Hong Kong ensnared in US-China showdown

The Trump administration's declaration on Wednesday that the United States no longer considers Hong Kong  autonomous from China, given Beijing's increasingly aggressive policies there, could pave the way for reprisals from Washington and a potentially dramatic reshaping of Asia's economic geography.

The US announcement was made a day before China's parliament approved a new security law for the semi-autonomous region on Thursday that gave Beijing broad powers to crush dissent there. For more than 20 years, Hong Kong has  enjoyed special privileges that differentiate it from mainland China. 

The American position raises two major questions: Will the Trump administration seek to hammer Hong Kong as a way to pressure Beijing, and who will ultimately pay the price for such measures?

Bristling at what it sees as continued Chinese aggression, the administration aimed to deter Beijing from undermining what had been Hong Kong's special status. US President Donald Trump's top diplomatic envoy for East Asia, David Stilwell, floated the prospect of visa or economic sanctions as a next step if China didn't alter course. He said the actions "will be as targeted as possible to change behavior" but said the State Department was "not hopeful that Beijing will reverse itself." 

The decision on what to do next now rests with the White House, with more announcements expected as soon as Friday, several officials told CNN. Additional measures could range from revoking Hong Kong's special trade relationship with the United States, including levying higher tariffs and tougher export controls, to targeting its role as a vital financial window for Beijing. Hong Kong's future will be largely shaped by the US measures in the coming weeks—and by Beijing's response.

Hong Kong isn't quite as important economically to China as it was when the British handed over the former colony in 1997, when it alone accounted for more than 16 percent of greater China's GDP. The number today is less than 3 percent. But it still plays a crucial role in giving Chinese banks and companies access to financing in dollars, and enabling the inflow of foreign investment to China. 

Hong Kong, in other words, is potentially a soft underbelly for a Chinese regime that desperately needs economic stability to shore up its political support.

"If the United States wanted to ensure that Beijing gets the raw end of this deal, so that they felt some pain, restricting Hong Kong's ability to act as a global financial center would be the way to do it," said George Magnus, an expert on the Chinese economy at the University of Oxford. "I'm not saying it would be a good thing, but if you're in a financial war, that's the way to do it."

Other experts believe that the United States isn't trying to use Hong Kong to open up a new front in the showdown against Beijing; it is merely trying to preserve Hong Kong's independence and relative freedoms as best it can. 

"I don't think this is about using Hong Kong to beat up China on a range of other issues," said Bonnie Glaser of the Center for Strategic and International Studies. "I think this is very specifically about China violating a treaty," she said, referring to the agreement between China and Great Britain on authority over Hong Kong.

The United States and its allies could influence China to at least tamp down how it implements its new law on Hong Kong, Glaser said. Washington's warning shots could convince Beijing to refrain from a full-fledged offensive on Hong Kong's protesters or completely roll back the territory's comparative freedoms.

"I don't think there's any real happy ending," she said. "But there are worst cases and there are less-than-worst cases."

The problem for the United States is that Hong Kong is caught in the crossfire, after a year of pro-democracy protests have already rattled the stability of the island and raised questions about its suitability as a hub for global business. Some analysts believe attacking Beijing through Hong Kong makes some sense for the United States—but is a destroy-the-village-to-save-it kind of strategy.

"The big question the administration is going to face is whether there is a sweet spot that enables them to apply enough pressure on the Chinese Communist Party that deters them from acting against Hong Kong, and ensures that those steps hurt the CCP and not the people of Hong Kong," said Michael Fuchs, a senior fellow at the Center for American Progress and a former Obama administration official focused on Asia affairs.

Trade between the United States and Hong Kong is estimated at $38 billion a year. The territory also hosts some 1,300 US companies, including nearly every major financial institution. The State Department also estimates that 85,000 US citizens reside in Hong Kong.

But it may be too late for the United States to do anything to salvage Hong Kong's status either as a financial hub or an island of freedom in China. The new Chinese security law, which would still require implementing legislation to give it teeth, could make the place untenable as a center for global trade and finance even without any US measures.

"People will leave, companies will move their headquarters elsewhere, probably places like Singapore, regardless," said Robert Manning, an expert on Asian security issues at the Atlantic Council, a Washington-based think tank. "What the US does might hasten the pace of it, but once you swing that wrecking ball, it's gonna hit, and it's just a question of how it plays out," he said. 

"But Hong Kong is not going to be Hong Kong anymore."

For Magnus, the US determination—required by law—essentially means that the administration has given up on trying to defend the special status that Hong Kong has enjoyed since 1997.

"The United States thinks this is lost now. The acceleration of the integration of Hong Kong into the mainland has reached the point of no return," Magnus said. "The goal of the United States is no longer to preserve Hong Kong as a financial center, it's just to punish China."

It's not clear that even tough US measures against Hong Kong would be enough to deter Chinese President Xi Jinping. Xi sees defeating threats to the legitimacy of the Chinese Communist Party's rule as more important than preserving China's access to the global ATM. That's doubly true given Hong Kong's primordial role in the narrative of the "century of humiliation" that the Chinese Communist Party has used to justify its rule.

"Part of the CCP's raison d'etre is to correct the errors of the past. Hong Kong is of great symbolic importance to China historically," said Magnus. Rewriting the verdict of the 19th-century Opium Wars isn't just about retaking territory the British took—it's about reasserting Chinese control over what it considers its core interests, and one of the world's premier economic hubs. 

"It's more than just a symbol," he said, "it's a symbol that means something."

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

Robbie Gramer is a diplomacy and national security reporter at Foreign Policy. Twitter: @RobbieGramer