The "Made in China" security laws imposed on Hong Kong are creating new flashpoints between China and the US that threaten to worsen an already tense and deteriorating relationship between the two economic super powers.
The new security laws, which immediately triggered fresh protests and arrests in Hong Kong on Wednesday, have already prompted Washington to end Hong Kong’s special treatment under US law, which allowed the former British colony to be regarded as if the 1997 handover to China had never occurred.
The Trump administration this week also imposed new restrictions on US exports of defence and equipment and some technology products to Hong Kong – the same types of restrictions that already applied to mainland China – after earlier cancelling visas for Chinese students and researchers and threatening sanctions on Chinese government officials and financial institutions with a role in devising or implementing the laws.
Combined with congressional and bi-partisan legislation signed by Donald Trump last week that would impose sanctions on Chinese officials and companies seen responsible for the treatment of Uighur Muslims in the Xinjiang region, the prospect of an escalation of hostilities appears very real.
The two countries have also slapped travel bans on each other in response to the coronavirus pandemic. Both have expelled each other's journalists, and the US has targeted the big Chinese technology companies with sanctions (most notably Huawei) on security grounds, has cut off access to US computer chips, is cracking down on the use of Chinese equipment in its electricity grid and is imposing its own audits on Chinese companies listed in the US, among other measures.
In the background, of course, is Trump’s much-touted trade deal, which – despite his borderline racist references to the Chinese origins of the coronavirus -- he regards as vital to his waning re-election prospects.
He places so much weight on that deal and its popularity in agricultural states that, according to former national security adviser John Bolton, he asked Xi Jinping to help him win re-election, pleading with him to live up to the terms of the trade deal the leaders signed in January and buy more US agricultural products.
Alas, that deal isn’t quite living up to Trump’s expectations. Some, indeed, have described it as a “lemon".
Bloomberg this week reported that at the end of May, China had purchased only about 19 per cent of the $US170 billion-plus of Chinese products it has to buy to meet its commitments to lift US purchases by $US200 billion ($289 billion) by the end of next year, compared to the levels spent in 2017.
While China’s purchases of US goods have been rising, and it has the excuse of the coronavirus for its tardy start to the program, it does seem unlikely that it will be able to meet its commitments, even with the threat of more tariffs on top of the $US360 billion already in place.
A failure by China to deliver on the trade deal would add to the raft of pressures on the relationship with the US, even as the looming US election is causing Trump and his Democratic opponent Joe Biden to compete on the toughness of their anti-China platforms.
White House trade adviser Peter Navarro caused sharemarkets to shudder last month when he said the trade deal was over; a claim he subsequently backtracked from, and which prompted Trump to tweet that the deal was "fully intact".
The markets have shown extreme sensitivity to the fairly volatile course of the trade relationship. With the accelerating spread of the coronavirus in the US and its economic fallout, trade has probably been the other big issue threat to markets’ stability.
Another threat might be developing in Hong Kong now. There will be extreme pressure on the Trump administration to take tougher measures in response to the security laws and what appears the inevitable conflicts between protesters and China’s security forces.
More than 300 people were arrested after thousands took to the streets protesting a day after a new national security law was passed in Hong Kong.
The US option of first resort tends to be financial sanctions, exploiting the dominance of the US dollar within the global financial system and economy. US Congress passed legislation, with bi-partisan support, on Wednesday that would impose financial sanctions in retaliation for the introduction of the security laws.
While it is conceivable the US could cut off Hong Kong’s access to the US dollar – which because of Hong Kong’s central role in the financing of China's trade with the rest of the world would have dramatic effects on mainland China –, the more likely course would be to extend and put in action the proposed sanctions on individuals and organisations associated with the security laws.
The outcomes might be quite similar. By barring financial institutions from providing services to sanctioned individuals or companies, with the threat that the banks themselves would be denied access to the US financial system and dollar funding, the US could destabilise China’s largest banks.
It could also shut down dealings with China by the big Western banks, which would have to take an extremely conservative approach to lending to Chinese individuals or companies in case they breached the sanctions. Banks have been fined massively for breaches of US sanctions – BNP Paribas handed over $US8.9 billion in 2014 for dealing with sanctioned countries.
The pressure on Trump to sign the bill Congress passed on Wednesday will mount, regardless of whether that jeopardises his trade deal. Imposing the sanctions would dramatically widen the fissures in the relationship between the US and China.
Trump ruminated earlier this year on the option of a "complete decoupling" of the US and Chinese economies.
If that was to occur, the catalyst might well be China’s decisions to renege on its 1997 commitment to preserve the "one country, two systems" framework under which Hong Kong had operated since the handover.