On inauguration day on January 20, President Donald J. Trump promised he would “tariff and tax foreign countries to enrich our citizens”, starting with 25% tariffs on Canada and Mexico. By February 1, he had signed an executive order for tariffs on both countries and added 10% across the board tariffs on China, adding to tariffs imposed on most but not all Chinese goods during his first term in office from 2017-2021. With all three countries, Trump invoked the International Emergency Economic Powers Act. Since then, things have been changing every minute, sending Hong Kongers to rush to their phones or laptops every morning to find out what happened overnight in Washington, DC.
Charting a course through the volatile early months of the US Administration has been far from simple. On February 14, AmCham convened a panel discussion with top regulatory, legal and business experts to identify some of the key challenges and offer advice for risk management. Playing to a packed house at AmCham’s Community Hub, while the panel discussion was under Chatham House rules, the ideas and advice were not, and we share them here. Speakers were Sally Peng, senior managing director of FTI Consulting (Hong Kong) Limited and vice chairman of AmCham, Ralph Iannazzone, CEO and executive director of CFL Enterprise Limited and co-chairman of the Apparel, Footwear and Supply Chain Committee at AmCham, and Benjamin Kostrzewa, a partner at Hogan Lovells and co-chair of Trade & Investment Committee at the Chamber.
How much will Hong Kong suffer from the new tariff wars? Conventional wisdom says a lot. Surprisingly, the consensus view from AmCham’s “Navigating Change: Latest US Trade Policy Updates Under the Trump 2.0 Administration” was not so much. Hong Kong has a wealth of experience dealing with the types of “puzzles” that the outbreak of new tariffs, sanctions and other restrictions on trade will generate.
Manufacturers, supply chain managers, importers and risk professionals are tackling a Rubik’s cube of possible combinations of countries of origin, trade rules, exemptions, logistics and new tariff declarations. But they are ready for it, steeped in decades weathering regulatory hurdles. In some ways, it’s an exciting time for trade professionals in Hong Kong.
“If you can do it right, and you can do it better than somebody else, you can win business”
Hong Kong’s expertise in trade complexity goes back to the days of quotas under the Agreement on Textiles and Clothing Act, which were removed in 2005, and the ongoing Generalized System of Preferences (GSP) Under the Trade Act of 1974, intended to provide support to the world’s poorest countries. Historically, Section 301 of the Trade Act of 1974 has been the main tool available for imposing tariffs on countries that ‘burden or restrict US commerce.’ The Trump Administration invoked the International Emergency Economic Powers Act (IEEPA) to impose the new tariffs on Canada, Mexico and China and 25% tariffs on global imports of steel and aluminum. IEEPA was used briefly in 2019 during the first Trump Administration to threaten high tariffs against Mexico, and requires no prior legislation, investigation, notice or public hearing.
For China the biggest threat is revocation of its permanent normal trade relations (PNTR), which was granted in 2000 prior to China’s entry to the World Trade Organization (WTO) in 2001. Since then, China’s exports to the US have increased by more than 300%, double the rate for imports from other sources despite the trade war, according to the Peterson Institute for International Economics. Removal of PNTR would increase tariffs on imports from China to 61% on average. Hong Kong would likely be included, although it is only included in Section 301 tariffs for items manufactured in China.
While in every sense a crisis in global trade, the new “America First Trade Policy” by the US imposes a challenge, not an existential threat, to the hardy traders of Hong Kong. “If you can do it right, and you can do it better than somebody else, you can win business, and your business can grow,” said one of the panelists. And much of the discussion focused on just how to do that.
For textiles and apparel, the body of expertise based in Hong Kong goes back to the era of textile quotas. “We were puzzle builders,” said one of the panelists. “We would have to understand not only who had quotas in a country, but which countries had one quote and how expensive it was. And we’re building these puzzles and figuring out how to get them to listen in the US. Because the year may end on December 31, but the quota for Sri Lanka ran out in October.”
Labor-intensive industries moved out of China long ago, as wage rates rose beginning in the 2000s. Attention in the apparel and footwear industries has moved to third countries where Chinese manufacturers have shifted production, particularly Vietnam and Mexico. “They got out of China a while ago, without the tariffs factor,” said a panelist. “But now we find a new level of clients, in technology, electric vehicle batteries and probably even some solar panel parts.” These companies, earnest though they may be to comply with regulations on all sides, and learn how to manage tariffs, have no idea what to do.
A nightmare for new entrants
“They want to be in compliance, which is something we really like to see. They want to understand the rules. They want to follow the world order, particularly now the US order, so they are open to all these rules and want to invest money to make changes. So I was in Shenzhen, and I explained to them, and then they said, if that’s legal, how come nobody is doing it? We told them, nobody is doing it because this is probably the first time you have any duties. Your duty rate before was probably zero.”
Managing tariffs requires skill and experience, and Hong Kong practitioners have both in abundance. US Customs, for example, recognizes a practice called “first sale” which provides opportunities for mitigating the dollar impact of tariffs. Importers purchasing goods in multi-tiered transactions can reduce the amount of duty paid by declaring the price charged between the manufacturer and the middleman instead of the price charged between the middleman and the US importer, which is the normal practice. While US Customs and Border Protection is becoming more stringent in its enforcement of first sale valuations, duty mitigation is an important strategy and one that bears results.
Since supply chains span multiple jurisdictions, consultants have developed apps that develop total landing costs and can be used to assess multiple variations. But whatever variation the manufacturer, importer or supply chain manager ends up with, US Customs has the final call on valuation. “What can US Customs do? They can do everything,” said one panelist. “You can line up three different ways of how you want to do your production,” but even with a signed country of origin certificate, Customs may disagree. One panelist noted that the budget for US Customs has tripled over the last few years, as it gears up to establish an External Revenue Service to monetize the envisaged avalanche of duty payments more efficiently.
On top of everything else, if the US follows through on declaring “reciprocal tariffs” on countries maintaining high tariffs on protected industries, the landscape will become even more complicated.
Managing risk
So what is the solution, as the risk of transactions increases? Risk will not go away. The simple, practical business side is to manage it. That means going through all the countries that you are trading with, the tariffs that are in place at the moment, what they could potentially become, and how to handle that going forward. Pulling production out of China to manage risk may not be the best course of action if it comes back to bite you six months later, said one panelist. Collaborating across the supply chain, and maintaining open lines of communication, is essential. “Having a clear understanding of what your situation is, what your solution may be, and how we’re going to attack this together is essential,” said a panelist. “Somehow everybody’s got to win. Otherwise, it doesn’t work.”
“It was easy when we were just focusing on China, because we were prepared for that. But we’re not prepared so much for everybody else, and that’s going to be more difficult, quite honestly,” said a panelist. “Now we have to look at tit for tat, and how do I manage my risk, and how do I spread that out.”
With US Customs, one piece of advice was not to be too nice to them. “Some of my clients, whenever US Customs comes by, were so nice to them. They would take them out to dinner, take them to karaoke. I ask, ‘Why do you do this?’. There’s a reason that US Customs keeps coming back to a few factories in Vietnam and they never go to Bangladesh. Just do your job and present your documents.”
Business needs to “operationalize its angst,” said a panelist. Companies need to break down every single component of the regulatory and operational environment and figure out which are the ones they actually need to worry about, and which are less of a threat. “See what you can control, and how to proactively mitigate that risk, and how to be reactive to it, if you face an investigation on the other side of the Pacific,” the panelist added.
Hong Kong: “We’re being caught in between”
Hong Kong has complied with US trade rules for years, but “all of a sudden, we’re being caught in between,” complained a member of the audience. “What’s hurting Hong Kong business is almost the sentiment of it.”
Despite the wealth of experience in Hong Kong, a long history of compliance with US trade rules, and its legacy membership in the WTO, the perception of Hong Kong from Washington and the US Congress is something like the bar scene in Star Wars, according to an audience member.
Since the US de-certified Hong Kong as a separate entity from China in 2020, even though it remains a separate customs territory under WTO rules, Hong Kong is increasingly seen as an adversary. “Obviously some businesses are doing fine, but obviously some are not,” said an audience member. “For some others, like agents, this is a big headache”.
Despite the odds, Hong Kong has continued to function well despite the geopolitical turmoil of the last few years, and that may be its saving grace. The US runs a large surplus in its trade with Hong Kong ($21.9 billion in 2024, with US imports of $6 billion according to the US Trade Representative’s office), and Hong Kong is largely a service economy, where things work and are convenient. As China seeks new partners for trade and investment to counterbalance US restrictions, Hong Kong will pivot with it. The panel discussion provided ample evidence that its expertise in trade, logistics and supply chain services will not be lost on new clients and new sources of demand.