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Annual Report by U.S. Commission Requests Assessment of Export Control Policy Toward Hong Kong

The U.S.-China Economic and Security Review Commission has released its 2018 report to Congress on the national security implications of the trade and economic relationship between the United States and mainland China. The report highlights how President Xi Jinping is pursuing structural changes in the global order to facilitate mainland Chinese ambitions and wonders whether mainland China’s willingness to adopt a more central role in global affairs is compatible with the existing order or will create “a new era of persistent competition.”

The report states that economic liberalisation has stalled under President Xi, noting that foreign companies hoping to participate in the mainland Chinese market “must pay a high price for admission, transfer technology, and suffer regulations that tilt the playing field in favour of their Chinese competitors.” The report also points out how the U.S. goods trade deficit with mainland China continues to climb to new heights, hitting a record US$375 billion in 2017 that is expected to be surpassed this year. In all, the Commission believes mainland China’s “state-led, market-distorting economic model” presents a challenge to U.S. economic and national security interests and voices many of the concerns expressed in previous annual reports and other similar documents.

As usual, the report makes a number of recommendations on a range of matters. Most notably for Hong Kong, the Commission is recommending that the U.S. Congress direct the U.S. Department of Commerce and other relevant government agencies to prepare an unclassified public report, with a classified annex, examining and assessing the adequacy of U.S. export control policy for dual-use technology as it relates to the U.S. treatment of Hong Kong and mainland China as separate customs areas. In addition to this recommendation, the report asserts that “considerations regarding the export of sensitive U.S. technology to Hong Kong are also predicated on the territory’s separation from the Mainland.”

While Congress could certainly look into the export control issue next year, there is no indication at this point that either Congress or the Trump administration are interested in modifying U.S. export control policy toward Hong Kong. It should be noted that legislation was introduced last year in both the House (H.R. 3856) and Senate (S.417) to implement annual certification of whether Hong Kong is sufficiently autonomous from mainland China to justify separate treatment under any particular U.S. law or any provision thereof, but these bills were not considered at the committee level.

The DOC notes on one of its websites that Hong Kong maintains an autonomous and transparent export control regime and that the United States continues to provide Hong Kong importers a comparable level of access to controlled dual-use U.S. technologies as before Hong Kong’s 1997 reversion to mainland China. Accordingly, in some cases items that do not require a licence for export to Hong Kong may require a licence to mainland China. The DOC states that U.S. companies should understand whether Hong Kong recipients of U.S. exports are end-users or merely intermediaries, as U.S. export control requirements are generally based on the final destination of the export.

Moreover, the U.S. State Department’s Hong Kong Policy Act annual report issued on 29 May 2018 states that the United States co-operates closely with Hong Kong on strategic trade controls and counter-proliferation initiatives. Among other things, the report indicates that the DOC, which employs a full-time export control officer to conduct end-use checks, industry outreach and government liaison work, continues to raise concerns about the diversion of controlled items, including during its annual bi-lateral discussion about strategic trade controls. The U.S. and Hong Kong governments have taken steps together to tighten licencing requirements and have also held joint seminars for industry groups, published due diligence guidance to raise industry awareness about transshipment risks and co-operated in on-going investigations.

The Hong Kong Policy Act annual report adds that, unlike mainland China, Hong Kong is also eligible to receive controlled U.S. defence articles sold via direct commercial sale. The State Department, which licences commercial sales of such articles under the International Traffic in Arms Regulations, ensures compliance via its Blue Lantern end-use monitoring programme and works with the Hong Kong government to reduce the risk of diversion.

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