Washington’s move to restrict Hong Kong’s access to “sensitive US technology” is seen as the first in a potentially long line of steps towards removing the city’s special trading privileges, and a further tightening of the screw on China’s access to hi-tech goods.

The plan, announced by US Commerce Secretary Wilbur Ross just hours before Beijing passed a national security law for Hong Kong on Tuesday, could see the city relegated from the same group of export license exceptions as Australia, Britain and Taiwan to a category that includes Russia, Syria and Venezuela, should it face the same restrictions as China.

Ross said that “the risk that sensitive US technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased, all while undermining the territory’s autonomy”.

His statement came on the same day that US authorities eliminated licensing exceptions for civil usage of “national security-controlled items” to “countries of national security concern”, including China.

Removing Hong Kong’s export licensing privileges could see the city’s re-exports to China designated in the same manner.

The overall effect is that either through direct import or shipment via Hong Kong, Chinese companies will find it more difficult to access technology deemed sensitive by Washington, from semiconductors and high-encryption telecoms, to lasers for medical use and even video games consoles.

“It is not necessarily the tightening of controls on defence or military equipment that is at issue, it’s the sensitive technology that is exported to and through Hong Kong from where the impact will be felt, as those are the things that the US is focusing on restricting to China, AI and telecommunications,” said Wendy Wysong, a Hong Kong-based partner at law firm Steptoe & Johnson and a former US export enforcement official.

“As such, US exporters are going to need to carefully look at those kinds of products that they are shipping to Hong Kong. They’re going to have to now really focus now on the shipment to Hong Kong and do enhanced due diligence on that as well because license exceptions may not apply,” she added.

Hong Kong, meanwhile, could see itself deprived of crucial hi-tech products that could be considered to be “dual-use”, a list which is continually expanding as technological leaps transform everyday items into smart, high-powered devices.

Victor Choi Kim-shing, chairman of Hong Kong Electronics and Technologies Association, said hi-tech importers in the city will now be subject to scrutiny on a case-by-case basis by the US government.

“The biggest impact is on Hong Kong’s re-export business of electronics components. It may also affect IT research and development,” he said, adding that even consumer products could be hit. “Some PlayStations have used very advanced central processors or graphic chips from the US. These products might not be able to be imported to Hong Kong.”

In each year between 2016 and 2018, US exports shipped to Hong Kong under export control exception licenses were valued between US$400 million to US$500 million, Hong Kong government data showed.

According to the US Bureau of Industry and Security (BIS), license requirements covered 1.2 per cent of US exports to Hong Kong in 2018. For China, licensed requirements covered 3 per cent of total US exports.

“The US tech sanctions on Hong Kong would greatly hammer the city’s re-export business of hi-tech products to other countries such as mainland China. This will be a devastating blow to Hong Kong,” said Francis Fong Po-kiu, honorary president of the Hong Kong Information Technology Federation, which represents IT employers.

But the elimination of civil use licenses for US goods shipped to China, which was announced in April and which came into force on Monday, broadens the scope of goods that would be covered by such permits.

“This would not have been such a big deal a year ago for Hong Kong, but the tightening of export controls on China means that it is,” said William Marshall, a trade specialist at Hong Kong law firm Tiang & Partners. “Many goods that were previously exported to Hong Kong from the US BIS that did not require a license now will, as of yesterday. Hong Kong companies with inventory of technology components bound for China will now also require a license for that trade.”

Experts were not surprised that the US led with export controls in its push to strip Hong Kong of its separate trading status. They advised that even though Washington had not announced a detailed procedural plan, the action should be regarded as immediate and applied retrospectively whenever it is signed into law.

“We knew export controls on national security grounds would be one area they [the US] could legitimately do. They feel a lot of shipments coming to Hong Kong were being sent to China for further production or for helping the research of Chinese institutions,” said Sally Peng, managing director in the export controls and sanctions division at FTI Consulting.

She added clients had been more concerned about the broadening of US export controls on China than the move to include Hong Kong.

The move could also throw a spanner in the works of China’s ambitious Greater Bay Area plan, a blueprint spanning nine cities and two administrative regions in southern China, of which Hong Kong is earmarked to bring in international technology.

China can technically reimport technology from other sources such as Singapore, but the US is currently reviewing the “additional permissive re-exports” mechanism under which such trade occurs, with a view to further isolate China and other adversaries, Marshall said.

“If Hong Kong is treated as a ‘Group D’ country, these exports would be subject to national security controls and would require a license, which may not be granted,” said Christopher Wall, an international trade lawyer at US firm Pillsbury, referring to the group of license exception nations, which includes China, the Democratic Republic of Congo, Cuba and other nations.
Analysts are now closely watching how US President Donald Trump will proceed, with some expecting an executive order confirming the change in status.

“They are doing it bit by and bit and out of very specific reasons, this time, national security reasons,” said Louis Chan, assistant principal economist at the Hong Kong Trade Development Council, a government agency. “But they can cherry-pick what they are doing in their best interests, either because of national security or other concerns.”