ⓒ YONHAP News

On May 28, China’s National People’s Congress overwhelmingly voted to approve the controversial Hong Kong security law. China went ahead with its push for the legislation, despite warnings from Washington. U.S. President Donald Trump said the following day that it would end preferential treatment for Hong Kong to retaliate against China.

Here is Professor Kim Gwang-seok at Hanyang University Graduate School of International Studies to discuss the potential influence of the escalating conflict between the U.S. and China over the Hong Kong issue on the South Korean economy. 

The removal of Hong Kong from its special trading status with the U.S. will have various repercussions. The status lets Hong Kong enjoy a preferential treatment that is unavailable to China, in terms of visas, investment and law enforcement. This is on the assumption that the former British colony is autonomous from mainland China. If Hong Kong loses this status, it may suffer from visa restrictions and find it difficult to attract investment. 

Hong Kong’s role as a global hub of trade, commerce and finance might weaken considerably, triggering a massive outflow of foreign capital. In brief, the loss of Hong Kong’s favored trade status will result in a drastic fall in its economic status. 

Under the 1992 U.S.-Hong Kong Policy Act, the U.S. has treated Hong Kong differently from China in trade and investment, on the premise that Hong Kong exercises autonomy. The special treatment has played a crucial role in promoting Hong Kong as a financial and logistics hub in Asia. 

If the U.S. revokes Hong Kong’s trade privileges, Hong Kong will be subject to the retaliatory tariffs of up to 25 percent imposed by the U.S. on China. It may end up losing its leading status as Asia’s financial hub over the long term. Probably for that reason, about 30 percent of American companies in Hong Kong are considering relocating to other regions. Washington’s move to strip Hong Kong of the special trade status will also deal a blow to Korea’s exports. 

Eighty-nine percent of Hong Kong’s total imports are re-exported, and half of the re-exports are China-bound. South Korea has used Hong Kong for intermediate trade to export its goods to mainland China, due to various advantages. These include low corporate tax and stable currency transactions in Hong Kong. If Hong Kong is no longer given preferential treatment, Korean exporters will inevitably see an increase in logistics costs. 

Hong Kong is the fourth largest export destination for South Korea, after China, the U.S. and Vietnam. Korea exported 31.9 billion US dollars worth of goods to Hong Kong in 2019. In fact, Korea’s largest trade surplus of 30.1 billion dollars last year was with Hong Kong. Many Korean businesses use Hong Kong as an intermediate trade hub to export their products to China. In 2018, 82.6 percent of Hong Kong’s imports from Korea were re-exported to China. 

If Hong Kong loses its special trade status and ends up being a local region of China, Korean exporters have to change their export strategies altogether. The Korean semiconductor industry, in particular, is on high alert, as semiconductor products account for 69.8 percent of Korea’s shipments to Hong Kong. 

The Korean semiconductor industry has exported chips indirectly to China by way of Hong Kong, due to various benefits. This includes excellent trade infrastructure such as harbors and airports in Hong Kong. Semiconductors accounted for 22.2 billion dollars or nearly 70 percent of 31.9 billion dollars of Korea’s exports to Hong Kong last year. More than 90 percent of chip products shipped from Korea to Hong Kong are re-exported to China. It is easy to understand that Korean chipmakers are wary of the possible removal of Hong Kong’s special status with the U.S. Korea is anxious about how to cope with this volatile situation. 

If Hong Kong no longer merits the special trade status, Korea will find it difficult to use it as a re-export center for China. Rather, Korean exporters may choose to export goods directly to the Chinese city of Shenzhen, where China’s tech giant Huawei has its headquarters, or to switch their shipping routes to Taiwan to export their products indirectly to China. 

While the U.S.-China conflict over Hong Kong has numerous risk factors, Korea might still find a silver lining. 

Twelve percent of China’s total exports are shipped to the U.S. through Hong Kong. Hong Kong’s trade status change will inevitably result in a decline in China’s shipments to the U.S. Korean products could then be in a relative competitive advantage in the U.S. market. Korea competes with China in smartphones, telecommunications equipment and electronic goods.

These products from Korea can fill the void left by the declining number of Chinese products in the U.S. market. The benefits may also go to petrochemicals, medical equipment, steel products and plastic goods. 

If Hong Kong loses its status as Asia’s financial hub, South Korea could emerge as “post-Hong Kong.” Singapore has already been cited as an alternative to Hong Kong, and Korea is also listed as one of the candidates. 

On the whole, however, the prolonged tension between the U.S. and China is not good news. On June 3, the U.S. decided to ban passenger flights from China. Clearly, the conflict between the world’s two largest economies is only intensifying. In this situation, Korea should find effective strategies. 

It is highly important for Korea to find a breakthrough. For now, it is crucial to address the problem diplomatically, not from a business point of view. Korea should strike a balance between the U.S. and China. It must maintain a security alliance with the U.S. on the one hand while promoting economic relations with China on the other. Korea should explain its position to China clearly and continue to make diplomatic efforts to elicit an agreement from China on bilateral economic cooperation. 

South Korean President Moon Jae-in has accepted U.S. President Donald Trump’s invitation to this year’s G7 summit. Earlier, on May 30, Trump told reporters that he would like to invite four more nations, including South Korea, to the summit. South Korea’s participation in the expanded G7 summit can strengthen its international status. At the same time, though, South Korea should also pay attention to its largest trade partner, namely, China. Stuck between the two superpowers, Korea should come up with well-thought-out diplomatic solutions and find a way to enhance its own interest.