong Kong’s autonomy” and conflict with China’s international obligations to
respect such autonomy stemming from, among other things, the Sino-British Joint Declaration on the
Question of Hong Kong. In addition, the U.S. Secretary of State issued a report finding Hong Kong no
longer sufficiently autonomous from China to warrant certain privileges under U.S. law that allow Hong
Kong to be treated differently than China. Thereafter, the President announced on May 30, 2020, that his
Administration would take actions to curtail these privileges, including by no longer treating Hong Kong,
the United States’ 15th-largest export market, as a separate customs territory from China.
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Following China’s adoption of a new national security law for Hong Kong (discussed in this CRS report),
the President issued Executive Order 13936 formally determining that Hong Kong is “no longer
sufficiently autonomous to justify differential treatment in relation to . . . China.” Pursuant to this
determination, the President, among other things, suspended certain sections of U.S. law, including
immigration, export control, and customs provisions, that provided Hong Kong with different treatment
than that extended to China, and ordered the relevant executive agencies to take steps to implement the
suspensions. To implement the executive order’s suspension of 19 U.S.C. § 1304, CBP issued a notice
requiring all products originating from Hong Kong to be marked “China” instead of “Hong Kong”
effective September 25, 2020. CBP later extended the transition period to November 9, 2020.
Legal Framework for Hong Kong’s Preferential
Trade Status
The U.S. legal framework that applies to Hong Kong was initially enacted in 1992 in anticipation of Hong
Kong’s transfer from British to Chinese control. This section first provides a brief overview of Hong
Kong’s legal status vis-à-vis China, and then sets out how the U.S. legal framework applies this status.
Hong Kong’s Legal Status as a Special Administrative Region
From 1842 to 1997, the United Kingdom exercised sovereignty over Hong Kong. In 1984, the Chinese
and British governments negotiated the Sino-British Joint Declaration on the Question of Hong Kong
(Joint Declaration), which transferred control of Hong Kong to China in 1997 while articulating certain
rights for Hong Kong. In particular, the Joint Declaration states that Hong Kong shall be designated a
“special administrative region” of China, as permitted by Article 31 of China’s Constitution. The Joint
Declaration also stipulates that Hong Kong “will enjoy a high degree of autonomy, except in foreign and
defence affairs” for 50 years after 1997. Additionally, the Joint Declaration states that Hong Kong “will
retain the status of a free port and a separate customs territory” and may enter into international
agreements and participate in international organizations under the name “Hong Kong, China.”
These guarantees are codified in Hong Kong’s Basic Law, passed by the National People’s Congress of
China in 1990. The Basic Law also adds that, as part of Hong Kong’s status as a separate customs
territory, its “[e]xport quotas, tariff preferences and other similar arrangements . . . remain valid,” and it
“may issue its own certificates of origin.” Pursuant to this arrangement, Hong Kong has remained a WTO
member and has negotiated a number of trade agreements, including one with China.
U.S. Statutory Framework on Hong Kong’s Status
To recognize the Joint Declaration, the United States enacted the U.S.-Hong Kong Policy Act of 1992,
which it later amended in the Hong Kong Human Rights and Democracy Act of 2019. Under this legal
framework, Congress stated, among other things, the “United States should continue to fulfill its
obligations to Hong Kong under international agreements, so long as Hong Kong reciprocates,” and the
“United States should respect Hong Kong’s status as a separate customs territory, and as a WTO member
country.” Further, it adds the United States should “grant the products of Hong Kong nondiscriminatory
trade treatment by virtue of Hong Kong’s membership in the General Agreement on Tariffs and Trade”
(i.e., GATT, the WTO’s predecessor) and “recognize certificates of origin for manufactured goods issued
by” Hong Kong.
To implement these policy statements, these Acts approve the following: (1) continued application of
existing U.S. laws to Hong Kong in the same manner as they applied prior to July 1, 1997, unless
otherwise provided for by law or executive order; and (2) continuation of all international agreements to
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which the United States and Hong Kong are members, provided these agreements were in force on or
after July 1, 1997, and entered into before November 27, 2019.
Under the U.S.-Hong Kong Policy Act, the President may decide to suspend application of a U.S. law that
provides Hong Kong with treatment different than that accorded to China if he determines that “Hong
Kong is not sufficiently autonomous to justify” such different treatment. Such a determination must be
made via executive order and may be rescinded by a subsequent executive order if the President
determines that Hong Kong has regained sufficient autonomy to qualify for differential treatment. With
respect to international agreements between Hong Kong and the United States, the President may
determine whether Hong Kong is legally competent to carry out its international obligations or “that the
continuation of Hong Kong’s obligations or rights under any such treaty or other international agreement
is not appropriate under the circumstances.” Such a finding must be reported to Congress. The precise
consequences of the President’s exercise of this authority are unclear, as the statute does not set out what
the President may do following such a finding. This may reflect the fact that the processes for suspending,
terminating, or withdrawing from treaties and other international agreements differ depending on the
terms of the agreements.
When executing his powers under these Acts, the President “shall consult appropriately” with Congress.
This requirement reflects the Executive Branch’s sole authority to recognize governments and their
boundaries (i.e., to recognize that China is not only sovereign over but also controls Hong Kong) and
Congress’s role in certain aspects of foreign affairs, including regulation of foreign commerce.
Implications of Revoking Hong Kong’s Trade Status
Pursuant to the President’s July 2020 executive order, CBP issued a notice requiring goods from Hong
Kong to list “China” as the place of origin. This section discusses the effects of CBP’s notice on the
treatment of goods from Hong Kong under U.S. law, and then discusses Hong Kong’s decision to initiate
a WTO dispute regarding the notice.
Changes to Hong Kong’s Customs Status Under U.S. Law
In 1997, the U.S. Department of Commerce and U.S. Customs Service (now U.S. Customs and Border
Protection) promulgated regulations to treat Hong Kong as a separate customs territory in the same
manner as it had been treated while under British control, even after control of Hong Kong passed to
China. CBP’s 2020 notice requiring goods produced in Hong Kong to be marked with “China” as the
country of origin eliminates part of that preferential treatment. CBP has stated that the regulatory change
applies only to how the country of origin is marked, but not to country-of-origin determinations for
purposes of assessing customs duties. Thus, certain additional duties that apply to China, such as the
Section 301 tariffs imposed after an investigation into China’s trade-related practices, do not apply to
goods produced in Hong Kong.
Hong Kong and the WTO
In October 2020, Hong Kong initiated a WTO dispute against the United States, requesting consultations
and arguing the U.S. actions taken with regard to how products originating from Hong Kong must be
marked may violate WTO rules. This part provides an overview of Hong Kong’s status at the WTO and
then discusses its WTO dispute against the United States.
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Hong Kong’s Status at the WTO
Hong Kong retains its own membership in the WTO—separate from China—as the organization permits
customs territories in addition to countries to join. As stated, the Joint Declaration and Basic Law permit
Hong Kong to retain its membership in the WTO’s predecessor (i.e., GATT) and carry over this
membership to the WTO in 1995 (which China did not join until 2001). Other nonsovereign customs
territories are also WTO members, including Macao and Taiwan, which has led to what some refer to as a
“One China, Four WTO Memberships” phenomenon.
To date, the United States has not suggested it would refuse to recognize Hong Kong’s rights under the
WTO agreements or find Hong Kong not legally competent to carry out its treaty obligations. However, if
the President were to make such a determination pursuant to Section 201 of the U.S.-Hong Kong Policy
Act of 1992, at least two limitations on such a determination could be relevant. First, the determination
would not affect Hong Kong’s status as a WTO member vis-à-vis other WTO members. In other words,
Hong Kong would not lose its WTO membership due to any potential U.S. actions to revoke its trade
privileges under U.S. law; other WTO members are not required to adhere to a U.S. decision on the
matter. Second, it is unclear whether such a determination would relieve the United States of its
international legal obligations to Hong Kong. On one hand, one might argue the United States no longer
needs to respect its WTO obligations to Hong Kong, as only actors with international legal personality
may incur or be owed international obligations. On the other hand, one could argue that Hong Kong
retains its legal personality, at least with respect to trade, as this status remains in effect under the Basic
Law; therefore the United States would still have to respect its international obligations owed to Hong
Kong as a matter of international law.
Hong Kong’s Challenge to U.S. Actions
On October 30, 2020, Hong Kong requested WTO consultations with the United States, in which the
United States agreed to participate. Hong Kong’s request for consultations stated that the new marking
requirement may violate provisions of three WTO agreements: the GATT; the Agreement on Rules of
Origin; and the Agreement on Technical Barriers to Trade. Hong Kong’s complaints under all three
agreements contend the new marking requirement violates various nondiscrimination obligations, as
goods from Hong Kong are treated differently under U.S. law from goods of other WTO members. With
regard to the Agreement on Rules of Origin, Hong Kong also asserts the marking requirement violates
U.S. obligations not to impose eligibility conditions for determining the country of origin that are
unrelated to manufacturing or processing, and to ensure U.S. rules of origin are applied in a “consistent,
uniform, impartial and reasonable manner.” Hong Kong has further indicated that it may extend its
complaint to any future changes in tariff treatment resulting from the July executive order and
implementing actions. In other words, if executive agencies attempt to apply certain duties to Hong Kong
that currently apply only to China (e.g., Section 301 tariffs or other antidumping or countervailing duties),
then Hong Kong might argue this also violates WTO provisions.
To date, the United States has not publicly stated its position as to whether it agrees with Hong Kong’s
assertions. However, in its decision to participate in consultations, the United States noted its acceptance
was “[w]ithout prejudice to whether [the dispute] raises issues of national security not susceptible to
review or capable of resolution by WTO dispute settlement.” This may suggest that if Hong Kong were to
request that a WTO panel hear the dispute, the United States may argue that, even if its actions violate the
WTO agreements, it is entitled to invoke the “essential security” exception in GATT Article XXI(b)
because its actions were motivated by national security concerns. This statement may also suggest the
United States will argue that a WTO panel cannot review the disputed actions because the Article XXI(b)
exceptions are “self-judging.” That is, because the text states the agreement shall not prevent a WTO
member “from taking any action which it considers necessary for the protection of its essential security
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interests,” WTO members themselves decide what is necessary to protect their essential security interests.
Under this interpretation, WTO panels may not second-guess these decisions.
The United States has articulated this position on the security-interests exception in other ongoing WTO
disputes. In two disputes not involving the United States, WTO panels rejected similar arguments from
other WTO members that invoked GATT Article XXI(b) and its mirror provision in the Agreements on
Trade-Related Aspects of Intellectual Property (see DS512 and DS567). As suggested by James Bacchus,
a former WTO Appellate Body member and Member of Congress, while these WTO panel decisions are
not binding on successive panels, they may “remove the foundations for the U.S. argument.” Thus, if
Hong Kong proceeds with a dispute against the United States, the WTO panel considering the case might
also conclude that it may review whether the U.S. measures meet Article XXI(b)’s requirements.
As of this writing, Hong Kong and the United States have not proceeded beyond the consultation stage of
the dispute. Because the parties do not appear to have resolved the dispute within the 60 days after Hong
Kong requested consultations (in this case, by December 29, 2020), Hong Kong may request
establishment of a WTO panel to hear the dispute. Although Hong Kong is now legally entitled under
WTO rules to request a panel, it is not required to do so; the parties may agree to extend consultations, as
has been done in other WTO disputes.
Author Information
Nina M. Hart
Legislative Attorney
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
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