The Department of Commerce announced the suspension of regulations affording preferential treatment to Hong Kong over China, including the availability of export license exceptions. This decision follows President Trump’s May 29th, 2020 remarks, in which he declared that Hong Kong was no longer sufficiently autonomous from the People’s Republic of China to warrant such preferential treatment. He stated that any suspension of Hong Kong’s independent status would “affect the full range of agreements we have with Hong Kong, from our extradition treaty to our export controls on dual-use technologies and more, with few exceptions.”

In a separate statement released June 29th, Secretary of State Mike Pompeo stated that “[t]he Chinese Communist Party’s decision to eviscerate Hong Kong’s freedoms has forced the Trump Administration to re-evaluate its policies toward the territory.” He further noted that “[a]s Beijing moves forward with passing the national security law, the United States will today end exports of US-origin defense equipment and will take steps toward imposing the same restrictions on U.S. defense and dual-use technologies to Hong Kong as it does for China.” Finally, Secretary Pompeo added that this decision was being made for national security reasons, because “[w]e can no longer distinguish between the export of controlled items to Hong Kong or to mainland China” and "[w]e cannot risk these items falling into the hands of the People’s Liberation Army, whose primary purpose is to uphold the dictatorship of the [Chinese Communist Party] by any means necessary.”

What Prompted These New Measures?

The impetus for these measures was China’s proposal to pass a controversial national security law affecting Hong Kong, which Beijing’s top legislative body finally passed on June 30, 2020. The law gives China new powers over Hong Kong, and prohibits acts of secession, subversion, terrorism, or collusion with a foreign country or “external elements” that endanger national security.

In his June 29 statement announcing the rollback of preferential treatment of Hong Kong, U.S. Secretary of Commerce Wilbur Ross noted that “[w]ith the Chinese Communist Party’s imposition of new security measures on Hong Kong, the risk that sensitive U.S. technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased, all while undermining the territory’s autonomy.” He stated that the United States was unwilling to accept these risks, resulting in the revocation of Hong Kong’s “special status.” Secretary Ross’s announcement ended by urging “Beijing to immediately reverse course and fulfill the promises it has made to the people of Hong Kong and the world.” Secretary Ross also announced that further actions to eliminate differential treatment were being evaluated.

BIS published a follow-on notice June 30, stating that all License Exceptions for Hong Kong that provide differential treatment to Hong Kong than those available to China are suspended effective yesterday. However, there is a savings clause for items already en route as of June 30th pursuant to an order. Additionally, to the extent a license exception was being utilized for deemed exports/re-exports to Hong Kong persons, that authorization can continue to be used until August 28, 2020. After that time, a license will need to be obtained. BIS notes that it is taking the action due to the new security measures, but also adds that there is increased risk of diversion of items from Hong Kong to the Chinese military, Iran or North Korea.

How Was Hong Kong Previously Treated for Export Control Purposes?

Hong Kong currently has a separate entry on the Commerce Country Chart in Supplement No. 1 to Part 738 of the Export Administration Regulations. As noted on the Bureau of Industry and Security’s (BIS) website, “[t]he United States-Hong Kong Policy Act of 1992 (Public Law 102-383, 106 Stat. 1448, Oct. 5, 1992) allows the United States to continue to treat Hong Kong separately from Mainland China for matters concerning trade and export control.” Up until now, Hong Kong had received favorable treatment regarding U.S. export licensing and regulations because it is a cooperating country with multilateral export control regimes.

Following Beijing’s proposed plans to approve a national security law that would threaten Hong Kong’s national autonomy, the Department of Commerce is now following through with President Trump’s threat to stop treating Hong Kong as autonomous for export control purposes.

What Impact Will This Change Have?

The impacts of this rule change are significant. As noted above, the most immediate impact is to License Exception availability. So, for example:

• License exception Technology and Software under Restriction (TSR) for which Hong Kong was previously eligible as part of Country Group B, will not be available. This license exception permits exports and reexports of eligible technology and software to destinations in Country Group B.
• License exception Strategic Trade Authorization (STA), authorizing in some cases, exports, reexports, and transfers (in-country) to countries in Country Group A:6, which previously included Hong Kong, will not be available.
• Certain license exceptions for 9x515 or “600 series” ECCNs (such as License Exception Temporary Exports, Reexports, and Transfers (in-country (TMP)) will be unavailable.
• However, Hong Kong would still be eligible to receive hardware classified as ECCN 5A002 or software classified as 5D002 without a license under License Exception ENC (b)(1) and (b)(3) (as China is currently eligible for (b)(1) &(3) exports).

Additional changes to the EAR to remove the differential treatment for Hong Kong could include (but note that there have not yet been clearcut announcements from the Administration that these changes are in effect):

• Data stored in Hong Kong would not be eligible for the new encryption rule under the International Traffic in Arms Regulations (ITAR), which adopted cloud computing encryption standards that the Commerce Department adopted in 2015, or the Commerce Department’s encryption rule. As we reported in our January 2, 2020 alert, the new ITAR rule and the older Commerce rule both require that companies cloud provider’s servers are not in the ITAR proscribed 126.1 countries (the Department of Commerce’s Country Group D:5, which includes China) or Russia. Data stored in Hong Kong would also no longer be eligible for the BIS carve-out to store encrypted technology since Hong Kong would be in Country Group D, not Groups A and B.
• The new Chinese military end-use/end-user rule, which we reported on in our April 29, 2020 alert, would apply to applicable entities in Hong Kong. This rule imposed stricter license requirements on a wide range of exports, reexports and transfers to China for “military end uses” or to “military end users.”
• Movement of items from Hong Kong to China would no longer be a regulatory “reexport,” but there would still be an in-country transfer, which in many cases could require a license.
• Items controlled for chemical & biological weapons (column CB3) would now require a license to Hong Kong:

• Additionally, items controlled under .y entries of the 500 and 600 series entries on the Commerce Control List (such as 3A611.y items) would require a license for exports to Hong Kong.

• What Does This Mean for Exporters?

  The rollback of favorable treatment could have a significant impact on multinational companies that had been using Hong Kong as a base instead of China, will add a number of new license requirements for exports, re-exports, and transfers previously authorized by License Exceptions available to Hong Kong but not China, and could have even further impacts on export license requirements going forward.