Hong Kong warns removing U.S. special status is a ‘double-edged sword’

By Steve Holland, David Brunnstrom and Sarah Wu

WASHINGTON/HONG KONG (Reuters) – President Donald Trump on Friday ordered his administration to begin the process of eliminating special U.S. treatment for Hong Kong to punish China, but stopped short of calling an immediate end to privileges that have helped the territory remain a global financial center.

In making the announcement, Trump used some of his toughest rhetoric yet against China, saying Beijing had broken its word over Hong Kong’s autonomy by moving to impose new national security legislation and the territory no longer warranted U.S. economic privileges.

At a White House news conference, Trump called this a tragedy for the people of Hong Kong, China and the world, having already attacked Beijing over the coronavirus pandemic, which began in China. Trump said China’s “malfeasance” was responsible for massive suffering and economic damage worldwide.

“We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China,” Trump said, adding that Washington would also impose sanctions on individuals seen as responsible for “smothering – absolutely smothering – Hong Kong’s freedom.”

He did not name any of the potential sanctions targets. Trump said his announcement would “affect the full range of agreements we have with Hong Kong,” from the U.S. extradition treaty to export controls on dual-use technologies and more “with few exceptions.”

“Our actions will be strong, our actions will be meaningful,” Trump added.

China’s state-run Global Times newspaper called Trump’s announcement “recklessly arbitrary.”

Trump gave no time frame for the moves, suggesting he may be trying to buy time before deciding whether to implement the most drastic measures, which have drawn strong resistance from U.S. companies operating in Hong Kong.

He also said he was issuing a proclamation to better safeguard vital university research by suspending entry of foreign nationals from China identified as potential security risks.

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Sources, including a current U.S. official, told Reuters on Thursday that the latter move could affect 3,000 to 5,000 Chinese graduate students.

Financial markets saw Trump’s announcement as more bark than bite and U.S. stocks finished mostly higher as it was seen as less threatening to the U.S. economy than investors had feared.

“I don’t think a lot has changed,” said Craig Allen, president of the U.S.-China Business Council. “We haven’t taken steps that really ratchet up the tension even more.”

He said he interpreted the actions rescinding Hong Kong’s special status as being first subject to review by various agencies and not happening immediately.

REVVED-UP RHETORIC

Trump’s revved-up rhetoric against China comes in the midst of his re-election campaign in which opinion polls show voters increasingly embittered toward Beijing, especially over the coronavirus.

Trump may be mindful though that a more serious rupture with Beijing could upend his hard-fought Phase One trade deal with the world’s second-largest economy, which he has counted on for economic benefit in major U.S. farm states.

Trump also has to take into account the effect on the more than 1,300 U.S. firms that have offices in Hong Kong and provide about 100,000 jobs.

Daniel Russel, the top U.S. diplomat for East Asia until early in Trump’s administration, said his Hong Kong provisions remained “fairly vague” and “it remains to be seen how quickly and extensively they are implemented.”

But there was a risk that removing Hong Kong’s special status might inadvertently accelerate its loss of autonomy.

“Beijing clearly calculated that the collateral damage to their overall interests from U.S. retaliation for would be manageable,” Russel said.

While Trump gave no time frame for moves, two people familiar with the matter said that among options under consideration were to set a deadline of a year from now for China to step back or else face full revocation of Hong Kong’s special status.

Such a deadline would buy time to avoid a major rupture in relations ahead of the Nov. 3 U.S. election. By the end of that period, however, Trump might no longer be in office to make the final decision.

Trump’s announcement came after Secretary of State Mike Pompeo declared China’s erosion of Hong Kong’s autonomy meant the territory no longer warranted special treatment under U.S. law. [L4N2D90NG]

Earlier, Hong Kong’s Beijing-backed government told Washington to keep out of the national security debate, and warned that withdrawal of the financial hub’s special status could backfire on the U.S. economy.

“Any sanctions are a double-edged sword that will not only harm the interests of Hong Kong but also significantly those of the U.S.,” it said late on Thursday.

It said that from 2009 to 2018, the cumulative U.S. trade surplus of $297 billion with Hong Kong was the biggest among all U.S. trading partners.

Chinese authorities and Hong Kong’s government say the security legislation poses no threat to the city’s autonomy and the interests of foreign investors will be preserved.

(Reporting Steve Holland, David Brunnstrom, Eric Beech, Jeff Mason, Matt Spetalnick, David Lawder and Daphne Psaledakis in Washington; Additional reporting by Sarah Wu and Marius Zaharia, James Pomfret, Greg Torode, Clare Jim, Sumeet Chatterjee and Anne Marie Roantree in Hong Kong, Michael Shields in Geneva, Kanishka Singh in Bengaluru; Writing by David Brunnstrom, Michael Perry and Robert Birsel; Editing by Clarence Fernandez, Simon Cameron-Moore, Timothy Heritage, Will Dunham and Cynthia Osterman)