HONG KONG (BLOOMBERG) - If the markets are any judge, US President Donald Trump's vow of "meaningful" action to strip some of Hong Kong's trade privileges has so far proved underwhelming.
Trump's announcement in the White House's Rose Garden on Friday (May 29) didn't provide any details or timeframe for what would come next, only that it would cover the full range of agreements between the US and Hong Kong with "few exceptions".
US stocks erased losses and traded little changed, with the S&P 500 Index rising 0.5 per cent at the close in New York. Hong Kong's Hang Seng Index on Monday (June 1) had early gains of more than 3 per cent, led by the finance sector.
Under the US-Hong Kong Policy Act of 1992, the president is empowered to suspend the territory's special trading privileges at any time through an executive order. The law covers the whole facet of the relationship, from trade to recognising passports to rules that affect air travel, shipping and investment.
It even allows for US dollars to be freely exchanged with Hong Kong dollars, which if revoked would amount to what some analysts have called the "nuclear option".
"We're not seeing a rush for the exits at all," Tara Joseph, president of the American Chamber of Commerce in Hong Kong, told Bloomberg Television on Monday. "What we're seeing generally is everyone first digesting the news. And second of all looking at their footprint in Hong Kong and thinking through whether that ought to change."
While revoking the policy act completely would raise huge legal questions that could mark a major hit to global trade, here are some of the key measures affecting trade that analysts are watching for.
Trump could treat Hong Kong exports with the same tariffs as the mainland. Yet the effect of this may be minimal: The territory exported US$4.8 billion (S$6.8 billion) last year to the US, about 1 per cent of what China shipped over. While Hong Kong is a major transshipment hub for Chinese goods, most of these are already taxed at mainland rates.
Moreover, the US enjoyed a US$23 billion trade surplus with Hong Kong, the biggest in the world - meaning Trump would potentially be throwing away a win according to his favourite metric if the city takes any reciprocal action.
Stripping Hong Kong of its tariffs exemptions will damage the port, shipping services and logistic industries, Iris Pang, Chief Economist Greater China at ING Bank NV wrote in a note.
"But these industries have been hurt anyway since the start of the trade war between Mainland China and the US," she wrote.
The US allows Hong Kong to import certain sensitive goods that are prohibited from China. This includes certain dual-use technology with consumer and military applications, like carbon fiber used to make both golf clubs and missile components.
Ending these privileges would make Hong Kong subject to the same export controls, including those placed on China following a deadly military assault on protesters in Tiananmen Square in 1989. While total Hong Kong imports requiring a special license from the US amounted to only 1.2 per cent of all goods in 2018, American exporters could have more paperwork to fill out on certain items.
"Export bans could have a direct impact on the tech race that China and the US seems to be engaged in," according to economists at Natixis SA.
SANCTIONS ON INDIVIDUALS
An amendment to the policy act last year gives the president authority to sanction people who are responsible for undermining freedoms and autonomy in Hong Kong. The law specifically mentions blocking assets and revoking visas for people named by the president.
Those could include Hong Kong and Macau Affairs Office chief Xia Baolong, the primary person in the mainland responsible for the territory; Luo Huining, who was appointed earlier this year to lead China's Liaison Office in Hong Kong; and officials in the city possibly including Carrie Lam, the chief executive.
Erick Tsang, who oversees mainland affairs in Hong Kong, said over the weekend that he wouldn't fear any US sanctions and would simply stay away from the country, the Standard reported.
SANCTIONS ON BANKS
US lawmakers are quickly moving ahead with a bill that would penalise banks that do "significant transactions" with Chinese entities involved in suppressing Hong Kong's freedoms. This could effectively cut those banks off from the US financial system, with measures such as blocking foreign exchange transactions and dealings with American lenders or citizens.
Republican Senator Pat Toomey and Democratic Senator Chris Van Hollen plan to move the bill forward this week. Given the ease with which anti-China measures have passed recently in Congress, Trump may have little choice but to sign it.
Any action on this front could potentially do serious damage to China and Hong Kong's role as an international finance centre.
Trump could use the 1977 International Emergency Economic Powers Act to implement much broader sanctions on China. This law, which is cited in the amendment to the US-Hong Kong policy act that passed last year, gives the president wide powers to deal with any "unusual and extraordinary threat" that he deems a national emergency.
Trump has already threatened to use it on a number of occasions during his presidency. He mentioned them when he threatened last year to place levies on Mexican goods as a way to force curbs on the flow of undocumented immigrants across the US-Mexican border.
And his administration also said last August that the legislation would give the president the authority to force American companies to leave China if Trump declared an emergency.
Still, any move on this front would escalate tensions with China drastically and effectively mean the end of the "phase one" trade deal signed in January.
'KILL' THE DOLLAR PEG
One key aspect of the US-Hong Kong policy act is a provision allowing the US dollar "to be freely exchanged" with the Hong Kong dollar.
If he wanted to, Trump "could kill the Hong Kong dollar peg in one fell swoop", according to Enodo Economics. Although that's unlikely, it said, even targeted curbs to block Chinese or Hong Kong banks from the US dollar clearing system would have "significant implications".
Oxford Economics is among those that think it's unlikely the peg will fall victim to the political pressures and notes Hong Kong's foreign exchange reserves are twice the size of the monetary base. In the event of material outflows, the Hong Kong Monetary Authority has various tools to release liquidity into the interbank system, they said.