Hong Kong’s economy slowed in 2024, with its Gross Domestic Product growing by 2.5% compared to 3.2% in 2023. Financial Secretary Paul Chan has said the impact of 20% tariffs on exports from Hong Kong and China are minimal, with only about 7% of Hong Kong’s direct exports going to the US. However, as Tony Miller writes, the impact on Hong Kong’s exports to the US since 2018 has been substantial even as Hong Kong has ceased to be primarily a manufacturer of goods. 

For Hong Kong and international companies with manufacturing in China, particularly small and medium enterprises, the impact of new rounds of tariffs could be dramatic. Being caught in a trade war is a new and painful experience for one of the world’s most open economies. The worst victims will be smaller players as the safeguards that once surrounded international trade are eroded.

On February 4, the United States Postal Service executed a perfect pirouette. In the morning, it announced that it would stop accepting postal packages from China and Hong Kong. In the evening it said it would resume the service. The postmen had obviously been blindsided by President Trump including removal of the de minimis waiver on such items in his announcement of the punitive tariffs to be imposed on China.

No mystery here; the reason the de minimis waiver exists in the US (and most other countries) is that assessing and processing the huge volume of such small items would cost far more than it would ever raise in revenue. One doesn’t know whether to laugh or cry.

Elsewhere, that question does not arise. Nothing has saddened me more over the last decade-and-a-half than witnessing the architect of the post-World War II multilateral system deliberately dismantling it. No explanation should be necessary, but allow me a few words on the past before I reflect on the chaotic present.

Forged in the grateful calm following the storm which engulfed the world in the middle of the last century, the Bretton Woods institutions, as they are often called, provided a framework for stabilizing global monetary matters, and, in the General Agreement on Tariffs and Trade (GATT), a forum for dismantling the barriers that had exacerbated economic woes before hostilities broke out. As the French economist Frederic Bastiat famously remarked, “When goods cannot cross borders, soldiers will.”

No system is perfect, and right from the beginning there were things that were just too difficult to touch – agriculture and aviation for two – and opt-outs for special circumstances, such as Anti-Dumping rules. Generally speaking, however, the Most Favored Nation ethic held. Whatever trading privileges a country offered to another were enjoyed by all; round by clumsy negotiating round the tariff walls were gradually demolished and the membership of the GATT grew. In retrospect, the high point was reached at the conclusion of the Uruguay Round, in 1995, when GATT was institutionalized as the World Trade Organization, and the Dispute Settlement Body was given formal status, with independent jurists presiding over cases brought by members big or small.

Not all members liberalized at the same speed. Some like-minded ones entered into economic unions or free trade agreements (FTAs). The European Union (EU), for example, greatly facilitated intra-European trade. At the same time, it simplified things for others by removing the need, on the one hand, for governments to negotiate with a plurality of European countries, and on the other, for traders to deal with a complex mess of differing customs rules.

In the WTO in Geneva, the EU was represented by a single commissioner, and member states’ ambassadors who chose to keep an eye on him, or her were likened to mothers-in-law. FTAs, on the other hand, whether bi-lateral or plurilateral, while fashionable with ministers looking for a quick headline, just increased the complexity of regulations and the frictional costs of doing business, at a time when manufacturing was rapidly being disaggregated. The only jobs they created were for the additional lawyers needed to find a way through the resulting maze of different rules.

The North American Free Trade Agreement (NAFTA) is one example; while it complicated things for those outside, it seemed a logical step for the three within. However, in his first term, President Donald J. Trump expressed dissatisfaction and forced a renegotiation on Canada and Mexico. NAFTA was replaced by the US-Mexico-Canada Trade Agreement in 2019. At the time, President Trump declared it a triumph of deal-making, and yet, in the first week of a second term, he imposed extraordinarily high tariff increases on his two bewildered partners.

To his credit, the Canadian prime minister, Justin Trudeau included 25% tariffs on imports of Tesla electric vehicles among his retaliatory measures, a move clearly intended to demonstrate to President Trump that materials and auto parts cross the US-Canada border multiple times in both directions before final assembly. That complex supply chain was facilitated by NAFTA and determined by Tesla’s ruthless search for efficiency. Interrupting or impeding only one crossing of the border for one component disrupts the entire chain. That simple lesson aside, the unspoken question that must be in the minds of Mexicans and Canadians alike is whether they can ever trust the United States to stand by any deal.

To return to the WTO, in retrospect, one can see that the agenda set for the next round of negotiations, the Doha Round was too ambitious, but that is no excuse for the United States, at the eleventh hour, balking at the idea of developing countries enjoying special safeguards for their agricultural products. Although such safeguards were little different from the exceptions it had routinely granted itself in other areas, it chose to walk away. There were 20 items on the list of difficult issues that WTO Director-General Pascal Lamy had patiently and courageously tabled for resolution at the final meeting. That 19 of them were resolved speaks volumes for the willingness of all other members to make concessions in the interests of the whole. That the twentieth proved too much for one member to swallow speaks even louder of that country’s unwillingness to go the extra mile.

Having effectively killed the Doha Round, the United States went on to refuse to give its approval to appointment of adjudicators to the Dispute Settlement Body (DSB), starting in 2017, effectively pulling that body’s teeth. Why? There will always be trade disputes, and passing them to the DSB is an effective way to allow the politics surrounding such spats to cool. Yes, you will win some and lose some, but withdrawing serves only to underline a continued clinging to an undeserved and highly undesirable exceptionalism.

Closer to home, after protracted negotiations, China was warmly welcomed into the WTO on December 11, 2001. Fast forward, and there is a ghastly irony in seeing the country which most actively encouraged China to liberalize and join the organization now blaming it for the consequences of American companies offshoring production. Any half-decent economist will tell you that President Trump and his advisers are barking up the wrong tree. Blaming the exporter for the imports that automatically flow from your own savings deficit is not going to solve the problem.

The US-China relationship is a strained one, complicating matters for Hong Kong as piggy-in-the-middle and separate customs territory, recent US apparent denials of its status notwithstanding. However, the imbalance of trade is not really complicated: households in one place save too much and consume too little, where in the other they save too little and consume too much.

China has not stolen American jobs. American manufacturers gifted them to China. Nor is it China’s fault that the United States lives beyond its means. Regrettably, while Trump and his advisors know this, they choose to say otherwise and will doubtless ratchet up tariffs in pursuit of whatever deal they are really after, even though the pain will be felt more by US households than anybody else.

Every barrier to trade creates an opportunity for enterprising businessmen. Trade will be hindered, not halted and economic growth will be suppressed for all, but manufacturers will work around the barriers by adjusting supply chains and establishing new plants. One has only to look at what happened last time Trump rocked the boat; China’s export of semi-manufactures to third countries increased, and their exports to the US grew accordingly. The impact on the balance of bilateral trade was negligible.

In Hong Kong’s case, the data may be skewed by Covid-19, but the impact on our direct exports to the United States, since it first raised tariffs in 2018 and then revoked our preferential trading status the following year, is still convincing. Over the next five years they fell 24% to US$34.84 billion in 2023. At the same time, as a percentage of total exports, they fell from 8.6% to 6.5%. So, we should expect some further damage to our direct exports this time round. Manufacturers whose main market has been North America will obviously be worst affected, but it is worth reminding ourselves that overall, Hong Kong is no longer a big exporter of goods.

Most Hong Kong manufacturers moved offshore several decades ago. Among the first to do so were those in the textiles and clothing trade looking for places where growth was not constrained by quotas imposed under the Multi-Fiber Arrangement. Over time, our expertise moved from manufacturing back to trading, and the experience and skills this brought in managing global supply chains will stand us in good stead over the next few years. Government estimates that offshore trading was worth just under US$700 billion in 2022.

If the micro (Hong Kong) effect of the new tariff increases is not immediately a concern, the macro effect on long-term global growth is. Still more worrying is the loss of safeguards for smaller players that comes with the dismemberment of the multilateral system, and the loss of trust that comes when a dealmaker disavows his last deal. Like Canada and Mexico, for the rest of the world that same question of trust looms large. Is what we are witnessing simply a Trumpian tantrum, or has the United States gone rogue?

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