US President issues Executive Order expanding sanctions relating to China and revoking Hong Kong’s preferential status

Introduction

On July 14, 2020, US President Donald Trump issued Executive Order 13936 (the “Order”), which authorizes the imposition of sanctions on additional persons determined to be involved in China’s new national security law (the “National Security Law”) and revokes Hong Kong’s preferential trade treatment. Together with the Hong Kong Autonomy Act 2020 (the “HKAA”), enacted on the same day, the Order is a response to the National Security Law and the latest in a series of recent actions targeting China. On August 7, 2020, the US Department of the Treasury imposed sanctions on 11 individuals pursuant to the Order.

We explain the key provisions of the Order in further detail below. For more information on the HKAA, please see our previous article.

Blocking sanctions

The Order builds on and implements provisions of the HKAA, as well as the Hong Kong Human Rights and Democracy Act of 2019. The Order enables the Secretary of State or the Treasury, in consultation with each other, to identify foreign persons deemed responsible for, or involved in, the development of the National Security Law or actions or policies that violate human rights in Hong Kong. US persons are prohibited from dealing with the property and interests in property of such foreign persons, who, along with their immediate family, are also subject to visa bans.

The category of foreign persons that may be so identified is defined liberally in the Order. For example, the blocking sanctions pursuant to the Order (the “Blocking Sanctions”) may apply not only to those who are responsible for, or who are involved in, developing or implementing the National Security Law, but also to those who are involved, even indirectly, in the enforcement of the National Security Law via the arresting or imprisoning of individuals. Furthermore, a wide range of alleged human rights abuses fall within scope of the Blocking Sanctions, including what is referred to in the Order as the undermining of Hong Kong’s democratic processes, peace or stability, the violation of the freedoms of expression, assembly and press enjoyed by the citizens of Hong Kong, and other “gross violations of internationally recognized human rights or serious human rights abuses.”

To some extent, the Blocking Sanctions overlap with the separate sanctions regime in the HKAA (the “HKAA Sanctions”). Both regimes target persons who allegedly undermine democratic processes and human rights in Hong Kong, and it is foreseeable that various Chinese entities will be subject to sanctions under both regimes. Additionally, both regimes raise a potential dilemma: as compliance with US sanctions may be illegal under the broadly-worded National Security Law, companies may be forced to choose between complying with the National Security Law and complying with US sanctions.

However, unlike the HKAA, the Blocking Sanctions authorize sanctions to be immediately imposed once persons are identified by the Secretary of State and/or Secretary of the Treasury. In addition, the Blocking Sanctions arguably target a larger category of foreign persons than the HKAA Sanctions – the Blocking Sanctions refer to a greater range of identified freedoms, employ broader language when defining their scope and, crucially, extend to those who materially assist, sponsor or provide support or goods or services to persons whose property and interests in property are blocked pursuant to the Order, as well as persons owned or controlled by, acting on behalf of, or who are leaders, officials, board members or senior executive officers of such persons. 

It is important for non-US persons to note that this “material assistance” language, typical of US blocking sanctions, means that non-US companies doing business with those targeted by the Order are also at risk of being targeted, especially because the term “material assistance,” which is not defined by OFAC, potentially applies to a wide range of business activities. 

As of August 7, 2020, 11 individuals have been designated pursuant to the Order. As a result, all property and interests in property of these individuals, and of any entities owned 50 percent or more by one or more designated persons, that are in the United States or in the possession or control of US persons are blocked and must be reported to OFAC. Unless licensed or otherwise authorized, all transactions by US persons or within (transiting) the United States that involve any property or interests in property of such blocked persons are prohibited.

Revocation of preferential treatment

Following the 1997 handover, Hong Kong continued to enjoy preferential treatment from the US under the United States-Hong Kong Policy Act 1992 (the “HKPA”), which essentially recognized Hong Kong as a customs territory separate from mainland China. The HKPA had for decades sheltered Hong Kong from various US tariffs and export controls, including the major “Section 301” tariffs imposed on Chinese products in 2018. For the position on section 301 tariffs, see our recent article, US CBP issues notice requiring goods produced in Hong Kong to be marked as products of China.

However, on May 27, 2020, US Secretary of State Mike Pompeo certified to Congress that Hong Kong was no longer sufficiently autonomous to justify such treatment under the HKPA, prompting President Trump to call for the elimination of policy exemptions giving Hong Kong preferential treatment. 

On June 29, 2020, the US Department of State announced that it is ceasing exports of US-origin defense equipment to Hong Kong and will take steps toward imposing the same restrictions on US defense and dual-use technologies to Hong Kong as it does for China. Concurrently, the US Department of Commerce announced it would be suspending regulations affording preferential treatment to Hong Kong over China, including the availability of export license exceptions under the Export Administration Regulations (the “EAR”) effective June 30, 2020.

The Order is the culmination of this process and formalizes the revocation of US preferential treatment of Hong Kong. It confirms that US policy is to suspend or eliminate different and preferential treatment of Hong Kong, to the extent permitted by law and in the interest of the US, and directed agency heads to commence “all appropriate action to further the purposes of [the Order]” by July 29, 2020.

This wording means the immediate impact of the Order is not entirely clear, as agency heads have significant discretion in determining how preferential treatment will be revoked – a discretion widened by their ability to propose any further actions “deemed necessary and prudent” to end preferential treatment of Hong Kong to the President for his consideration.

Other provisions of the Order are more specific, including provisions to end preferences for Hong Kong passports, academic cooperation and existing extradition agreements. Notably, the Order revokes preferential treatment under the Arms Export Control Act. As a result, sales and exports of defense articles are prohibited (save where specific licenses have been granted by the Directorate of Defence Trade Controls) and future license applications for such sales and exports are subject to a presumption of denial.

Furthermore, the Order officially revokes Hong Kong’s export license exemptions under the EAR, which will lead to restrictions on the export, re-export and transfer (in-country) to Hong Kong of a significant number of controlled goods, including certain computers, aircraft, and technologies and software.

Conclusion

The impact of the revocation of Hong Kong’s preferential treatment is likely to be highly sector specific. The service sector, for example, is unlikely to be greatly affected, whereas importers and exporters may in the future be subject to major tariffs or export controls. Businesses in such industries are advised to closely monitor the responses of relevant US agencies in the coming months.

Depending on their implementation, the Blocking Sanctions may have a significant impact on both US and non-US companies active in the Chinese market. Such companies may want to proactively review their existing clientele to identify at-risk persons, and ensure they have comprehensive policies in place to prevent dealings with foreign persons subject to Blocking Sanctions.

Finally, companies should be aware that the Order, and designations under it, may provoke retaliatory action from China, with China’s foreign ministry stating its intention to sanction “relevant US personnel and entities.” On the other hand, it may also prompt other countries to implement similar export controls – the UK, for example, has announced that it will extend its China arms embargo to Hong Kong.

We will continue to monitor the implementation of the Order as well as responses from other countries and issue additional briefings.

If you have any questions regarding the Act, or US sanctions on China, please do not hesitate to contact Katie McDougall (London), Kim Caine (Washington, DC), Stefan Reisinger (Washington, DC) or David Harris (London).