Hong Kong’s WTO Dispute: Implications of US Tariffs and the Future of Trade
Yirong Han | 28 February 2025
Summary
The United States (US) imposed new tariffs on Hong Kong (HK) goods and revoked a customs exemption for low-value parcels, prompting HK to file a WTO complaint. China responded with retaliatory tariffs, highlighting the complexity of trade in geopolitics.
These tariffs significantly impact HK’s economy, particularly SMEs, resulting in economic uncertainty.
A lengthy WTO process is very likely, leading to a high-severity impact on Hong Kong’s economic stability. The final ruling will affect Hong Kong’s relations with the US and China, potentially affecting Hong Kong’s autonomy.
On 4 February 2025, the United States (US) imposed a 10% tariff on various Hong Kong (HK) goods, eliminating a pre-existing customs exemption for low-value parcels. This prompted both China and HK to file complaints with the World Trade Organisation (WTO). HK government argued the US violated WTO rules and disregarded HK separate customs territory status – a position supported by a 2022 WTO ruling that found the US practice of labelling HK products as “Made in China” unlawful.
The immediate impact of the new tariffs was significant economic uncertainty for HK businesses. The removal of the “de minimis” exemption, for packages under USD 800 (GBP 646), coupled with a temporary (later reversed) suspension of parcel shipping, severely affected businesses. It affected those reliant on affordable, direct-to-consumer shipping in the US market – such as e-commerce firms, whose loss of cost advantage threatened their competitiveness and profitability. This economic disruption was further amplified by China’s retaliatory tariffs on various US imports (coal, LNG, oil, agricultural machinery, and vehicles) alongside an antitrust investigation into Google.
The primary economic impact on HK stems from increased costs and reduced competitiveness, particularly for small and medium-sized enterprises (SMEs), which may lead to the potential for operational hardship. Prolonged uncertainty, including the impact of the 2020 National Security Law, reduces investor confidence by increasing perceived political and regulatory risks. This, in turn, discourages foreign direct investment and slows economic recovery by limiting capital inflows and business expansion. This economic disruption extends beyond HK; economists warn that escalating US-China trade tensions could significantly raise prices for US consumers, given that industries with tight margins cannot absorb increased costs. The scale of US imports from China – USD $427 billion (GBP 345 billion) in 2023, with a substantial portion in consumer electronics – underscores the potential for widespread global economic repercussions. The 60-day consultation period initiated by the WTO is unlikely to lead to a quick resolution, given the history of US obstruction of judicial appointments within the WTO’s dispute-resolution system.
HK reliance on international trade makes supply chain disruptions a major concern, as demonstrated by the brief suspension of parcel shipping. Financial Secretary Paul Chan warned that these tariffs could prolong Hong Kong’s high-interest-rate environment, negatively impacting businesses and the asset market. These high interest rates increase borrowing costs, contributing to the observed slowdown in recent growth, indicated by the weakening of private sector expansion in recent months. A projected 2.1% GDP growth for 2025 centres on weak private consumption already impacted by falling real estate and equity prices. The combination of supply chain disruptions, the impact on e-commerce, and the anticipated lengthy WTO process contributes to heightened operational uncertainty.
This trade dispute is intertwined with the US- China geopolitical competition, making a purely economic resolution unlikely. China’s retaliation highlights the high stakes involved and the potential for a wider conflict. The WTO’s ruling will likely influence Hong Kong’s relationship with both the US and China – potentially affecting its autonomy.
Ginevrajocosa88/Wikimedia, CC BY 4.0
Forecast
Short-term
Hong Kong is highly likely to experience significant economic uncertainty, with a high-severity impact on its economy. Small and medium-sized enterprises (SMEs) reliant on US exports will be significantly affected.
While the risk of a heightened trade war with China is likely, a substantial short-term increase in US inflation is unlikely due to slowed growth and pre-emptive business stockpiling.
Medium-term
WTO proceedings will likely continue, characterised by delays and complexities, resulting in a medium-severity impact. This period will be crucial in determining the long-term economic consequences for Hong Kong businesses and the potential for further escalation of US-China geopolitical tensions.
Long-term
The WTO ruling will likely have a high-severity impact on Hong Kong’s economy and its relationship with the US and China. A ruling against Hong Kong’s claims could significantly weaken Hong Kong’s economic standing, and strain relations with both powers – affecting its autonomy and global trade position. It is also important to note that a favourable ruling is unlikely to resolve the underlying geopolitical issues.
Diversification of trade partners and alternative economic strategies will likely become crucial for Hong Kong’s long-term economic stability. However, the effectiveness of these strategies will depend significantly on the willingness of both China and the US to de-escalate tensions. This indicates that Hong Kong’s economic future remains linked to the broader trajectory of US-China relations.