As export markets for U.S. businesses, Hong Kong and Taiwan share enough similarities that they’ve often been considered together in discussions about trade with the Pacific Rim. But due to changing U.S.-China relations, these significant trading partners are headed in opposite directions, which is likely to require an ongoing evolution by people who manage export business.
Source: BIS
Markets compared
Here’s some quick data for perspective:
Area:
- Hong Kong: 1,063 square miles
- Taiwan: 13,976 square miles
Population/Density:
- Hong Kong: 7.5 million / 17,614 per sq. mile)
- Taiwan: 4 million / 1,683 per sq. mile)
Per capita Gross Domestic Product:
- Hong Kong: $62,839 (10th)
- Taiwan: $56,959 (13th)
Source: Wikipedia
2020 Rank among U.S. trading partners (two-way trade):
- Hong Kong: 22
- Taiwan: 9
2020 Value of U.S. Exports
- Hong Kong: $36.3 billion (15th)
- Taiwan: $39.1 billion (10th among export markets)
2020 Trade balance:
- Hong Kong: $16 billion surplus
- Taiwan: $27.6 billion deficit
Source: Office of the U.S. Trade Representative
Hong Kong
U.S. trade with Hong Kong is on a downward curve due to global politics.
Until recently, Hong Kong and China were treated as separate entities for export control. That was to Hong Kong’s advantage; many goods and services that couldn’t be exported to China could still be sent to Hong Kong without a license. But that was based on the “one nation, two systems” doctrine China promised when taking over the territory in 1997 from British control. In 2014, the Chinese government claimed “comprehensive jurisdiction” over the Hong Kong territory, and began a steady process of eliminating its political and economic distinctions.
In response to China’s violent democratic crackdowns in Hong Kong in 2020, the U.S. Bureau of Industry and Security (BIS) “suspended all license exceptions for Hong Kong that provide differential treatment as compared to those available to China.” Five months later, in December 2020, BIS went further, ruling that Hong Kong would no longer be defined as a separate entity from China under EAR.
BIS explained:
“Pursuant to E.O. 13936, BIS amends the EAR to remove provisions that provide differential and preferential treatment for exports to Hong Kong, reexports to Hong Kong and transfers (in-country) within Hong Kong of all items subject to the EAR when compared to the treatment for such transactions to or within China. As a result of this rule, Hong Kong will be treated the same as China under the EAR except in certain circumstances that do not provide preferential treatment. The references to Hong Kong that remain in the EAR support U.S. national security and foreign policy objectives, and recognize certain differences that remain in how trade is processed within and through Hong Kong.”
While 98.6 percent of U.S. exports to Hong Kong in 2020 still didn’t require a BIS export license, the number of denials where licenses were required grew significantly – from just three in 2016 to 50 in 2020.
Although increased export controls mean additional license requirements, the new policy hasn’t yet significantly changed the types of commodities U.S. businesses sell in Hong Kong. The leading categories of goods, as defined in the U.S. Harmonized Tariff Schedule, account for 80 percent of total U.S. exports, according to a statistical analysis of trade with Hong Kong from BIS:
- Machinery & Mechanical Appliances; 45.8 percent of exports
- Stone, Glass & Semiprecious Metals; 12.3 percent
- Chemicals, Plastics, Leather Products; 7.7 percent
- Transportation equipment; 7.2 percent
- Advanced instrumentation; 6.9 percent
Agriculture accounts for another 9.2 percent. Notably, art and antiques represent 4.4 percent of U.S. exports to Hong Kong – and 12.9 percent of such U.S. exports anywhere in the world.
When viewed more narrowly by Export Control Classification Number (ECCN), the top licensed exports, by value, were:
- Telecommunication equipment not controlled ECCN 5A001 (ECCN 5A991)
- Electronic components (3A001)
- Systems, equipment and integrated circuits for information security (5A002)
There are, essentially, no exports to Hong Kong under International Traffic in Arms Regulations (ITAR).
While exports to Hong Kong rebounded by more than 25 percent in 2021 – the largest increase in more than 30 years – that’s attributable to early recovery from the pandemic. With total exports still below pre-pandemic levels, the big gain doesn’t represent a change in the longterm downward trend.
The most important thing to know about exporting to Hong Kong is that it is now no different than exporting to any other destination within China – an environment of increasing EAR restrictions, licensing requirements and brittle diplomatic relations.
Taiwan
Trade with Taiwan (officially the Republic of China, but not recognized as such by either the People’s Republic of China or the United States) has been growing gradually but steadily for more than a decade. Taiwan continues to be treated as a separate export destination from China, and the export environment has remained relatively stable.
Taiwan is the world leader in production of semiconductor chips, and a good portion of U.S. exports support that and other like industries. More than 79 percent of the value of total U.S. exports to Taiwan are in five categories, according to a statistical analysis of trade with Taiwan from BIS:
- Machinery, semiprecious metals, minerals; 35.9 percent
- Chemicals and plastics; 13.8 percent
- Minerals; 11.6 percent
- Transportation equipment; 10.3 percent
- Advanced instrumentation; 7.5 percent
Agriculture accounts for another 10.6 percent.
Overall, 97.4 percent of U.S. exports subject to the EAR to Taiwan did not require a license. Among the most commonly licensed items were semiconductor manufacturing equipment (ECCN 3B001), military gas turbine engines and components (9A619), and military aircraft and components (9A610). In addition, about $900 million of exports, or 3.0 percent of the total, were subject to the ITAR.
In the United States, there has been a push to increase those military sales as a defense against China’s longstanding position that it still maintains possession – if not control – over Taiwan. There is also a strong political movement in the United States to support Taiwan’s independence by strengthening bilateral economic cooperation. The roadmap for this is moving beyond the Trade & Investment Framework Agreement that currently governs bilateral trade, and enacting a free trade agreement. It would be a complex process, “given the unofficial status of U.S. diplomatic relations with Taiwan,” according to March 2022 brief from the Congressional Research Service.
One of those complexities is Taiwan’s economic dependence on China. While Taiwan and China may argue about the island nation’s independence, Taiwan sent 42 percent of its total exports – valued at more than $100 billion – to China and Hong Kong in 2021, capping a decade of nearly unbroken growth. So, while U.S. goods flow relatively freely to Taiwan, Taiwan’s goods flow with similar ease to China.
This creates a potential security risk to the U.S. that’s covered by Commerce Department’s “Foreign Produced Direct Product Rule” (FDP) – the regulation used to prevent U.S. technology from reaching Chinese telecommunications giant Huawei Technologies over concerns that its electronic products could pose a cybersecurity threat to the United States.
Put simply, the FDP places EAR-based export controls on certain products with security implications that are produced outside of the United States using U.S. technology, software, or equipment. It’s designed to prevent the use of foreign companies as proxies for sales of controlled goods. The upshot is that the biggest risk for exporters of technology to Taiwan is the possibility that regulated products or services could end up benefiting mainland China.
While trade relations with Taiwan are likely to continue growing stronger, the push and pull between the United States and mainland China requires extra care for exporters. For example, an export license application to Taiwan is likely to be returned if it’s filed under Republic of China – Taiwan’s official name.
Do you have questions about export compliance in regards to Hong Kong or Taiwan? Visit www.learnexportcompliance.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.