Revoking Hong Kong’s Preferential Trade Status: Legal Framework and Implications

Revoking Hong Kong’s Preferential Trade Status: Legal Framework and Implications

Legal Sidebari

Revoking Hong Kong’s Preferential Trade
Status: Legal Framework and Implications
Updated April 2, 2021
On July 14, 2020, then-President Donald Trump 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 against the United States,
arguing the new marking requirements violate several WTO agreements. On March 31, 2021, President
Joe Biden’s Administration indicated that it intends to maintain the suspension of differential treatment of
Hong Kong.
This Sidebar presents the legal framework that applies to Hong Kong’s status as a separate customs
territory from China, and it analyzes the implications of the U.S. actions as well as Hong Kong’s decision
to initiate WTO proceedings. Although the former President’s executive order suspended a number of
other statutory provisions that gave preferential treatment to 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, President Trump announced on May 30, 2020, that
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his Administration would take actions to curtail these privileges, including by no longer treating Hong
Kong, the United States’ 15th-largest export market as of 2019, as a separate customs territory from China.
Following China’s adoption of a new national security law for Hong Kong (discussed in this CRS report),
President Trump 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, President Trump, 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. On March
31, 2021, President Joe Biden’s Administration indicated that it intends to maintain this suspension of
differential treatment of Hong Kong.
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 fifty 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”

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(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
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 former President’s July 2020 Executive Order, CBP issued a notice requiring goods from
Hong Kong to list “China” as the country 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 CBP) 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

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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.
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 with respect to the
new marking requirements for goods produced in Hong Kong. The United States agreed to participate.
After consultations failed to resolve the issue, on January 14, 2021, Hong Kong formally requested that a
WTO panel be established to hear the dispute. During the January 25, 2021, meeting of the WTO’s
Dispute Settlement Body (DSB), the United States objected to the request, as permitted by Article 6.1 of
the WTO’s Dispute Settlement Understanding. The DSB agreed to defer consideration of Hong Kong’s
panel request, at least in part due to the recent change in presidential administration in the United States.
Hong Kong made a second request on February 22, 2021, and the DSB agreed to establish a panel.
Hong Kong’s request for a panel contends 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 these agreements contend the new marking requirement
violates a number of obligations. First, the marking requirement allegedly violates various
nondiscrimination obligations, all rooted in the “most favored nation” concept, which generally requires
the United States to extend the same treatment to all WTO members. Second, the marking requirement
allegedly violates fair, impartial, and uniform or consistent administration of rule of origin marking
requirements. Finally, the marking requirement allegedly violates a provision that limits WTO members
from mandating other members fulfill conditions unrelated to manufacturing or processing as part of rule
of origin determinations.
The United States has not published comment regarding 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

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dispute settlement.” The United States has also reportedly argued that Hong Kong’s dispute is not
appropriate for consideration by a WTO panel because such panels cannot adjudicate issues of national
security under Article XXI(b) of the GATT. Based on these statements, the United States may argue
before a WTO panel that, even if its actions violate the WTO agreements, the 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 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. However, in two disputes not involving the United States, WTO panels rejected similar
arguments from other WTO members invoking GATT Article XXI(b) and its mirror provision in the
Agreements on Trade-Related Aspects of Intellectual Property (see DS512 and DS567). As noted by a
number of commentators, those disputes may “remove the foundations for the U.S. argument” and
suggest that other WTO panels may rule similarly. Thus, a WTO panel considering the case might also
conclude that it may review whether the U.S. measures meet Article XXI(b)’s requirements in addition to
considering Hong Kong’s claims on the merits.

Author Information

Nina M. Hart

Legislative Attorney

Disclaimer
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