For other versions of this document, see http://wikileaks.org/wiki/CRS-97-311
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                                                                 97-311 F




   CRS Report for Congress
             Received through the CRS Web




     Hong Kong's Reversion to China:
Problems and Remedies for the United States




                       Kerry Dumbaugh
                  Specialist in Asian Affairs
         Foreign Affairs and National Defense Division
                          Coordinator




                          March 3, 1997




      Congressional Research Service { The Library of Congress
               HONG KONG'S REVERSION TO CHINA:
         PROBLEMS AND REMEDIES FOR THE UNITED STATES

                                         SUMMARY


      Concern over the future of Hong Kong-U.S. interaction led Congress in 1992 to enact the
Hong Kong Policy Act (HKPA), thus providing the statutory authority for Hong Kong's
treatment as a separate entity under U.S. law despite its return to Chinese sovereignty on July 1,
1997. Nevertheless, a number of unprecedented and complicated questions remain about the
continued validity of U.S. bilateral and multilateral agreements with Hong Kong that were
negotiated, signed, and implemented while Great Britain was the sovereign.

      Over the past year and more, U.S. policymakers have been holding discussions with Hong
Kong and Chinese officials on a range of important issues for U.S. policy after the 1997
transition falling into five categories: current U.S.-Hong Kong bilateral agreements that will
remain in force in Hong Kong, but not be extended to the PRC; current U.S.-PRC bilateral
agreements that will be extended also to Hong Kong; current multilateral agreements that will
continue in force for Hong Kong, even though the PRC is not a party; current multilateral
agreements in force only for the PRC and the United States, and which will be extended to Hong
Kong; and mechanisms for administering the various agreements that will ultimately be in place.


      As of early 1997, U.S. Administration officials had formed preliminary positions on the
future status of existing agreements. In addition, there have been varying degrees of progress
on a range of new agreements where discussions are being held either with Hong Kong (when
the matter concerns areas where Hong Kong has been promised autonomy) or with the PRC, as
appropriate. These include discussions with Hong Kong on a number of law enforcement-related
issues, including a new extradition agreement (already concluded); discussions with Chinese
officials on U.S. consular arrangements in Hong Kong; and discussions with Chinese officials
on security and defense-related issues. According to U.S. officials, the purpose in these
discussions is not to create new situations for the United States in Hong Kong that did not exist
before, but instead to determine how best to continue the status quo arrangements that have
already existed in U.S.-Hong Kong relations.

      The Hong Kong Policy Act and the ongoing discussions about agreements appear to
address the potential U.S.-Hong Kong issues that can be foreseen at present. But the uniqueness
of Hong Kong's impending transition of sovereignty suggests that some issues affecting U.S.
interests may be unresolved -- even unknown -- by the transition date.
   This report, originally prepared as a memorandum for the House International
Relations Committee, Asia Pacific Subcommittee, has been released for general
congressional use by the Chairman, Rep. Doug Bereuter.
                                            TABLE OF CONTENTS


CURRENT U.S. LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
   THE HONG KONG POLICY ACT (P.L. 102-383) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
   AMENDING THE HONG KONG POLICY ACT
       IN THE 104TH CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

OVERVIEW OF LAWS GOVERNING
   INTERNATIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
   U.S.-HONG KONG AGREEMENTS AND TREATIES . . . . . . . . . . . . . . . . . . . . . . . . 5
   BILATERAL INVESTMENT TREATY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
   WTO MEMBERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
   U.S.-HONG KONG ECONOMIC RELATIONS AFTER 1997 . . . . . . . . . . . . . . . . . . . 9
        U.S. Trade Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
        Textile Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
        Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
        ISSUES FOR U.S. POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

EXPORT CONTROLS AND PROLIFERATION ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . 12
    TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
    THE WASSENAAR ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
    WEAPONS OF MASS DESTRUCTION (WMD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
        Issues for U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SECURITY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
    DEFENSE-RELATED ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
        Issues for U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
    REGIONAL BALANCE OF FORCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
        Issues for U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

FOREIGN POLICY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
    IMMIGRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
    CONSULAR ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
    HUMAN RIGHTS AND POLITICAL FREEDOM . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
        Provisional Legislature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
        Freedom of the Press . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
        Issues for U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

LAW ENFORCEMENT AND OTHER LEGAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
   EXTRADITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
   MUTUAL LEGAL ASSISTANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
   PRISONER TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
       Issues for U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

HONG KONG'S JUDICIAL STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
   OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
   COURT OF FINAL APPEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
   BILINGUALISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
                    HONG KONG'S REVERSION TO CHINA:
               PROBLEMS AND REMEDIES FOR THE UNITED STATES


                                        CURRENT U.S. LAW1


THE HONG KONG POLICY ACT (P.L. 102-383)2

      Much of current U.S. policy concerning the Hong Kong transition is encapsulated in a
single public law -- the Hong Kong Policy Act of 1992, introduced by Senator Mitch McConnell.
The law sets forth prescriptions for how the United States should conduct bilateral relations with
Hong Kong when it becomes a non-sovereign entity. It is the Hong Kong Policy Act that
authorizes the U.S. government to continue to treat an autonomous Hong Kong as a separate
legal entity -- both in U.S. law and with respect to international agreements and treaties -- even
after Hong Kong's incorporation into Chinese territory under the "one country, two systems"
policy. The substantive core of the Act does the following:

           ®    States that U.S. laws shall continue to apply with respect to Hong Kong after the
                transition to Chinese rule after July 1, 1997, in the same manner as they were applied
                before the transition.

           ®    Extends congressional approval for all treaties and international agreements between
                the United States and Hong Kong so that they continue in force after July 1, 1997,
                and requires the President to report to Congress if he determines either that Hong
                Kong is not competent to carry out its obligations, or that it is not "appropriate" for
                Hong Kong to have rights or obligations under any such treaty or international
                agreement.

           ®    States that the President may issue executive orders on or after July 1, 1997, to
                suspend portions of, or entire, U.S. laws that treat Hong Kong separately from the
                People's Republic of China (PRC) if he determines that Hong Kong is not sufficiently
                autonomous, and states that the President should consider the terms, obligations, and
                expectations in the Joint Declaration in making such a determination. The law also
                states that the President may terminate any such executive order if he determines
                Hong Kong has regained sufficient autonomy.
           ®    Requires the President to report to Congress by March 31 in each of six years -- 1993,
                1995, 1997, 1998, 1999, and 2000 ­ on eight specific factors regarding Hong Kong,
                including: (1) significant developments in Hong Kong and agreements the United
                States has entered into with Hong Kong; (2) developments surrounding the transition


       1
      Prepared by Kerry Dumbaugh, Specialist in Asian Affairs, Foreign Affairs and National
Defense Division (FAND).
   2
       22 U.S.C. Section 5701 et seq.
                                              CRS-2


            to Chinese sovereignty; (3) the nature and extent of official and unofficial Hong
            Kong-U.S. exchanges; (4) any U.S. laws suspended or re-instituted under Section 201
            and Section 202 of the public law (described above); (5) treaties and international
            agreements the President has determined Hong Kong is incompetent to carry out
            under Section 201(b) of the public law; (6) significant problems in U.S.-Hong Kong
            cooperation on export controls; (7) the development of democratic institutions in
            Hong Kong; and (8) the nature and extent of Hong Kong's participation in
            multilateral fora.

        ®   Requires, where applicable, a separate report on "China: Hong Kong" in other U.S.
            reports that are compiled on a country-by-country basis, including human rights
            reports required by Sections 116(d) and 502(B) of the Foreign Assistance Act of
            1961; trade barrier reports required by Section 181 of the Trade Act of 1974; and
            economic policy and trade practices reports required by Section 2202 of the Export
            Enhancement Act of 1988.

AMENDING THE HONG KONG POLICY ACT
IN THE 104TH CONGRESS

      In P.L. 104-107, the FY1996 Foreign Operations Appropriations Act (H.R. 1868), the
104th Congress amended the U.S. Hong Kong Policy Act (the HKPA) by requiring a report to
be submitted also in 1996 (the original HKPA did not call for a 1996 report), and by requiring
additional detailed information to be included in the 1996 report only. Other requirements
included information on: 1) Hong Kong's new Basic Law3 and its consistency with the Joint
Declaration; 2) the openness and fairness of elections to Hong Kong'slegislature; 3) the openness
and fairness of the election of Hong Kong's new chief executive, and the executive's
accountability to the legislature; 4) the treatment of political parties in Hong Kong; 5) the
independence of Hong Kong's judiciary and its power to exercise final judgment over Hong
Kong law; and 6) Hong Kong's Bill of Rights.4

      In H.R. 4278, the FY1997 Omnibus Appropriations Act (P.L. 104-208), the 104th Congress
again directed that the Administration include additional information in the annual Hong Kong
report -- again, for one report only, the 1997 report, as required by Section 301 of the original
Hong Kong Policy Act. The additional requirements imposed by the Omnibus Act were almost
identical to those required under the FY1996 Foreign Operations bill. 5


   3
    The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of
China will serve as Hong Kong's de facto Constitution after the July 1, 1997, transfer of sovereignty.
   4
      Although the FY1996 Foreign Operations Appropriations bill could have amended the Hong
Kong Policy Act to permanently require the additional information in future reports, the
appropriators dealt only with the requirements of the March 1996 Hong Kong report, and not with
the requirements of future reports.
    5
      In the Omnibus Appropriations bill (P.L. 104-208), Congress reflected China's decisions on
Hong Kong's legislature, changing the reporting requirement from one on the "fairness of elections
for the legislature" to the new requirement of a report on China's plans to dissolve Hong Kong's
elected legislature and replace it with a provisional body. The other five additional requirements
                                                                                     (continued...)
                                              CRS-3


      Earlier, the 104th Congress had included language in the Foreign Relations Authorizations
Act, FY1996 (S.908/H.R. 1561) that would have increased and made permanent the reporting
requirements currently required under the HKPA. The President vetoed this bill for reasons
unrelated to the Hong Kong provisions.


OTHER RECENT CONGRESSIONAL ACTIONS

      In 1996, the Senate also considered legislation to extend diplomatic privileges, exemptions,
and immunities to Hong Kong's Economic and Trade Offices in the United States. Now,
representatives of Hong Kong stationed in the United States receive their diplomatic privileges
as representatives of the United Kingdom (U.K.). S. 2130 sought to give Hong Kong U.S.
diplomatic privileges in its own right under the provisions of the International Organizations
Immunities Act.6 Since the House did not act on the measure prior to adjournment, no such
statue on diplomatic status has been enacted.

      Concern for the future of Hong Kong residents also led Members of Congress in the past
to address immigration issues outside the Hong Kong Policy Act framework. Congress has acted
several times, for instance, concerning visas for Hong Kong residents. The 101st Congress
enacted the Immigration Act of 1990, which establishes a separate immigrant visa quota for
Hong Kong and offers a deferred visa to Hong Kong residents, thereby providing a possible
future refuge without provoking an immediate exodus.7 In the 103rd Congress, Senator Connie
Mack and Representative John Porter each introduced legislation (S. 665 and H.R. 1265) that
would have provided a certain number of deferred visas to Hong Kong journalists and their
families; neither bill was enacted, but similar legislation is expected to be introduced early in the
105th Congress.


ISSUES FOR U.S. POLICY

      Congress has demonstrated an ongoing interest in the specifics of future U.S.-Hong Kong
agreements and in U.S.-Hong Kong relations generally. Efforts in the 104th Congress to further
amend the Hong Kong Policy Act in 1995 and 1996 may well continue in the 105th Congress.
In 1997, Members may try again to extend the annual March reporting requirement mandated
by the Hong Kong Policy Act beyond its current cutoff date in the year 2000. Or, Members may
seek to make permanent the additional reporting requirements mandated for the 1996 and 1997
reports in the appropriations bills for those fiscal years. New reporting requirements may be
posed that reflect new issues arising in the coming months, perhaps including reports on
extradition matters, on the Hong Kong government's cooperation with the United States, or on


   5
    (...continued)
are the same as those listed for the FY1996 Foreign Operations Appropriations bill (P.L. 104-107).
       6
    22 U.S.C. Section 288. S. 2130 was an original measure reported to the Senate by Senator
Helms on September 25, 1996, without written report.
    7
     U.S. visas must be used within the fiscal year that they are issued. The Immigration Act of
1990 created visas for Hong Kong residents, the use of which could be deferred until the year 2001.
The "deferred visa" is unique to Hong Kong.
                                              CRS-4


whether U.S. businesses operating in the territory are being treated as before. Congress also is
likely to give early consideration to another measure concerning Hong Kong's diplomatic
privileges in the United States. But in addition to revisiting these measures considered by the
104th Congress, new actions may be initiated on specific developments unfolding in Hong Kong
as the transition progresses. Options for further congressional action on a wide range of issues
are addressed in the sections below.


                           OVERVIEW OF LAWS GOVERNING
                            INTERNATIONAL AGREEMENTS8

      Hong Kong's reversion to the PRC raises a number of questions regarding the post-1997
status of bilateral and multilateral agreements to which the United States, Hong Kong, and the
PRC are parties. Under the Vienna Convention's "Moving Treaty-Frontier Rule," all treaties to
which Hong Kong is a party, as well as all those concluded by Great Britain and extended to
Hong Kong, would no longer be in effect as of July 1, 1997, while all treaties entered into by the
People's Republic of China would apply to Hong Kong instead. Notwithstanding this rule, the
parties involved can agree to a different arrangement. U.S. practice in such instances has been
to extend the existing treaty or agreement rather than negotiate a new one. 9


1984 SINO-BRITISH JOINT DECLARATION

      Hong Kong's treaty relations are addressed in the 1984 Sino-British Joint Declaration,
which states the following general principles: the Hong Kong Special Administrative Region
(HKSAR) "will maintain a high degree of autonomy, except in foreign and defence affairs," (Art.
3(2)) and using the name "Hong Kong, China," the HKSAR "may on its own maintain and
develop economic and cultural relations and conclude relevant agreements with states, regions
and relevant international organizations" (Art. 3(10)).

      The Joint Declaration also allows the continued application of Hong Kong's existing
agreements under the following standards: (1) the application to the HKSAR of international
agreements to which the PRC is or becomes party will be decided by the PRC Government, "in
accordance with the circumstances and needs" of the HKSAR and "after seeking the views" of
the HKSAR; (2) international agreements to which the PRC is not a party "but which are
implemented in Hong Kong, may remain implemented" in the HKSAR; and (3) the PRC "shall,
as necessary, authorize or assist" the HKSAR "to make appropriate arrangements for the
application to the Hong Kong Special Administrative Region of other relevant international
agreements" (Art. XI, ¶ 2).

      To facilitate the transfer of sovereignty, Annex II of the Declaration further established the
Sino-British Joint Liaison Group (JLG) for the purpose of discussing all matters relating to the
transfer of government, including the status of Hong Kong's treaties and agreements. The JLG


   8
       Prepared by Jeanne J. Grimmett, Legislative Attorney, American Law Division.
   9
    American Law Institute, Restatement (Third) of the Foreign Relations Law of the United States
§ 210, Comment h (1987).
                                                CRS-5


has been reviewing bilateral and multilateral agreements to which Hong Kong is a party.10 The
United States would need to consent to the continuation in force of any such agreements that
currently apply to the United States, and U.S. officials have formed a preliminary position about
which of these existing agreements will apply and which will not. Decisions may also be
required as to whether U.S.-PRC bilateral agreements should apply to Hong Kong.


U.S.-HONG KONG AGREEMENTS AND TREATIES

      In addition to deciding upon current agreements with Hong Kong that either should or
should not continue past the transition date, the United States is negotiating or has concluded
agreements with Hong Kong in the areas of civil aviation, extradition, mutual legal assistance,
prisoner transfers, and consular arrangements. These will replace agreements on the same
subjects previously entered into with the U.K. and extended to Hong Kong. The United States
is also negotiating a bilateral investment treaty with Hong Kong. Finally, the U.S. Department
of Defense is holding discussions with PRC officials about allowing U.S. navy ships to continue
to visit the port of Hong Kong.

      In case of both bilateral agreements between the PRC and the United States and multilateral
agreements to which both are parties, the Moving Treaty-Frontier Rule would make these
automatically applicable to the HKSAR. Under the Joint Declaration, however, the application
to the HKSAR of international agreements to which the PRC is or becomes party will first be
decided by the PRC government.


BILATERAL INVESTMENT TREATY

      Among other agreements currently under discussion, the United States is negotiating a
bilateral investment treaty (BIT) with Hong Kong. The U.S.-Hong Kong Policy Act expressed
the sense of Congress that the United States should negotiate a BIT with Hong Kong, in
consultation with the PRC.11 The Clinton Administration hopes to complete negotiations and
submit the BIT to the Senate during the first part of 1997. If the treaty is ratified and enters into
force before July 1, 1997, it may continue to apply in Hong Kong under Article XI, ¶ 2 of the
Joint Declaration. Some 12 countries have already entered into investment promotion and
protection agreements with Hong Kong with the intent that they apply after July 1. 12

      The U.S. BIT program, under which well over 40 BITs are currently in force, seeks to
create a stable climate for U.S. investments worldwide subject to the rule of agreed and
understood laws. The treaty with Hong Kong will presumably contain the following provisions,
which have long been fundamental elements of the U.S. prototype: a broad definition of

    10
      U.S.-China Business Council, Hong Kong's Transition to Chinese Sovereignty: Legal and
Business Issues 7 (October 1996)[hereinafter cited as Hong Kong's Transition].

   11
        Act, § 103(10), 22 U.S.C. § 5713(10).
        12
       Hong Kong's Transition, supra note 4, Appendix B (listing Australia, Austria, Belgium,
Denmark, Italy, France, Germany, Luxembourg, The Netherlands, New Zealand, Sweden, and
Switzerland).
                                               CRS-6


"investment"; the extension of the better of most-favored-nation (MFN) or national treatment to
investments of the parties; a prohibition on performance requirements;13 a requirement that
expropriations meet international law standards, including the payment of prompt, adequate and
effective compensation; an obligation to allow the unrestricted transfer of investment-related
funds; and consent to binding international arbitration for investor-State disputes.


WTO MEMBERSHIP

       Consistent with its grant of autonomy to Hong Kong in economic matters, the Joint
Declaration envisions Hong Kong's continued participation in the General Agreement on Tariffs
and Trade (GATT), now the World Trade Organization (WTO). Hong Kong is an original
Member of the WTO, a status to which it was entitled as a Contracting Party to the GATT 1947.
Like the GATT, the WTO Agreement allows both sovereign nations and independent customs
territories to become parties. China is not a member of WTO.

     Hong Kong originally took part in the GATT as a dependency of the U.K., but became a
Contracting Party in 1986 after the U.K. invoked GATT Article XVII, allowing parties who had
accepted the agreement on behalf of a customs territory to sponsor it for separate and full
membership if the territory had or acquired "full autonomy in the conduct of its external
commercial relations and of the other matters provided for in this Agreement." Prior to this, the
PRC had assured GATT Members that after the 1997 reversion Hong Kong would maintain the
autonomy required under Article XVII.14 The United States intends to respect the separate
membership of Hong Kong in the WTO, a policy set forth in the United States-Hong Kong
Policy Act.15

      In joining the WTO, Hong Kong has accepted the multilateral agreements that are a
condition of membership, including the WTO Dispute Settlement Understanding. Hong Kong
is also likely to become a member of the WTO Agreement on Government Procurement, its
accession having been approved in December 1996 on terms negotiated.16 The United States and




   13
      Performance requirements typically place restrictions on investors, such as requiring investors
to sell all or a portion of their goods for export.
   14
         J. Jackson, The World Trading System 47 (1989), citing GATT Doc. 1384, April 26, 1986.

    15
      The Act expresses the sense of Congress that the United States should respect Hong Kong's
status as a separate customs territory and as a Contracting Party to the GATT, whether or not the
PRC is a member, and should continue to grant the products of Hong Kong MFN status under U.S.
law by virtue of its GATT membership. Act, §§ 102(3), 103(4), 22 U.S.C. §§ 5712(3), 5712(4).
   16
      WTO Press Release No. 61 (Dec. 5, 1996) <http://www.wto.org/wto/ Whats_new/press61/htm
[hereinafter cited as WTO Press Release]. As of February 25, 1997, Hong Kong had not yet
deposited its instruments of accession with the WTO Director General. The Agreement will enter
into force for Hong Kong 30 days after it does so. Hong Kong has been a party to the Tokyo Round
Agreement on Government Procurement.
                                               CRS-7


22 other WTO Members are currently party to this accord.17 Parties are obligated, among other
things, to grant national and MFN treatment to firms of other parties bidding for goods or
services contracts and to refrain from using offsets, such as local content or investment
requirements. Obligations under the Agreement apply only to procurements by government
agencies listed in each party's Annex in the event the value of a contract equals or exceeds a
certain threshold amount ($ 182,000 for purchases of goods or services by central government
entities). An original signatory of the Agreement, Hong Kong had listed some 69 central
government agencies in its Annex, along with two sub-central bodies (the Urban Council and
Urban Services Department, and the Regional Council and Regional Services Department).


ISSUES FOR U.S. POLICY

      In the event the PRC becomes a WTO Member, questions may arise as to the precise legal
relationship of the PRC and the HKSAR, particularly with respect to which should bear
international responsibility for violations of WTO obligations that may involve both parties.18
U.S. officials could ask the WTO to create a working party to monitor Hong Kong's trade actions
under the agreement. The United States also could seek to link China's accession to the WTO
with Hong Kong's continued autonomy, although some U.S. policymakers point out that such
a linkage could counteract the stated goal of U.S. policy, which is to reinforce Hong Kong's
separate status from China.19 U.S. policymakers undoubtedly also will want to monitor what the
effects will be of Hong Kong's WTO status while China remains a non-member.

       Other concerns involve the implications of not having a U.S.-Hong Kong investment treaty.
If the United States cannot conclude its BIT discussions prior to July 1, 1997, for instance, some
suggest that this will place U.S. investors at a competitive disadvantage relative to other investors
in Hong Kong. Many BITs have annexes excluding certain sectors from national treatment for
foreign investors; some also are concerned, then, if Hong Kong is seeking to exclude any sectors
in its ongoing BIT talks with the United States.




    17
      Other parties are Canada, the European Communities and 15 member states, Israel, Japan,
Republic of Korea, Aruba, Norway and Switzerland; Singapore and Liechtenstein have completed
accession negotiations and Chinese Taipei is currently in the process of negotiating the terms of its
accession. WTO Press Release, supra note 14.

  18
    See, e.g., Skeen, "Can Capitalism Survive Under Communist Rule? The Effect of Hong Kong's
Reversion to the People's Republic of China in 1997," 29 Int'l Law. 175, 195-196 (1995).
  19
       U.S. policy goals on separate treatment for Hong Kong are spelled out in the Hong Kong Policy
Act.
                                             CRS-8


                      COMMERCIAL AND ECONOMIC ISSUES20


                      TABLE 1. U.S.-Hong Kong Trade: 1986-1995
                                     ($Billions)

                            U.S. Exports          U.S. Imports          U.S. Trade Balance
  1986                                    3.0                   8.9                         -5.9
  1987                                    4.0                   9.9                         -5.9
  1988                                    5.7                  10.2                         -4.6
  1989                                    6.3                   9.7                         -3.4
  1990                                    6.8                   9.5                         -2.6
  1991                                    8.1                   9.3                         -1.1
  1992                                    9.1                   9.8                         -0.7
  1993                                    9.9                   9.6                          0.3
  1994                                  11.4                    9.7                          1.7
  1995                                  14.2                   10.3                          3.9
  1996                                  14.0                    9.9                          4.1

        Source: U.S. Department of Commerce.



      Growing investment and trade links between Hong Kong and China have played a major,
even critical, role in the development and growth of both economies. Hong Kong is by far the
largest foreign investor in China, accounting for 60% of total foreign direct investment (FDI) in
China. Actual Hong Kong FDI in China in 1995 totalled $20 billion. Hong Kong's dominant
position as China's largest foreign investor gives it a large stake in the Chinese economy. In
addition, nearly half of China's exports to the world are first shipped to Hong Kong (then re-
exported), and a large share of China's imports enter through Hong Kong. China and Taiwan,
which until recently maintained no direct trade links, currently ship most of their trade with each
other through Hong Kong. 21

     Under the terms of Sino-British agreements, Hong Kong will retain the status of a free port
and be free to continue its free trade and liberal investment policies after July 1, 1997. These

   20
      Prepared by Wayne M. Morrison, Specialist in International Trade and Finance, Economics
Division, with contributions on taxes by Kerry Dumbaugh, FAND.
    21
      On January 22, 1997, China and Taiwan reached consensus to end a 48-year ban on direct
shipping links -- a move with significant potential implications for Hong Kong's historic role as a
conduit for trade between the two. According to the South China Morning Post, a Hong Kong
newspaper, China-Taiwan trade in 1996 was estimated at approximately $20 billion (U.S.)
                                                CRS-9


same agreements promise that Hong Kong will continue to formulate its own monetary and
financial policies, maintain its own currency, and control its foreign exchange reserves. As a
result, it is expected that Hong Kong will maintain its policy of pegging its currency to the U.S.
dollar. However, some analysts argue that China might attempt to limit Hong Kong's ability to
use its foreign exchange reserves to prop up its currency in the event of extensive currency
speculation after 1997.22 Relatedly, Hong Kong will continue to participate in various
international economic forums, such as the WTO and the Asia-Pacific Economic Cooperation
(APEC).

      Hong Kong was the 13th largest U.S. trading partner in 1996, and an important center for
U.S. economic ties with Asia. As of January 1997, about 37,000 Americans reside in Hong
Kong. Over 1,000 U.S. firms have offices in Hong Kong, of which about 400 are regional
headquarters. Total U.S. foreign direct investment in Hong Kong at the end of 1995 stood at
$13.8 billion, with Hong Kong often acting as a middleman between Chinese and U.S. firms for
trade and investment. U.S. exports to, and imports from, Hong Kong totalled $14.0 billion and
$9.9 billion, respectively. The U.S. balance of trade with Hong Kong has improved from a $5.9
billion deficit in 1986 to a $4.1 billion surplus in 1996 (see table 1). This is largely explained
by the fact that many of the products the United States used to import from Hong Kong are now
being imported from China -- some manufactured by Hong Kong-owned enterprises in China.23


U.S.-HONG KONG ECONOMIC RELATIONS AFTER 1997

       Chinese trade and economic officials are projecting that Hong Kong's transition to Chinese
rule will create more business opportunities.24 According to a December 1996 survey, U.S.
business confidence in Hong Kong has increased by four percentage points over 1995.25
Nevertheless, U.S. concerns remain over the stability of the political system and governmental
institutions; the free flow of information; and the viability of the legal system and the dependable
rule of law, including the enforcement of contracts, the protection of individual and property
rights, and the maintenance of a reliable system of commercial dispute resolution. In addition,
U.S. policymakers remain concerned about the potential turnover in senior Hong Kong
government officials after 1997.

U.S. Trade Data

      After the 1997 transition, the United States will continue to treat Hong Kong as a separate
customs territory for a variety of economic relations, including the collection of trade data and
for rules of origin purposes. As in the past, China will argue that U.S. trade data on imports from


   22
        See Far Eastern Economic Review, December 19, 1996, p. 16.

   23
        The U.S. trade deficit with China has grown from $1.7 billion in 1986 to $39.5 billion in 1996.


   24
      According to the New China News Agency in a January 20, 1997 report on the comments of
an assistant minister for Foreign Trade and Economic Cooperation in Beijing.
  25
    The American Chamber of Commerce (Hong Kong) Survey of Business Confidence, Dec. 1996,
reports 95% of their members find the business environment in Hong Kong "favorable."
                                               CRS-10


China are overstated because (1) a large share of China'sU.S. exports is from Hong Kong-owned
factories in the mainland, and (2) many of China's exports to the United States are transshipped
through Hong Kong, where additional value is added by Hong Kong firms; while U.S. trade
statistics attribute the full value of the final product in these cases as originating from China. The
size of the U.S. trade deficit with China is a highly political issue. Some U.S. policymakers
perceive it to be largely a direct result of significant Chinese export malpractices and trade
barriers against U.S. exports. Some economists note that while the United States does face
significant Chinese trade barriers, such barriers are more likely to affect the composition rather
than the level of U.S. exports to China. Still, the size and growth of the U.S. trade deficit with
China is likely to be a continuing source of trade friction.

Textile Agreement

       The United States will continue to allocate textile quotas to Hong Kong separately from
those it allocates to China.26 But U.S. officials remain concerned over efforts by Chinese
producers to avoid U.S. textile and apparel quotas by transshipping them through third parties,
including Hong Kong. In June 1996, the U.S. Customs Service implemented new rules requiring
additional import documentation on certain textile imports from Hong Kong and tightened rules
of origin for certain products, in order to control illegal transshipments from China.27 U.S.
Customs officers have visited Hong Kong at the invitation of Hong Kong's Customs and Excise
Department to observe Hong Kong's textiles export control system and to inspect its textile
factories to ensure that transshipments have not occurred. Hong Kong has pledged to continue
its efforts to stop illegal textile transshipments after 1997.

Intellectual Property Rights Protection

       China has agreed to allow Hong Kong to apply major international intellectual property-
related agreements and to participate in relevant organizations. Many of Hong Kong's
intellectual property rights (IPR) laws are based on U.K. legislation, requiring Hong Kong to
localize many of its IPR laws before July 1997. After 1997, Hong Kong is expected to maintain
an independent intellectual property regime which will have authority over Hong Kong's IPR
policies, laws, and enforcement efforts. Hong Kong officials have pledged to ensure continuity
in the IPR protection that exists under current law and to improve other laws which will bring
it into compliance with the Trade Related Aspects of Intellectual Property Rights (TRIPS)
agreement under the General Agreement on Tariffs and Trade (GATT) and its successor, the
WTO.

      The United States remains concerned over the rising piracy of U.S. software and compact
disc music in Hong Kong but especially the high level of pirated products produced in China,
many coming into Hong Kong. Some of these pirated products have been produced by Hong
Kong owned firms in China. In April 1996, the U.S. Trade Representative (USTR) announced
it would conduct an out-of-cycle review of Hong Kong's IPR protection practices to determine
if U.S. action were warranted. In December 1996, USTR noted that Hong Kong had improved



   26
        International Trade Report, June 19, 1996, p. 1007.
   27
        U.S.C. cite for new rules.
                                           CRS-11


its IPR protection, and that consequently no action was needed.28 Should Hong Kong fail to
enforce IPR laws and textile quotas, the United States could impose trade sanctions. Key aspects
of such enforcement will be the ability of the Hong Kong government to prevent Hong Kong
firms from illegally transshipping products from China through Hong Kong, and the ability of
the Hong Kong government to prevent intellectual property theft by China.

Taxation

      Hong Kong's reversion to China also has potential consequences for the U.S. tax code's
treatment of U.S. companies operating in Hong Kong and China. Under Subpart F, Section 951-
964 of the U.S. Internal Revenue Code, corporations are subject to U.S. income tax on income
earned by the foreign corporation that is considered to have been artificially shifted to another
country with lower taxes. Some members of the U.S. business community have suggested that
treating Hong Kong as a jurisdiction separate from China could have adverse tax consequences
for U.S. businesses with subsidiaries in both China and Hong Kong by making income taxable
in the United States once it was moved from one of these tax jurisdictions to the other.

      None of the provisions of the Hong Kong Policy Act address the U.S. tax code directly.
Nevertheless, Section 201(a) of the Act states that the United States will treat an autonomous
Hong Kong separately after the transition and apply current laws in the same manner as before.
Under current law, the United States considers Hong Kong to be separate -- and not part of the
U.K. -- for Subpart F tax purposes. The U.S. tax treaty with the PRC was ratified by the Senate
with the understanding that its provisions would not apply to Hong Kong. Thus, some American
businesses have suggested that it is unclear how Subpart F of the Internal Revenue Code is to be
applied to businesses operating in Hong Kong after the July 1 transfer. According to an official
of the U.S. Treasury, the Treasury Department intends to issue guidance on the Subpart F issue
in the near future.


ISSUES FOR U.S. POLICY

      One of the key trade questions involving Hong Kong's transition involves whether the
United States will be able to maintain its currently close working relations with Hong Kong trade
officials on commercial issues, including the exchange of information and cooperation on
enforcement. Another question involves the independence of Hong Kong trade officials --
whether they will be able to operate without interference from high-level Chinese government
officials, and whether they will be able to continue to devote sufficient resources to enforcing
Hong Kong's trade and IPR laws. The United States will probably be monitoring Hong Kong
government actions to determine if there is an increase in corruption or reduced cooperation with
the United States on trade issues. Should China interfere in Hong Kong's economic and political
affairs, U.S. policymakers may consider a number of options, including imposing sanctions
directly against China, delaying U.S. support of China's accession to the WTO, or refusing to
grant China permanent MFN treatment. China's potential countermeasures to such actions would
appear formidable.



    28
     For example, Hong Kong enacted legislation to outlaw the production of pirated goods by
Hong Kong firms outside of Hong Kong.
                                               CRS-12


                 EXPORT CONTROLS AND PROLIFERATION ISSUES


TECHNOLOGY29

       The U.S. government has generally been satisfied with Hong Kong's current export control
regime. As a result, the United States has allowed Hong Kong to import, license-free, most
controlled high technology dual-use items under the U.S. Export Administration Act of 1979, the
primary authority for controlling U.S. exports. 30 U.S. and Hong Kong trade officials maintain
close contact and cooperation, ranging from exchanges of information to joint investigations of
suspected illegal diversions of exports. Hong Kong officials expect that they will be able to
maintain an autonomous export control regime after 1997. If so, the United States will likely
continue to give Hong Kong separate export control treatment for advanced technology items;
still, Hong Kong is also likely to be subject to close U.S. review to ensure that certain exported
U.S. technologies to Hong Kong are not illegally transshipped to China or elsewhere. If Hong
Kong's export control regime deteriorates after 1997, the United States might respond by
tightening controls on exports to Hong Kong.


THE WASSENAAR ARRANGEMENT31

      The Wassenaar Arrangement is a multilateral accord "to contribute to regional and
international security and stability, by promoting transparency and greater responsibility in
transfers of conventional arms and dual-use goods and technologies,32 thus preventing
destabilizing accumulations." It is the result of three years of negotiations to replace the
Coordinating Committee For Multilateral Export Controls (CoCom) -- the Cold War organization
for controlling sensitive exports to the communist bloc. The new group has much broader
membership and smaller lists of controlled goods. Under Wassenaar, each national government
regulates its own exports, whereas under CoCom, any member could disapprove the export by
any other member of a controlled item to a proscribed destination. The Arrangement
complements the existing export control regimes for nuclear, chemical, and biological weapons
and their delivery systems, and other transparency mechanisms such as the UN Register.

      Hong Kong had the status of a "cooperating country" under CoCom. That status dissolved
when CoCom ceased to exist in mid-1994. Hong Kong, as a territory of Great Britain, currently
participates in the Wassenaar Arrangement. After reversion, Hong Kong will not be allowed to


        29
        Prepared by Wayne Morrison, Analyst in International Trade and Finance, Economics
Division.
  30
     U.S. State Department. United States-Hong Kong Policy Act Report, March 31, 1996, p. 9. The
Export Administration Act expired in 1994 but has continued in effect through authority invoked
by the President under the International Economic Emergency Powers Act.
   31
        Prepared by Robert Shuey, Specialist in Defense Issues, Foreign Affairs Division.
        32
        Dual-use exports are those commodities, processes, or technologies created primarily for
civilian purposes which can also be used to develop or enhance the capabilities of military
equipment.
                                             CRS-13


become a Participating State, because it is not a separate country; it will no longer be able to
participate as an element of Britain; and it will not be able to participate as part of China because
China is not a Participating State. 33

      Wassenaar is twice the size of CoCom (33 participating countries compared to 17) but has
no "cooperating countries." Countries are either Participating States or have no official status
with the Wassenaar Arrangement. The PRC had no status with CoCom and is not a Participating
State of Wassenaar. According to Administration officials, China has not been invited to join
Wassenaar because of concerns regarding Chinese weapons exports to Iran and Pakistan and
other shortcomings in its export control system. 34 Participating States agree to control exports
and retransfers of items on a common Munitions List based on the categories of major
conventional weapons used for the Conventional Forces-Europe Treaty and the United Nations
Arms Register, and more than 100 items on a List of Dual-Use Goods and Technologies. The
decision to allow or deny transfer of an item is the sole responsibility of each Participating State.
Hong Kong has agreed to conform to these policies.

      The Arrangement is not directed against any state, but is designed "to enhance cooperation
to prevent the acquisition of armaments and sensitive dual-use items for military end-uses, if the
situation in a region or the behaviour of a particular state is, or becomes, a cause for serious
concern...." 35 The Participating States have generally agreed that significant transfers to the
military establishments of Iran, Iraq, Libya, or North Korea could threaten international or
regional security or stability. All have national policies to prevent transfers of arms and sensitive
technologies to these pariah countries. Neither Hong Kong nor China is subject to restraints on
exports due to any Wassenaar actions or policies.


WEAPONS OF MASS DESTRUCTION (WMD)36

      Hong Kong has been responsible and cooperative in working with other countries and
multilateral groups in trying to prevent the spread of nuclear, chemical, and biological weapons
and missile delivery systems. Although it is not a member of the Nuclear Supplier's Group, the
Australia Group, or the Missile Technology Control Regime (MTCR), it has exchanged
information on suspected illicit transfers and has participated in workshops and meetings
addressing these issues. In one recent case, Hong Kong seized a shipment of ammonium
perchlorate that was being passed through the territory on the way from North Korea to Pakistan.




   33
        Telephone conversations with State and Commerce Department officials, January 1997.
   34
      Statement of Thomas McNamara, Assistant Secretary of State for Political-Military Affairs,
before the Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on
International Finance and Monetary Policy. September 21, 1995. Washington Post, September 20,
1995, p. A15. Lynn Davis News Conference. Reuters transcript, January 23, 1996.
  35
     The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods
and Technologies, Initial Elements, as adopted by the Plenary of 11-12 July 1996.
   36
        Prepared by Robert Shuey, Specialist in Defense Issues, FAND.
                                            CRS-14


This chemical is used with others to produce rocket fuel and is controlled under the MTCR.
Hong Kong has helped identify and stop other dangerous shipments to the Middle East. 37

      Authorities in Hong Kong, including Director-General of Trade Alan N. Lai, say they will
continue to uphold high standards of export control and nonproliferation. Director-General Lai
has been assured by Chinese officials that Hong Kong will be able to maintain its export control
system after reversion. It is his view, that Hong Kong officials will be able to verify the nature,
end-use, destination, and propriety of exports from Hong Kong, including goods being
transferred through Hong Kong to other destinations.38 These officials say it is in China's and
Hong Kong's interests that Hong Kong continues to maintain high export control standards so
that other countries will continue to trust it as a trading partner and afford it beneficial trade
status.

Issues for U.S. Policy

       After reversion, the Secretariat of the Wassenaar Arrangement will no longer be able to
share the organization's reported information with Hong Kong because it will not be a
Participating State. The United States has the option of deciding to continue sharing intelligence
with the Hong Kong government. U.S. officials will face decisions about what kinds of
intelligence will continue to be shared and what the mechanism will be for making those
decisions. Hong Kong authorities recently have uncovered several instances of unauthorized
weapons and other materials being shipped through Hong Kong. This may be a good sign,
showing that Hong Kong authorities are effectively monitoring the situation and are adept at
enforcement. On the other hand, some could view it less positively, alleging that illegal
transshipments are increasing and are likely to continue to do so after July 1, 1997. U.S.
policymakers face serious policy questions in deciding how to monitor Hong Kong's
performance on export controls and what steps should be taken in the event that Hong Kong's
export controls should be judged insufficient.


                                    SECURITY ISSUES39

     U.S. Defense Department, State Department, and other security department/agency officials
agree generally with the goals noted by Clinton Administration public spokespersons regarding




  37
      "Hong Kong, Pakistan: Fuel said Bound for Pakistan Agency Suspected by the West," in South
China Morning Post, Dec. 13, 1996, p. 4, cited in FBIS-CHI-96-242; "Hong Kong, Pakistan: DPRK
Firm Said Behind Rocket Fuel Bound for Pakistan," in South China Morning Post, Dec. 13, 1996,
p. 4, cited in FBIS-CHI-96-242.
       38
      Discussions with Director-General Lai, Jan. 23, 1997, and with other Hong Kong Trade
Department officials in July 1996.
       39
      Prepared by Robert Sutter, Senior Specialist in International Affairs, Foreign Affairs and
National Defense Division. This is based on a longer analysis prepared in February, 1997, for the
House International Relations Committee's Subcommittee on Asia/Pacific Affairs.
                                             CRS-15


the reversion of Hong Kong to PRC sovereignty and what this means for U.S. interests.40 In
particular, they would like to see current levels of U.S. security-related cooperation with Hong
Kong continued after Hong Kong's reversion to PRC sovereignty. Nonetheless, the shift of Hong
Kong's sovereignty from Great Britain -- a close military ally of the United States -- to the PRC
poses a number of questions and issues for U.S. policymakers concerned with issues such as
defense relations, intelligence sharing and operations, and proliferation controls. Thus far, U.S.
government officials have not publicly offered definitive answers to these questions or firm
resolutions of these issues.


DEFENSE-RELATED ISSUES

      On average, 70 U.S. Navy ships visit Hong Kong each year for crew rest and for naval
support services such as ship repairs, resupply, maintenance, and refueling. The procedures by
which U.S. and British officials handle notification of such visits are efficient, usually involving
a few days advance notice to British authorities in Hong Kong by the U.S. Hong Kong
Consulate. PRC officials stated during the Chinese Defense Minister's visit to Washington in
December 1996 that an agreement "in principle" was reached between the United States and
China allowing continued U.S. Navy ship visits to Hong Kong after July 1, 1997. U.S. Defense
Department officials are now in the process of working with their Chinese counterparts on the
specific details of this agreement.

       Another issue concerns actions of U.S. military personnel in Hong Kong. Under British
rule, incidents of U.S. military personnel being arrested for breaking laws in Hong Kong have
usually involved the accused being transferred by Hong Kong government authorities to U.S.
military authorities for judgment and punishment. Continuation of this practice under Chinese
sovereignty, however, is not necessarily a safe assumption, and is under discussion with the PRC.

      Another set of defense relations issues has to do with the presence of four or five U.S.
Military Attaches and related support personnel in the Defense Liaison Office of the U.S.
Consulate in Hong Kong. These officials are involved in arranging for the U.S. Navy ship visits
to Hong Kong and other matters involving military cooperation such as flight clearances. The
Defense Department hopes to continue these activities in Hong Kong after July 1, 1997.

Issues for U.S. Policy

      The U.S. Navy is expecting to continue to use Hong Kong as an important port of call for
its Asian fleet at a comparable number of annual visits as in the recent past. One key issue for
the Navy will be whether the notification and approval procedures for these ship visits will
become more difficult in the future under Chinese rule. Another issue of concern is whether U.S.
military personnel accused of violating Hong Kong laws after July 1, 1997, will continue to be
returned to U.S. military authorities for judgment and punishment, as was the case under British
sovereignty. If not, decisions will need to be made about whether some more formal
arrangement may be needed to protect the safety of U.S. military personnel in Hong Kong while
providing for the legitimate legal rights of the Hong Kong and PRC governments.


  40
    The views of these officials were obtained in private interviews conducted in Washington, D.C.
January 6-10, 1997.
                                            CRS-16


     It seems doubtful that U.S. Defense Attaches in Hong Kong will continue to share
information and interact in the same way with Hong Kong authorities as they do now. Questions
remain about what relationship U.S. military officials stationed in Hong Kong will have with the
PRC, which is formally in charge of Hong Kong's defense, and with the PRC's People's
Liberation Army (PLA) Garrison, due to begin work in Hong Kong on July 1, 1997.


REGIONAL BALANCE OF FORCES

      Hong Kong has rarely been seen as strategically important in determining the balance of
forces in East Asia. The British garrison was quickly subdued in Japan's march to Southeast Asia
in the 1940s, while the British government was among the first western powers to recognize the
People's Republic of China, in part because London judged that Hong Kong was strategically
untenable if attacked.

      Nonetheless, the reversion in July 1997 does give Chinese military forces unprecedented
free access and control in one of the major ports along the Pacific rim. It also frees Chinese
military planners of any concerns they might have had about the area falling into the hands of
forces prepared to confront the PRC.

Issues for U.S. Policy

      Hong Kong's reversion to the military control of the PRC raises questions about the
potential impact of the transfer on the overall balance of forces in the East Asian region, and, in
particular, on U.S. military concerns in the region. U.S. policymakers may wish to explore
whether Chinese military planners in the past were concerned about Hong Kong becoming a
strategic problem for the PRC and, if so, how serious those concerns were. In particularly, U.S.
strategic planners will undoubtedly be exploring any current or potential negative consequences
of the transfer for U.S. military concerns in the region.


                                FOREIGN POLICY ISSUES


IMMIGRATION41

       The transfer of sovereignty over Hong Kong implicates two sets of migration rules under
U.S. law: those governing permanent or temporary entry, and those permitting humanitarian
sanctuary. Under the Immigration and Nationality Act of 1952 (INA), as amended, (8 U.S.C.
1101 et seq.) visas to resettle in the U.S.--immigrant visas--are generally allocated based on
country of origin. But nothing prohibits Congress from granting entities other than foreign States
their own, separate allocation of immigrant visas, and Congress has treated Hong Kong as though




  41
    Prepared by Ruth Wasem, Education and Public Works Division, and Larry Eig, American Law
Division.
                                             CRS-17


it were a foreign State since the INA was modified by the Immigration Act of 1990.42 The
separate treatment of Hong Kong would appear to continue to apply after the transfer of
sovereignty. We do not know of any objection the PRC has made to our continuing this
treatment. There are significant backlogs for family-based visas from the PRC, and folding Hong
Kong into the PRC would increase, not reduce, these backlogs.

      Over the past decade, there has been a twofold increase (to 152,000) in the number of
nonimmigrants visas--i.e., temporary entries for students, tourists, business people, temporary
workers, and the like--issued to Hong Kong residents. A basic requirement for issuance of a
nonimmigrant visa is that the applicant intends to return home. Any significant change in
conditions in Hong Kong may make it more difficult to show a likelihood of return and thus
result in tightening up of nonimmigrant visa issuances. Changing conditions also may affect how
human rights provisions in the INA are applied to Hong Kong residents, many of whom relocated
in Hong Kong to flee repression in the PRC. In cases of individualized persecution, the refugee
and asylum provisions in the INA allow for admission based on past persecution, or on a well-
found fear of prospective persecution, due to political opinion, race, religion, ethnicity, or
membership in a social group. The 104th Congress specified that coercive population control
policies constitute political persecution and allows up to 1,000 such refugees or asylees annually.
The INA also gives the Attorney General authority to grant blanket relief to aliens here from
countries undergoing civil strife or natural disasters.

      Reportedly, Hong Kong has been a base for some organized crime syndicates that operate
alien smuggling rings. The transfer of sovereignty may facilitate PRC-Hong Kong cooperation
in combatting smuggling and thereby affect the extent to which Hong Kong continues to be a
back door for illegal immigrants. With respect to assuring continued access of Americans to
Hong Kong, the INA grants the President power to suspend or otherwise restrict the entry of any
class of aliens when public interest requires.


CONSULAR ARRANGEMENTS43

      Because the operative U.S. consular agreement in Hong Kong was negotiated and signed
with the U.K., U.S. Administration officials for months have been holding discussions with
Chinese officials on a matter that will be within the PRC's sole jurisdiction -- U.S. consular
arrangements in Hong Kong. According to State Department officials, the U.S. goal is to reach
an agreement that will permit the status quo in Hong Kong to continue. They say they will
vigorously resist PRC efforts to use the consular agreement to limit the size and staffing of the
U.S. consulate in Hong Kong below current levels. For instance, U.S. Administration officials
would like an agreement that allows the United States to continue to share information with Hong
Kong authorities on law enforcement, intellectual property rights, and export control issues -- all

   42
      As an inducement to remain in Hong Kong at least until sovereignty is transferred, the 1990
Act also granted visa preference to certain employees of American companies and allowed Hong
Kong residents who were issued certain types of visas until year 2000 to resettle here. The 1990 Act
included a special provision for certain employees of the U.S. mission in Hong Kong.


    43
     Both this section and the section on Human Rights and Political Freedom were prepared by
Kerry Dumbaugh, Foreign Affairs and National Defense Division.
                                            CRS-18


important current functions of the U.S. Consulate in Hong Kong. Currently, U.S. officials
operating in the U.S. Hong Kong Consulate include officials of the U.S. Customs Service, the
Federal Bureau of Investigation, the Drug Enforcement Administration, the Immigration and
Naturalization Service, and the Secret Service. Some of these or other current consular functions
may be particularly sensitive to the PRC.


HUMAN RIGHTS AND POLITICAL FREEDOM

Provisional Legislature

      Beijing's decision to dissolve the elected Legislative Council (Legco) on July 1, 1997, and
replace it with an appointed temporary body, the so-called "provisional legislature," is likely to
be an acid test for American confidence about the "one country, two systems" concept. A
provisional legislative body is not provided for in either the Joint Declaration or the Basic Law,
and Beijing's decision to appoint such a group is viewed by many American policymakers as but
the beginning of heavy-handed Chinese interference in Hong Kong's promised decisionmaking
autonomy. How the provisional legislature behaves, what legislative actions it takes during its
tenure, how long it will be before elections are held for the first Hong Kong SAR Legislative
Council (and whether Beijing honors its commitments about the first legislature),44 and how
democracy advocates in Hong Kong react to the provisional body -- all these are likely to have
continuing repercussions for U.S. policy.

Freedom of the Press

     In addition to the dissolution of Legco, the extent to which China allows freedom of
expression -- including freedom of the press and freedom of assembly -- is another key variable.
Under the Basic Law, China has accepted a number of legal guarantees for Hong Kong'spolitical
and economic future. Among these is one contained in Article 27 of the Basic Law, which
declares, "Hong Kong residents shall have freedom of speech, of the press and of publication;
freedom of association, of assembly, of procession and of demonstration; and the right and
freedom to form and join trade unions, and to strike."

      Despite the apparent clarity of such language, Chinese officials routinely make statements
that suggest either a more restrictive approach or total disregard of these provisions will prevail


   44
     On April 4, 1990, China's Seventh National People's Congress adopted a document entitled the
Decision of the National People's Congress on the Method for the Formation of the First
Government and the First Legislative Council of the Hong Kong Special Administration Region
(SAR). Paragraph 6 of this document states: "The first Legislative Council of the Hong Kong SAR
shall be composed of 60 members, with 20 members returned by geographical constituencies
through direct elections, 10 members returned by an election committee, and 30 members returned
by functional constituencies. If the composition of the last Hong Kong Legislative Council before
the establishment of the Hong Kong SAR is in conformity with the relevant provisions of this
Decision and the Basic Law of the Hong Kong SAR, those of its members who uphold the Basic
Law of the Hong Kong SAR of the People's Republic of China (PRC) and pledge allegiance to the
Hong Kong SAR of the PRC, and who meet the requirements set forth in the Basic Law of the
Region may, upon confirmation by the Preparatory Committee, become members of the first
Legislative Council of the Region."
                                            CRS-19


after the transition to Chinese rule. China's Foreign Minister, Qian Qichen (who is also chairman
of the Preparatory Committee), was quoted in an October 16, 1996, Asian Wall Street Journal
article as saying that journalists would be able to publish criticism, "but not rumours or lies" or
personal attacks on Chinese leaders. Apart from the dissolution of Legco, how Beijing handles
the issue of personal freedoms in Hong Kong could be the most potentially explosive issue
surrounding the transition.

Issues for U.S. Policy

      The dissolution of Hong Kong's elected Legislative Council and its replacement with a
provisional legislative body poses a number of implications for the United States. There are
questions about whether decisions by such a provisional body will have the effect of law in cases
where U.S. interests are involved. Opponents of the provisional body may advise or even
pressure U.S. investors in Hong Kong to refuse to acknowledge the provisional legislature as a
legitimate law-making body or to abide by its decisions. Significant curbs on press freedom in
Hong Kong may harm U.S. news bureaus operating out of Hong Kong, and may also influence
U.S. business and investment decisions in the territory.


                  LAW ENFORCEMENT AND OTHER LEGAL ISSUES


EXTRADITION45

       International extradition is the process of transferring individuals between States to stand
trial or face punishment. Standards and procedures that guide U.S. extradition practice are
contained in bilateral and multilateral agreements and implemented under Federal statute (18
U.S.C. §§ 3181-3195). Federal officials lack power to extradite an individual absent a treaty or
independent statutory authority.

      By a 1976 exchange of Notes, the United States and the U.K. agreed to apply the U.S.-U.K.
extradition to Hong Kong. There is no U.S.-PRC treaty. However, the JLG has approved a
model extradition agreement, and the PRC has approved a number of negotiating partners,
including the United States. Within this framework, the Hong Kong government, under
entrustment from the U.K., concluded a new extradition agreement with the United States. The
PRC approved the text of the agreement in September 1996, and the agreement was formally
signed in December 1996, by representatives of the U.S. and Hong Kong governments. The new
agreement is intended to govern U.S.-Hong Kong extradition upon its adoption and to continue
to govern extradition after U.K. sovereignty lapses.

      The Administration intends to submit the U.S.-Hong Kong agreement to the Senate soon
for approval under treaty approval procedures. The Administration apparently has decided not
to regard the agreement as an executive agreement that was implicitly authorized in advance by
the U.S.-Hong Kong Policy Act. A Fugitive Offenders Agreement has been approved by the
PRC, through the JLG, and is pending before the Hong Kong Legislative Council (Legco).



   45
        Prepared by Larry Eig, American Law Division.
                                            CRS-20


      On January 7, 1997, a U.S. district court judge questioned the continuation of extradition
to Hong Kong without an agreement with the PRC. The Court treated the situation as one of
extradition to the PRC, and did not address the question of Hong Kong's separate and
autonomous judicial system. The Court's decision disallowed the extradition under the U.K.
treaty on the grounds that judicial proceedings could not be completed prior to Hong Kong's
transfer of sovereignty. But the decision also looked unfavorably upon extending extradition
obligations beyond that time by executive agreement with Hong Kong authorities. The
government has appealed the January 7 decision, and oral arguments are expected to be heard
by mid-March, 1997, at the latest.

       Whatever its legal fate, the January 7 decision embodies a wider concern about the ultimate
independence of the Hong Kong judicial system than was expressed by the Clinton
Administration in connection with its extradition negotiations with Hong Kong. In this regard,
it is important to note that U.S. extradition practice allows the Secretary of State to refuse the
extradition of an otherwise extraditable individual upon finding that extradition is being sought
to punish the individual because of his or her political views. The U.S.-Hong Kong agreement
is similar. The U.K.-U.S. extradition treaty, which heretofore has governed extradition to Hong
Kong, does not allow for a judicial role in assessing the motives of an extradition request or how
the judicial system will treat a person who is transferred. In a January 21, 1997 statement issued
in response to the January 7 court decision, a Chinese spokesman reiterated that the Hong Kong
courts will continue to apply Hong Kong law after July 1997 free from any interference, and said
that it was "groundless" to question the independent nature of the judicial system of the future.


MUTUAL LEGAL ASSISTANCE46

      The United States, like other States, historically was reluctant to aid in the enforcement of
foreign penal law. Nevertheless, the increase in transnational financial and drug crime has led
to a series of bilateral agreements, known as mutual legal assistance treaties (MLATs), to assist
foreign prosecutions. Even now, however, the shared interest in facilitating the prosecution of
transnational crime is viewed as being outweighed at times by unwillingness to provide
information to those with different standards of criminality and professional conduct.

      The Senate approved an MLAT with the U.K. during the summer of 1996. Unlike the case
with the U.S.-U.K. extradition treaty, we do not know of any exchange of Notes that apply the
U.K. MLAT to Hong Kong. Still, Hong Kong authorities have been directly negotiating a mutual
legal assistance agreement with the United States. An agreement apparently has been initialed
and is now undergoing review by PRC authorities. The Administration is likely to seek Senate
approval of the agreement through the treaty approval process.

      While Congress favored continued cooperation with Hong Kong under the U.S.-Hong
Kong Policy Act, concerns about entering into MLATs generally will resonate louder with
respect to Hong Kong the less independent the Hong Kong judiciary and law enforcement
authorities are perceived to be. MLATs themselves contain certain safeguards from abuse,
including provisions that allow a State to deny assistance when its security or similar national
interests would be compromised. In furtherance of these safeguards, Senator Jesse Helms has


   46
        Prepared by Larry Eig, American Law Division.
                                            CRS-21


successfully sponsored understandings that have been attached to several MLATs that allow
withholding assistance to States whose officials are corrupt. In the past, Senator Helms and other
members of the Senate Foreign Relations Committee have also worried that MLATs could be
used as "fishing expeditions," or could facilitate foreign investigations of activities we do not
regard as criminal--activities with respect to "capital flight," for example.


PRISONER TRANSFER

      Separate from the MLAT, the United States and Hong Kong have negotiated a prisoner
transfer agreement. If it follows the format of other prisoner transfer agreements, an individual
convicted of a crime by a party State may be transferred to the individual's home country to serve
out his or her sentence. But prior prisoner transfer agreements have required, and Federal statute
now requires, that the prisoner give prior consent to the transfer.


Issues for U.S. Policy

      The extradition treaty has already generated some controversy with potentially far-reaching
implications in light of the U.S. District Court's allegations that China's harsh, non-democratic
judicial system would be the judicial system likely to exist in Hong Kong after the 1997
transition.47 The Court's view raises some questions about the ability of U.S. policymakers to
effectively pursue policies designed to ensure Hong Kong's separate treatment.

      In the case of the prisoner transfer agreement, there may be implications for the United
States and China if prisoners being transferred to Hong Kong routinely refuse to give their
consent, as required by U.S. law. Given the U.S. district court case, future cases under the new
extradition agreement may also be challenged on the grounds that PRC itself, while having
approved the agreement, is not the signatory party. To resolve some of these difficulties, some
U.S. officials may advise pressing the PRC to give written notification of its approval for new
treaties and agreements, despite those agreements having been approved by China in the JLG
process.




      47
      Lui Kin-Hong v. United States, No. 96-CV-10849 (D. Mass., filed April 24, 1996),
Memorandum and Order, January 7, 1997, Tauro, C.J.
                                                      CRS-22


                           HONG KONG'S JUDICIAL STRUCTURE48


OVERVIEW

      Hong Kong's current judiciary is independent from the executive and legislative branches
of the government. The territory's most senior court is the Supreme Court. But decisions of the
Hong Kong Supreme Court are not final. Instead, the supreme court of appeal is in London in
the Judicial Committee of the Privy Council, which served as a general court of appeal for British
colonies. As citizens of a British Crown Colony, Hong Kong litigants who have exhausted all
local appeals have been able to appeal court decisions directly to the Privy Council. This will
not be the case after the transition to Chinese sovereignty.

      The Basic Law,49 which will serve as the de facto Constitution of the Hong Kong SAR,
deals with the HKSAR judiciary in Chapter IV, Section IV, articles 80-96, and also in articles
19 and 158.50 The Basic Law provides that Hong Kong's current judicial system -- that is, the
system of English Common Law -- will continue after the transition. It declares that the courts
are to exercise judicial power "independently, free from any interference," that trial by jury and
presumption of innocence are to be maintained, and that citizens will continue to have the right
to a prompt, fair trial (arts. 85-87).

      After a long delay, a new court dedicated to hearing human-rights related civil cases began
its operations in Hong Kong on February 17, 1997. All cases classified as "administrative law" --
challenges under the Bill of Rights, election petitions, habeas corpus applications, and so on --
are to be organized into one court list. Plans to include criminal cases involving Bill of Rights
issues were shelved in July 1996. Human rights advocates fear that the current overseer of the
special court, Mr. Justice Brian Keith, could be replaced after reversion with a judge who is not
sympathetic to human rights issues. 51



     48
       The sections below on the Judicial Structure of Hong Kong, the Judiciary Under the Hong
Kong Special Administrative Region, Arbitration, Contract Law, and related Areas of Potential
Concern for the United States, were prepared by Mya Saw Shin, Senior Legal Specialist, and Wendy
I. Zeldin, Legal Research Analyst, of the Law Library of Congress.
        49
       Adopted by the Third Session of the Seventh National People's Congress of the People's
Republic of China on Apr. 4, 1990. It was drafted pursuant to paragraph 3(12) of the Joint
Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and
the Government of the People's Republic of China on the Question of Hong Kong (Dec. 19, 1984).
For the English text of the Basic Law, see for example Ming K. Chan and David J. Clark, eds., THE
HONG KONG BASIC LAW: BLUEPRINT FOR "STABILITY AND PROSPERITY" UNDER CHINESE
SOVEREIGNTY? 165-209 (Armonk, N.Y., M.E. Sharpe, Inc. 1991). The English text of the Joint
Declaration is at 259-288.
    50
     The Joint Declaration deals with the judiciary in its Item 3(3) and in Annex I (Elaboration by
the Government of the People's Republic of China of Its Basic Policies Regarding Hong Kong),
Section I and especially III.
   51
      Court Dedicated to Human Rights Cases To Start Next Week, SOUTH CHINA MORNING POST, Feb. 10, 1997, at 5, retrieved
from FBIS on-line, Feb. 11, 1997.
                                              CRS-23


COURT OF FINAL APPEAL

       Both the Basic Law and the original Joint Declaration provide for a Court of Final Appeal
(CFA), to be established and located in Hong Kong, which will serve as the highest appellate
court for Hong Kong cases after July 1997. The CFA will have jurisdiction over everything
except "acts of State." However, "acts of State" will be construed under the vague wording of
article 19 of the Basic Law, not under the Common Law definition. This has raised concerns that
Chinese leaders may choose to interpret "acts of state" so broadly as to seriously limit the kinds
of cases that can be appealed to the CFA. Whenever questions arise in adjudicating such issues,
the courts must obtain a certificate from the Chief Executive on questions of fact concerning acts
of state, which will be binding. Before issuing the certificate, the Chief Executive must obtain
a certifying document from the Chinese Central Government (para. 3). Related to concerns over
acts of state, there is also concern about whether Chinese authorities will seek to use article 23
of the Basic Law to define a wide variety of possibly benign activities as crimes against the state,
and therefore outside the CFA'sjurisdiction. (Article 23 deals with "treason, secession, sedition,
subversion against the Central People's Government, or theft of state secrets...")

     In January 1997, it was reported that the drafting of the procedures and regulations for the
CFA were about to be completed.52 Also, the registrar of the Privy Council in Hong Kong has
set March 1, 1997, as the date on which London's Privy Council will stop accepting cases from
Hong Kong, although that date "is for guidance only and is not a guarantee that a case submitted
before that date will be heard before July 1, 1997." 53


BILINGUALISM

      The Basic Law prescribes that in addition to the Chinese language, English may also be
used as an official language by the executive authorities, legislature, and judiciary (art. 9). The
Common Law tradition in Hong Kong has been built in English, but 98% of Hong Kong
residents are Cantonese speakers and less than half of them are bilingual, which means that
statutes must be translated into Chinese if the Common Law is to survive in the HKSAR.54 Since
April 1989, new legislation has been drafted bilingually; a program to translate the laws in place
before that time began in 1987. The drafts must be approved by the Bilingual Laws Advisory
Committee, comprised of lawyers, linguists, and legislators, in order to be authenticated, then
confirmed by the Legislative Council and endorsed by the Executive Council.55 The drafting




   52
        Shih chieh jih pao [World Journal] (New York), Jan. 14, 1997, at A8.

  53
     Hong Kong Sets Cut-Off Date for Appeals to Privy Council in London, AGENCE FRANCE PRESSE,
Jan. 15, 1997, from Nexis, Curnws file.
   54
    Jonathan Karp, Torting in Tongues: Translating Law Into Chinese Proves a Massive Task, FAR
EASTERN ECONOMIC REVIEW 18 (July 8, 1993).
   55
        Id.
                                               CRS-24


team set the end of 1995 as a deadline for completing their task. The target date for adoption of
bilingualism in the courts is June 30, 1997. 56


ARBITRATION

      The PRC is a party to the 1958 New York Convention on the Recognition and Enforcement
of Foreign Arbitral Awards, and the agreement has been in force for Hong Kong.57 The
Convention, now incorporated into the Arbitration Ordinance, is extended to Hong Kong by
virtue of the United Kingdom's adherence, although Hong Kong itself is not a signatory. Now,
arbitral awards made in Hong Kong are enforceable in the PRC and vice versa. This will no
longer be true after reversion, since the Convention does not cover enforcement of awards within
one sovereign state. While the Hong Kong Government recognizes this problem and has tried
to put it on the agenda of the JLG for discussion with China, the issue's resolution does not seem
imminent.58

      Hong Kong enacted a modified version of the 1979 English Arbitration Act in 1982,59 and
in 1989 adopted the United Nations Commission on International Trade Law (UNCITRAL)
Model Law.60 At present, the Ordinance contains two regimes, one applying to domestic
arbitration (Part II) and another applying to international arbitration (Part IIA). Hong Kong has
also adopted its own set of domestic arbitration rules, which came into effect in April 1993.61
Hong Kong courts recognize and enforce arbitration awards made in those countries that are
signatories to the New York Convention. For international arbitration, the Hong Kong
International Arbitration Centre (HKIAC) recommends the use of its Procedures for Arbitration,
which includes UNCITRAL Rules.62 Those parties who do not wish to arbitrate under the
UNCITRAL Model Law for international arbitrations may opt out of it and into the domestic
regime set out in the Arbitration Ordinance. Parties choosing this route may also opt out of any
judicial review of the award pursuant to the terms of the Ordinance.




   56
        Xinhua in English, June 9, 1995, as carried in FBIS, June 13, 1995, at 94.
    57
      Arbitration (Parties to New York Convention) Order, subsidiary legislation to Chapter 341,
Arbitration Ordinance, 23 Laws of Hong Kong, at A1-A3.
    58
       P. Baldinger, section on "Hong Kong's Transition," in Hong Kong's Transition to Chinese
Sovereignty: Legal and Business Issues 19 (Washington, D.C., The US-China Business Council,
1996).
   59
         Cap. 341, 23 LAWS OF HONG KONG.
   60
         K. P. Berger, INTERNATIONAL ECONOMIC ARBITRATION 3 (Deventer, Kluwer, 1993).
        61
             E. E. Bergsten, comp. and ed., National Rules and Enactments: Hong Kong, 1.b, in 3
INTERNATIONAL COMMERCIAL ARBITRATION          (Dobbs Ferry, Oceana, 1996).
   62
         Id. at 9.
                                              CRS-25


      Commercial arbitration is an area in which Sino-British negotiations have been deadlocked
for some time.63 China has two options: either (1) developing domestic legislation placing Hong
Kong arbitral proceedings in a special category of special enforcement, which would enable them
to be brought before the PRC courts for enforcement, or (2) relying on a specific provision of the
New York Convention. This provision states that the Convention shall apply to arbitral awards
not considered as domestic awards in the States where their recognition and enforcement are
sought. China's record of enforcing foreign arbitration awards is described as spotty at best,
although Hong Kong courts have enforced sixty Chinese awards during the four years leading
up to 1996. 64


ISSUES FOR U.S. POLICY

      Although Hong Kong's judicial processes are to be completely separate from those in the
PRC, some wonder whether Chinese officials after the transfer will seek to have legislation made
by legislative bodies in the PRC applied to Hong Kong. In any case, Chinese officials may seek
to block judicial independence or influence judicial proceedings in Hong Kong through indirect
means, such as controlling judicial appointments or narrowing the jurisdiction of the courts. This
is of particular concern since about 25% of higher court judges either are now or will soon be
eligible for retirement.65 Other concerns relate to whether court proceedings will continue to be
conducted in English, as in the past.




   63
         SOUTH CHINA MORNING POST, Jan. 9, 1997, at 18, retrieved from FBIS online, Jan. 9, 1997.
   64
         P. Baldinger, supra note 1, at 20.

    65
      HK's Last Legal Year Under British Rule Begins Amid Exodus of Judges, AGENCE FRANCE
PRESSE, Jan. 13, 1997. Four higher court judges have indicated that they will quit and eleven others
are nearing retirement age.

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