Escalating US China tensions and its impact on Hong Kong

Hong Kong, powerful port and global symbol of free trade since the 19th century, is caught in escalating tensions between Beijing and Washington.

In addition to harboring a robust manufacturing base, the semi-autonomous territory of seven million, under the loose control of China, has long functioned as one of the world's key transshipment hubs. A 1909 account says that "tea, silk, opium, sugar, flax, salt, earthenware, oil, amber, sandal-wood and granite" were traded in the port.

How Hong Kong adapts now to the 21st century trade crisis will signal the resiliency of global trade and the fate of mega-ports. In response to the crisis, Hong Kong has increased subsidies for domestic businesses, and is forging new free-trade alliances with third countries.

City leaders estimate that roughly half of all Chinese goods shipped via Hong Kong to the US are subject to Trump administration tariffs on hundreds of billions of dollars of Chinese shipments. Increasingly, Hong Kong is a free-trade area in a tariff world. With the exception of alcohol, tobacco and oil, it has no import duties, a big reason it has a trade deficit.

Hong Kong trade deficit, first 9 months

• 2018: $44 billion
• 2017: $24.4 billion
• 2016: $18.4 billion
• 2015: $39.4 billion
• 2014: $56.7 billion

Hong Kong was originally occupied by the UK in 1841 and was returned to China in 1997. When that happened, Beijing promised to restrain itself from imposing a socialist economic model. Hong Kong is densely packed with people and has few natural resources, meaning it needs to import most of what it consumes, and most of that comes from China and Taiwan.

Hong Kong top sources of imports, first 9 months, 2018

• China $199.9 billion
• Taiwan $44.6 billion
• South Korea $31.8 billion
• Japan $27.2 billion
• US $20.7 billion
• Malaysia $18.5 billion
• Switzerland $12.2 billion
• India $11.8 billion
• Singapore $11.4 billion
• Thailand $10 billion

China is also Hong Kong's chief export destination. For decades, it was Beijing's ticket to the rest of the world, a place where Chinese entrepreneurs and political leaders could engage Western companies and learn about technology. Now China and its manufacturing regions have become the economic heart of the continent, consuming and producing more than anywhere else.

Hong Kong top destinations for exports, first 9 months, 2018

• China $235 billion
• US $33.9 billion
• India $13.8 billion
• Japan $12.2 billion
• Thailand $10.5 billion
• Singapore $9 billion
• Taiwan $8.8 billion
• Vietnam $7.9 billion
• Germany $7.2 billion
• Netherlands $6.4 billion

Maintaining a strong relationship with the US, its top consumer market after China, is crucial for Hong Kong. A 1992 law affirms the territory's commercial independence.

A recent congressional report has called for revising the US' terms with Hong Kong, citing infringements on civil liberties and press freedom. In response to a congressional report, Hong Kong chief executive Carrie Lam Cheng Yuet-ngor warned the US that any change in Hong Kong's privileged status could hurt both sides. So far, the US has maintained that it will keep separate ties with Hong Kong, despite that report.

Separately, Hong Kong is slowly forging its own path in the global trading system. It now has separate free-trade agreements with mainland China, New Zealand, the European Union's free trade area, Chile, Macao, Georgia, the Maldives, and the Association of Southeast Asia Nations, or ASEAN.

Hong Kong this month signed its ninth free trade deal, with Australia, which, despite its size and proximity, is merely its 16th biggest export market. The deal locks in tariff-free trade, and also opens Hong Kong's lucrative services sector to Australian investment. Edward Yau Tang-wah, secretary for commerce and economic development, said the deal was "important" because the two economies compliment each other, particularly in services.

The agreement, he added, would send a "positive message" during a time of skepticism about free trade. Hong Kong is a major exporter of consumer goods to Australia.

Hong Kong's top exports to Australia, 2017

• TV, sound equipment, electronics $1.8 billion
• Electrical machinery $620.7 million
• Medical, optical equipment $296.9 million
• Knit apparel $260.2 million
• Precious stones $257.2 million
• Apparel, not knit $196.5 million
• Leather art, handbags, etc. $158.7 million
• Toys, games, sports gear $153.4 million
• Clocks, watches $113.4 million
• Books, newspapers $95.4 million

Going the other way, Australia mostly sends niche products like beer and wine, and gold. Australia is one of the world's biggest gold miners, producers and exporters.

Australia's top exports to Hong Kong, 2017

• Gold $5.1 billion
• Beverages $300.7 million
• Edible fruits and nuts $271.8 million
• Meat $223.8 million
• Dairy and honey $166.7 million
• TV, sound equipment $165.8 million
• Packaged food $150 million
• Fish $102.4 million
• Oil and gas $84.6 million
• Pharmaceuticals $72.9 million

Hong Kong hopes agreements like the one with Australia can keep its free-trade legacy alive. The government this month said that economic growth had sunk to a two-year low. The territory, the government added, is subject to "increasing downside risks" because of lower growth in Europe and Asia. In addition, the US-China dispute over tariffs is hurting global trade, it said. "The impacts on Hong Kong's external trade have begun to surface, and are likely to become more apparent in the near term," chief government economist Andrew Au said in a statement.

Posted 18 November 2018 by John Miller, Guest Blogger