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Security law threatens Hong Kong's arbitration and trade hub status

Prospect of politicized courts and US sanctions has business community sweating

TOKYO -- China's contentious new national security law for Hong Kong, which came into force July 1, threatens Hong Kong's status as an international business center, both as a provider of international legal services in Asia and as a trading hub.

Critics of the security law, which criminalizes separatism, subversion, terrorism and collusion with foreign forces, say it puts Hong Kong's position as an international legal center at risk. Hong Kong is locked in a fierce competition with Singapore to attract arbitration cases to settle international commercial disputes. Crucial to the international arbitration business is a track record of judicial neutrality, in which courts are insulated from politics.

Tatsuo Murao, a solicitor with Cast Group familiar with Chinese legal affairs, said provisions in the law that grant Hong Kong's chief executive the authority to appoint judges in national security cases had come in for particularly strong international criticism. "The provisions are seen as a clear sign of Beijing's willingness negate the independence of Hong Kong's judiciary," Murao said.

Carrie Lam, Hong Kong's chief executive, has tried to counter those complaints by stressing that the judiciary will be responsible for assigning cases to judges.

But Beijing's repeated political interventions in Hong Kong's affairs have eroded international trust in the "one country, two systems" principle, which was meant to safeguard the integrity of the territory's courts. This has tipped the scales in Singapore's favor among international companies keen to ensure that their cases will be heard in an impartial manner. It has become increasingly difficult for Hong Kong to win international arbitration business, even for commercial disputes with few political implications.

Hong Kong is hemorrhaging legal talent at an alarming rate. "A growing number of legal practitioners specializing in arbitration are moving from Hong Kong to Singapore," said Yoshimi Ohara, a lawyer and a specialist in international arbitration at law firm Nagashima Ohno & Tsunematsu.

Some experts point out that Hong Kong still enjoys advantages as a venue for arbitration in cases involving Chinese companies.  There is now a reciprocal arrangement under which Chinese courts are empowered to issue interim measures in aid of institutional arbitrations seated in Hong Kong, including the preservation of assets on the mainland.

But the security law has "created the impression that arbitration decisions in Hong Kong will inevitably favor Chinese interests, delivering a blow to the city's reputation," said Hiroko Nakamura, a Hong Kong-based lawyer with Anderson Mori & Tomotsune.

Alarmed by these developments, the Hong Kong International Arbitration Center, a dispute settlement body, issued a statement on June 19 stressing its neutrality.

Nevertheless, Shigehiko Ishimoto, a lawyer with Mori Hamada & Matsumoto, predicted that "an increasing number of businesses embroiled in international commercial disputes will seek arbitration either in Singapore or even in mainland China due to advantages concerning costs and procedures." 

Beijing's crackdown on the pro-democracy movement in Hong Kong has also dealt a heavy blow to the city's position as a trading hub. The U.S. has announced that it is suspending preferential treatment for Hong Kong exports, making them subject to the same tariffs and licensing requirements that apply to the Chinese mainland.

In 1992, the U.S. enacted the Hong Kong Policy Act. The law, which took effect after the territory's reversion to Chinese rule in 1997, treats Hong Kong as a distinct entity from China based on the principles of the 1984 Sino-British Joint Declaration. That declaration spelled out the sovereignty and administrative arrangements for Hong Kong after the handover of power from the British to the Chinese. It enshrined the concept of "one country, two systems," under Hong Kong was promised a high degree of autonomy.

The Hong Kong Policy Act stipulates that the city's special treatment is contingent on China abiding by its promise to allow the territory to remain largely autonomous. It authorizes the U.S. president to revoke Hong Kong's special status if the promise is broken.

U.S. moves to rescind Hong Kong's preferential trade status could deprive the territory of its customs advantages and restrict its access to the U.S. market.

"A broad array of Hong Kong's exports to the U.S., including [computer] chips, chemicals and consumer electronics, could be subject to the additional tariffs that Washington has imposed on Chinese products under Section 301 of the U.S. Trade Act," said Kana Itabashi an attorney at international law firm Baker McKenzie.

At present, products made in mainland China make up nearly 80% of Hong Kong's merchandise exports to America. Chinese exports that are merely routed through Hong Kong to the U.S. are already subject to the additional tariffs. The re-export approach works by having Hong Kong carry out production management and procurement of materials and parts for products made in China.

However, Takayuki Kozu, an accountant at KMPG Japan, said: "The tactic of using Hong Kong's privileges as a means to sidestep the additional tariffs ... will lose much of its taxation benefit," if the U.S. carries out its threat to revoke Hong Kong's privileges. 

This approach has worked because of a system under which products made and processed in China can be exported to the U.S. without being subject to the tariffs, if production management and procurement of materials and parts are conducted in Hong Kong.

"Many Japanese companies use this method to ensure that their exports of products made in China to the U.S. are spared the upheaval of the U.S.-China trade war," Kozu said.

Despite these difficulties, companies doing business in China will have a hard time finding an alternative to Hong Kong for their strategic and operational nerve centers. They will continue to nervously monitor the effects of the national security law on Hong Kong's international standing.

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