Hong Kong has always been following the Basic Law policy, which is supposed to “enact on its own” to replace the national security law. However, through the year 2019 to 2020 Hong Kong protests and violence have continued to worsen within the city, which has led the Chinese government to quicken its pace to regain control of the city by imposing the national security law in the territory.
Regarding that law, it covers the act of secession, subverting state power, organising and carrying out terrorist activities that endanger national security and activities that interfere with Hong Kong Special Administrative Region (HKSAR), and involve foreign powers. Hongkongers have been furious about the imposition of this law because it is in contravention of the Basic Law. This has triggered the US as they also think that China has deprived Hongkongers of their most valued rights -- freedom of speech and press, freedom of assembly, and freedom of association. This eventually led the US to cease thinking of Hong Kong as a separate entity from China and make their choice in taking action there to sanction China from violating the obligation under the 1984 agreement.
What did Trump touch on?
Trump has mentioned that free trade will be suspended between Hong Kong and the USA. Hong Kong will have limitations on accessing the USA’s new technology in the future. More than 3,000 Chinese graduate students' visas are also revoked. Exchange students and workers will be revoked. In particular, the daughters or sons of Professional Regulation Commission (PRC) officials’ are not allowed to study in the US. Travel warnings are also issued. Chinese officials’ assets that are in the US may also be frozen.
How does it affect Hong Kong in the short run and long run?
In the short run, Hong Kong’s financial and stock market will face a threat that may be due to a shocking effect of the sanction, but whether a financial crisis will result and the time of its arrival remains unknown. Besides, exports of Hong Kong will greatly drop compared to the time of having free trade. This is because virtually all products from China are directed to be re-exported via Hong Kong to America. As well as Investors’, whose investing incentives towards Hong Kong will also decrease as the city no longer has free trade but restrictions by China’s laws. According to the graph below, as investments and exports of goods and services decrease, aggregate demand drops. Therefore in the short-run, as both price levels and national gross domestic product (GDP) decrease along with an addition of the current world-wide COVID-19 issue, Hong Kong’s recession will further worsen and become much more serious than any other city.
In the long run, the number of resources and technology will decrease when America cuts China’s connection to its technology network. This way, China can no longer research into America’s advanced technology or make adaptations for their use. According to the graph below demonstrated, the long-run aggregate supply (LRAS) shifts to the left, and in response, GDP decreases.
Will it last?
Every year the USA is having a trade surplus with Hong Kong for 31 billion US dollars, which means their exports surpass their number of imports. When the US decides to cancel free trade, they are going to lose their trade surplus every year. Hence, I think they would not cancel free trade for a long time as they also risk losing a big part of their money inflow.
The US should also foresee a chance for China to make a threat of retaliation. China may freeze all US firm’s assets in return and many more which is still not known. This causes great losses in the US as a lot of big US firms have numerous shops in both China and Hong Kong.
Moreover, according to the stock market today, Hong Kong and China stocks jumped for the first time since Trump's speech. Hong Kong’s Hang Seng index rallied 3.4 whereas China’s CSI 300 index of Shanghai and Shenzhen shares increased 2.7 percent. This has reflected that as Trump has failed to unveil any specific measures (i.e., time and date of enacting the sanction, details to the sanction, etc.), analysts envision that Hong Kong and China are safe for now. To obtain the sanction it requires time for the US to finally take action and this will not affect Hong Kong and China until then. Moreover, there is an ongoing question, which is, “Is Trump going to win the next election?” If Trump is not the next president, the sanction may not last long either.