Hong Kong’s role in the Indo-Pacific Economy

Consul General Kurt Tong

February 27, 2019
(As prepared for delivery)

Good afternoon, ladies and gentlemen.

First, allow me to extend my greetings to the alumni association of the Hong Kong
University of Science and Technology’s Kellogg Executive MBA Program. The
Kellogg program is world-renowned for its excellence, and it is a great pleasure and
honor to have you here today. Thank you for your support for today’s discussion.

I also want to thank The American Club of Hong Kong for providing this fantastic
venue. I can think of no better place to consider the past and future of Hong Kong’s
role in the Indo-Pacific economy than here in the Clipper Room, looking out over
Victoria Harbor, and standing in front of a portrayal of Hong Kong’s port in the 19th
Century. The American Club has been a steadfast and valued partner of our
Consulate for close to a century.

Hong Kong’s Economic History: A Cross-Roads for the Indo-Pacific

The U.S. Consulate in Hong Kong actually first opened in 1843, and we celebrated
our 175th anniversary last year. Brainstorming among the Consulate staff, we have
used our anniversary to reflect on what binds America so closely to Hong Kong, to
China, and to the rest of the Indo-Pacific region.

The United States has actually been trading with China for even longer than Hong
Kong has existed, starting with the Empress of China, which sailed from New York to
Canton in 1784. But the crucial point is that, from that time, though the opening of
our Consulate in Hong Kong, and on to today — when our trade with the nations of
the Indo-Pacific region has reached the remarkable sum of $1.8 trillion! — America’s
vision for the Indo-Pacific has remained one and the same: a vision of open ports
and open doors, and of peace and free commerce, with all nations committed to an
open and fair architecture for trade and investment in the Indo-Pacific.
And 175 years after we opened our Consulate here, no other city in Asia so closely
reflects those values, and that optimistic vision for free and fair commerce, as does
Hong Kong.

History really can be quite instructive. Looking at that history closely, it is noticeable
that commerce, trade and shipping interests have been at the absolute center of
U.S.-Hong Kong relations from the very beginning.

The opening of our Consulate in Hong Kong in 1843, in fact, coincided with a
noticeable flurry of U.S. diplomatic activity in East Asia, all of which was designed to
create new and expanded market opportunities for American traders, including the
signing in 1844 of the first-ever commercial agreement between the United States
and China. The Hong Kong Consulate was closely involved in supporting that
negotiation between Caleb Cushing, the first U.S. envoy to China, and Ki Ying, then
Viceroy of Canton, and you can still visit the granite table in the Kun Lam Temple in
Macau where the agreement was signed.

The so-called “Treaty of Wang Xia,” was notable at the time for according both
parties “most favored nation” access to each other’s market, reflecting the American
view that foreign traders should not seek to establish exclusive advantages in their
trade with China, or with any other economy in the region.

If you find this history interesting, I encourage you to visit the Maritime Museum and
check out their timely exhibit titled “Dragon and Eagle: American Traders in China.”
The exhibit provides texture to our understanding of just how central trade and free
commerce was to U.S.-China and U.S.-Hong Kong relations in those days – just as it
is today. It also mirrors how the United States of America is and has been, for
centuries, a Pacific nation – culturally, economically and politically.

Key Economic Policy Principles for the Indo-Pacific

Ladies and gentlemen: It is tempting to think of the Indo-Pacific region solely in
geographic terms – to picture in the mind’s eye broad expanses of ocean stretching
between the various islands and shores. This suggests separation, or isolation. But
the reality is that oceans do not divide us. If we add economics and people into the
picture, it becomes clear that those seemingly wide oceans actually bring us
together. We share the same currents, the same winds, and, most importantly, the
same goals of trade, peace, and prosperity.

This vision of the Indo-Pacific is about how common interests and values connect us,
bind us, and, in doing so, create boundless opportunities. This vision reflects the
United States role as the leading champion of free, fair, and reciprocal trade.

Before coming to Hong Kong, I personally spent a number of years working in

leadership roles in the Asia-Pacific Economic Cooperation organization, or APEC for
short.

APEC, has been working hard for years to achieve a shared vision of free and open
trade and investment in the Indo-Pacific region. The organization’s efforts have
inspired a number of important breakthroughs aimed at bringing the Indo-Pacific
region closer together, including a variety of bilateral and multilateral trade and
investment agreements among the region’s economies.

In 2011, as hosts of APEC, the United States outlined four overall objectives for the
region.

First, we called for an OPEN platform, one that allows for participation from around
the world – including economies not actually represented in APEC – in order to
maximize opportunities for entrepreneurs, investors, workers, and consumers
everywhere, from all parts of the planet.
Second, we called for a FREE regional platform and a system with as few barriers to
trade and investment as possible.

Third, we called for a TRANSPARENT platform in which the ‘rules of the road’ are
established in consultation with stakeholders and are known to everyone, regardless
of connections or country of origin. In the absence of transparency, corruption
flourishes, and regulations can be applied arbitrarily. That harms competition, and
the trust and confidence that are necessary for trade and investment to flourish. The
rules of the road should be known to all and applied equally to all.

Taken together, openness, freedom, and transparency help sustain the fourth
principle we outlined, which is that markets should be FAIR. The United States seeks
a level playing field and an environment in which businesses rise or fall based on
honest competition rather than government manipulation.

This principle is often undermined when governments directly own the means of
production, including via state-owned corporations. It can also be undermined if
nations take a predominantly mercantilist view, pushing their own exports while
constraining imports.

The United States, of course, was founded on the principle that individual citizens
actually occupy a higher moral and legal status than the government. As a result, we
tend to favor a minimized role for government in influencing private economic
activity.

We realize that some societies in the Indo-Pacific region, notably Mainland China,
may have a different point of view regarding the proper balance between the rights of
the government and the rights of individual citizens, or the rights of private
corporations.

But really the only way for trade and investment relationships to be fair and
reciprocal is for governments to get out of the way of business, as much as possible,
so that business can be conducted without being either helped or hindered by
governments.

I imagine that you all have been closely following the negotiations currently taking
place between the United States and China. Those talks are aimed at mapping out a
shared view regarding the scope and range of verifiable and enforceable structural
reforms that China can undertake. Such reforms could restore American confidence
that the U.S.-China trade and investment relationship can be made fair and
reciprocal, despite the many challenges at hand.

I am not here to speak about that agenda today, or to try to predict our chances for
near-term success. But I am happy to say that the United States is committed to
enhancing its economic relationships with all partners in the region that can embrace
an open, free, transparent and fair vision for Indo-Pacific trade.
My boss, Secretary of State Pompeo, likes to say that the United States practices
“partnership economics,” as evidenced by our enthusiasm for win-win, open-market
trade and investment arrangements.

The United States already has three high-quality and mutually beneficial Free Trade
Agreements with partners in the Indo-Pacific, along with fourteen Trade and
Investment Framework Agreements. And we are working hard to update our
investment and trade agreements to make them more useful to workers and
businesses, and better suited to 21st Century market realities. This work includes the
updated agreement with the Republic of Korea, for example, and the recently signed
U.S.-Mexico-Canada trade agreement.
Hong Kong’s Strengths Flow from Free Economy Principles
So, ladies and gentlemen, with all that in mind, let me turn now to the matter of Hong
Kong and its role in the Indo-Pacific economy.

I think it is evident that Hong Kong’s abiding strengths flow from its fierce embrace of
free economy principles, including the rule of law.

That situation puts Hong Kong closely in tune with America’s international economic
policy priorities.

We all know about Hong Kong’s famously consistent gold-star rating from the
Washington-based Heritage Foundation, which has ranked Hong Kong as the freest
economy in the world for 25 consecutive years, including every year since the
establishment of the Special Administrative Region.

While some people criticize the Heritage Foundation’s methodology as putting too
much emphasis on low tax rates as a determinant of economic freedom, it is notable
and positively affirming that Hong Kong also ranked 4th this year in the World Bank’s
more broadly calculated Ease of Doing Business Index.

Indeed, even considered among its peers in the relatively liberalized Indo-Pacific
region, Hong Kong stands out for its dedication to practicing free and open trade,
with negligible tariff or non-tariff barriers.

But Hong Kong’s advantages go far beyond low tariffs and low taxes. It is also very,
very important to Hong Kong’s success that its legal system continues to be based
on common law principles akin to British law. Hong Kong judges are independent,
and final judgments are respected and enforceable. Contracts signed in Hong Kong
can be depended upon to be fair and reliable. Similarly, property rights in Hong
Kong, including intangible rights like intellectual property rights, are well protected,
both in law and in practice.

Also very important in the modern era is the fact that Hong Kong maintains an open
Internet. Hong Kong is not subject to the Mainland’s invasive cyber-security laws,
and persons in Hong Kong can access Internet content not available in the Mainland,
including content offered by U.S. media and technology firms.
Government regulation of the economy in Hong Kong has remained relatively non-
invasive and non-discretionary. This is because Hong Kong’s regulatory system is
aimed at facilitating business activity rather than controlling it. Hong Kong ranks a
very respectable 14th in Transparency International’s Corruptions Perceptions Index,
reflecting several decades of concerted effort to stem corrupt business practices and
corruption in government. The recent establishment of a meaningful competition
policy authority in Hong Kong could lead to even further progress in this regard.

Ladies and gentlemen: After three years living here in Hong Kong I have firmly
concluded that it is these intangible factors – the city’s economic policy philosophy,
rule of law, and good governance – that are the keys to Hong Kong’s economic
success, both in the past and in the future.
It is certainly nice that Hong Kong has accrued budget surpluses that have allowed it
to make generous investments in infrastructure. But airports and ports and bridges
and subways would not be enough by themselves to overcome Hong Kong’s small
market size and weaknesses in natural resources and land scarcity. It is Hong
Kong’s operating philosophy that has led to its impressive competitiveness.

These intangible assets of Hong Kong, its free economy principles, are the main
wellspring of the international community’s respect for the city and give it the ability
to punch above its weight in global affairs.

Hong Kong, for example, has historically had a strong voice in the World Trade
Organization. It is also a much-respected member of the global Financial Action
Task Force and the Financial Stability Board.

It is also these core values that have enabled Hong Kong to attract new international
partners in bilateral trade agreements, such as the one it just signed with Australia.

Next week, when the Asia-Pacific Council of American Chambers of Commerce

gathers here in Hong Kong for its annual meeting – as well as to celebrate the 50th
anniversary of the American Chamber of Commerce in Hong Kong – I expect that
the delegates assembled from around the Indo-Pacific region will talk a lot about how
Hong Kong’s core values have made it such a vibrant place for international
business.

The Abiding Strength of U.S.-Hong Kong Economic Ties

Naturally, then, given everything I have said thus far about Hong Kong and the
United States, it will not surprise you when I tell you that the United States sees
Hong Kong as a highly valued partner precisely because of its free economy
principles, founded as they are upon strong respect for the rule of law, and
buttressed by an independent judiciary to interpret those laws.

Recently I have seen fit to remind people in Hong Kong of the continuing importance
of the U.S. economic and business relationship to both of our peoples.
The United States is Hong Kong’s second-largest trading partner beyond the
Mainland. Two-way trade in goods totaled U.S. $37 billion in 2018, with trade in
services contributing tens of billions more to both economies.

As in the 19th Century, Hong Kong remains an important nexus for merchandise
flowing between the United States and China. In 2016, approximately 9% of China’s
exports to the United States, and 7% of China’s imports from the United States,
flowed through Hong Kong. Some 43% of Hong Kong’s total trade, in fact, consists
of re-exports going between the two countries. With trade and logistics accounting
for more than 20% of the value added to Hong Kong’s economy, I think it is safe to
say that trade with the United States significantly benefits the city.

As for direct investment, in 2017, the stock of direct investment from the United
States into Hong Kong increased about 18%, to an impressive $81 billion. More U.S
companies have established regional headquarters or offices in Hong Kong than
have companies from any other country, accounting for close to one-fifth of all
foreign firms conducting regional operations from Hong Kong in 2018.

As for finance, nearly every major U.S. financial firm maintains a major presence in
Hong Kong, with hundreds of billions of dollars in assets under management. Hong
Kong is also a major location for U.S. legal and accounting services firms.

In fact, taken together in total, the Hong Kong government estimates that U.S. firms
employ some 101,000 people in Hong Kong. I think that is good news, especially
since U.S. firms are among the city’s most popular employers. One survey showed
that 13 of the 75 most popular places to work in Hong Kong are U.S. firms.

And thinking forward, toward the 21 Century economy, Hong Kong’s close
relationship with the United States is also helping to shape the city’s economic
future. Americans account for more than 20% of all non-Hong Kong entrepreneurs in
the city, contributing more than any other country, including Mainland China. U.S.
venture capital invested heavily in the famous Hong Kong “unicorn” start-ups
GoGoVan and WeLab. And the leaders from both of these companies studied in the
United States before setting up shop in Hong Kong.

Indeed, education and academic research are also very important areas for U.S.-
Hong Kong collaboration. About 8,000 Hongkongers study full-time at the university
level in the United States. And there are numerous collaborations and exchange
programs between top U.S. universities and Hong Kong institutions, including in
areas Hong Kong is looking to develop into key economic drivers.

All that private sector cooperation that I have just mentioned is matched by extensive
government-to-government cooperation, supporting our private sector economic ties.

For example, although it is not widely advertised, you might be interested to know
that U.S. federal law enforcement agencies work closely with the Hong Kong
Disciplined Services to find illegality in the economic sphere.
Working together, Hong Kong and the United States have done a lot to disrupt the
flow of contraband – including both counterfeit goods and narcotics – between East
Asia and the United States. Over the past year alone, U.S. government information
regarding shipments entering Hong Kong, in fact, has generated 40 arrests and
multiple seizures of contraband, to include 485 pounds of illegal drugs, more than
40,000 counterfeit items, and more than 6,500 firearm parts and ammunition. That’s
clearly a very good thing. Hong Kong, meanwhile, has expanded its assistance to
stop millions of dollars of illicit fund transfers from U.S. victims to and through Hong
Kong banks.

We have also redoubled our efforts together on sanctions enforcement and

enforcement of export controls, which is important to our shared strategic goals in
the Indo-Pacific region.

But getting back to my main point: All of this cooperation, in both the private sector
and the public sector, is made stronger by Hong Kong’s reliability as a city with good
governance and the rule of law.

The Hong Kong Policy Act and Concerns About the City’s Autonomy
So, with that positive picture in mind, let me shift direction for a few moments to
discuss some of the risks facing Hong Kong’s economic and political future, as well
as the future of its relationship with the United States, and with the rest of the
international trade and investment community.
The official, government-to-government relationship between the United States and
Hong Kong is governed by the Hong Kong Policy Act, and is based upon the
continued substantial maintenance of the “one country, two systems” framework, and
the existence of a high degree of autonomy for Hong Kong, as called for in the Basic
Law. The Hong Kong Policy Act establishes the policy of the U.S. government to
treat Hong Kong as a non-sovereign entity distinct from China for the purposes of
U.S. domestic law, based on the principles of the 1984 Sino-British Joint Declaration.

To date, the United States has observed that Hong Kong, as a general matter, has in
fact maintained a high degree of autonomy under the “one country, two systems”
framework, at least in most areas. And that degree of autonomy has been
considered sufficient to justify continued special treatment of Hong Kong by the
United States, for the purposes of U.S. law as well as bilateral agreements and
programs in such areas.

Clearly, the application of the Hong Kong Policy Act, and the resulting special
treatment of Hong Kong under U.S. law, has been a big success story over the past
two decades, greatly facilitating U.S.-Hong Kong cooperation. The U.S government’s
current differential treatment of Hong Kong covers quite a number of important
areas, including law enforcement, export controls, visa rules, and the treatment of
cross-border investment.

But to be honest, ladies and gentlemen, certain recent events in Hong Kong have
raised cautionary flags for some U.S. observers, as they consider the sustainability
of Hong Kong’s high degree of autonomy going forward.
We are now in 2019, and we have all had fun heralding the arrival of a new year,
under both the Gregorian and lunar calendars. New Year celebrations are always a
hopeful time, and I remain hopeful that 2019 will be a good year.

Last year, 2018, however, was unfortunately not a good year for Hong Kong’s history
in terms of the maintaining of its autonomy under “one country, two systems,” as it
witnessed a number of unfortunate “firsts” in that history: Hong Kong’s first banning
of a political party; the first foreign journalist ejected from the city; and the first time
Hong Kong has disqualified a large number of political candidates for their political
views, among other negative developments. In all of these cases and trends, the
Mainland Central Government appears to have been intimately involved in the Hong
Kong Government’s decision-making.

Now, I am not here to tell you that the sky is falling. Even skeptics in the United
States recognize that Hong Kong remains very distinct and different from the rest of
China. And I have already described Hong Kong’s considerable competitive
advantages – based as they are in the city’s autonomy, its rule of law, its
independent judiciary, and its free economy principles.

But I would not be doing my job as a diplomat if I were not honest enough to share a
note of caution about the future.

Now, when I express my worries about the status of Hong Kong’s autonomy I
sometimes get pushback from people saying that political autonomy and freedom of
expression and other such concerns do not really matter to the business community.
Neither the Chinese business community nor the foreign business community, they
tell me, really cares about such issues. And as long as business decision-makers are
happy, they say, Hong Kong’s economic future will remain bright.

I’m actually not so sure about that. I’m not confident that politics can be so neatly
divorced from economics in how this city runs.

In a general sense, for example, a narrowing of Hong Kong’s political and

democratic space is likely to adversely impact the city’s marketplace for ideas and
innovation.

But there are also other, more specific ways that the Mainland Central Government’s
desire to influence and control political conversations and events in Hong Kong could
negatively impact the functioning of the economy, and the international business
community’s role here.

Immigration and visas, for example, are one place where politics and business can
come into contact – as we saw last year. If foreigners’ residency status in Hong Kong
were to become broadly subject to political considerations, as is often the case in the
Mainland, it would certainly impact the business environment here.
Similarly, regulation of the Internet and cyber-space is an important area where
business interests, and political and security interests, intersect. Maintaining Hong
Kong’s freedom of the Internet and its freedom of expression is quite critical to
realizing the city’s positive ambitions to be an important center for innovation in
information technology and cyberspace.

Other important areas of potential confluence between politics and economics are
government regulation, government procurement, and financial market supervision.
To date, when potential foreign investors have asked me whether Mainland-Hong
Kong political considerations play any role in the local government’s procurement
decisions, I have happily been able to tell them that I am aware of no such cases. It
is important to maintain that positive aspect of the Hong Kong business environment.
Similarly, I know that portfolio investors watch closely to see whether Red Chip
companies are allowed to cut any corners in their financial reports supporting their
Hong Kong market listings. It is important for financial reporting rules to continue to
be evenly and strictly applied.

Indeed, financial market transparency, open access to business and government

information, and a fair playing field are some of the key foundations on which Hong
Kong commerce is built. Hong Kong’s fair and independent judiciary reinforces that
system. We all want this system to continue to prevail.

I have been sometimes asked why, as America’s representative in Hong Kong, I

occasionally engage in dialogue with Mainland Central Government officials in
addition to my Hong Kong Government counterparts.

For my part, one purpose of such conversations is to point out to Mainland

policymakers the risks that ongoing political tightening poses for the realization of
Beijing’s own goals for Hong Kong’s contribution to Chinese economic development.
I let them know that, in my view, there needs to be consistency between the political
and economic institutions of the city in order to sustain the confidence of the
international business community, as well as Hong Kong’s foreign government
partners, in the city’s future. Absent a strong international presence in Hong Kong’s
economy, it is clear, the city would offer much less value to the rest of China.
Vigorous Use of Hong Kong’s Autonomy Will Help China and the Region
Let me close on a more positive note, by considering the great potential that exists
for Hong Kong to continue to play a positive and leading role in the national, regional
and global economy.

As I have stated before, my hope is that Hong Kong will make full use of what I call
its “demonstration power” — its power to show just how much prosperity is possible
when global best practices are applied, in China as they are elsewhere.

I have also previously referred to the maintenance of Hong Kong’s high degree of
autonomy under the “one country, two systems” framework as a “use it or lose it”
proposition.
I think it is important for Hong Kong to use the autonomy it has been granted to
further strengthen its value proposition for the Indo-Pacific, including China. Using
Hong Kong’s autonomy energetically will also further strengthen that autonomy,
creating a positive and self-reinforcing cycle of confidence.

There are opportunities out there, regionally and globally, for private businesses as
well as government officials who are willing to be bold. Hong Kong’s new free trade
agreements with ASEAN, Georgia, and Australia are clear examples of this kind of
creative and outward-thinking approach. But there are still more ways that Hong
Kong could concretely demonstrate its commitment to open markets, for instance by
joining additional international trading arrangements, or by hosting substantive high-
level APEC meetings and initiatives. Hong Kong could send a very positive message
just by signing up to APEC’s existing data privacy principles, thereby showing its
determination to follow global best practices for Internet governance and cross-
border data flows.

The Hong Kong private sector, meanwhile, can show off the city’s strengths by
continuing to make proactive deals with counterparts from all directions – including
partners in the United States, China and other jurisdictions in the Indo-Pacific region
– while making full use of the city’s strengths, as reflected in Hong Kong’s rule-of-law
and core values.

I know that the trade policy friction between the United States and China has created
some nervousness here in Hong Kong.

Certainly both the U.S. and Chinese governments are now working very hard to try
to improve and re-shape our economic relationship, to make it fairer to both nations.

But Hong Kong, I believe, can help resolve those problems as well. In fact, I think
that the current tense situation presents a real opportunity for Hong Kong to
demonstrate its lasting value, as a transformative portal linking China to the rest of
the world economy.

Such a contribution is possible because of Hong Kong’s rules-based approach to

commerce and regulation, its fiercely independent judiciary, its freedom of
expression and of the Internet, and its highly liberal trade and investment and tax
policies.

Hong Kong, in fact, is the visible proof that an economy can be part of China, but
also be consistent with global best practices. China too can become a place that
achieves prosperity through “win-win” business solutions, without a lot of state
intervention. China too, we hope, can be a market that protects private property, and
it can be a place where government authorities respect the rights of investors to
make free decisions in a transparent system.
Last week, in presenting the interesting new Great Bay Area initiative announced by
Beijing, the Hong Kong government said, correctly, that Hong Kong’s “economic,
legal and social systems are different from those of the Mainland.”

As a foreigner, I can be less polite, and say that those systems are not just
“different,” but actually, from a global point of view, “better!”

Last year, China celebrated the 40th anniversary of its crucial “reform and opening”
policy changes, which allowed China to catch up technologically and rejoin the global
economy as an important international partner. That process of “reform and
opening,” however, remains incomplete.

Looking toward the future, I hope and believe that Hong Kong can once again point
the way, for China and for the Indo-Pacific region more broadly.

Hong Kong’s economy has grown rapidly, and achieved and maintained its
prosperity, precisely because it has been free, open, transparent and fair.

With effort and courage, Hong Kong’s special economic contribution to the nation
and the region can continue and expand in the decades to come.