Trump made a tough call to finally arm himself with bipartisan opposition towards China, by signing a controversial bill on Hong Kong on Wednesday. This was good news, both for Republican hawks, human rights defenders and proponents of democratic change. Curiously enough, this happened on the same day that it became clear the economy had taken its shoulder in the trade war – GDP being revised for Q3, from a preliminary value of 1.9% to 2.1% QoQ.

Note the sarcastic (?) wording of the reason for signing – “out of respect for President Xi and China”. Although hilarious, Trump’s decision drove China into a frenzy, as seen from the Chinese Foreign Ministry statement in which it called the US actions “hegemonic” and promised to “resolutely counteract it”. The escalation over the painful Hong Kong issue basically killed any optimism left for the “Phase one” trade deal. However, the stock market’s refreshing historical peak may indicate a conviction that China is losing its leverage over the US and that investors are focusing instead on economic momentum.

What is the Hong Kong Bill?

This is an amended version of the Hong Kong Policy Act of 1992, which allows the US to directly assess political developments in Hong Kong. That is, no longer qualify the protests as “internal affairs” of China, which imply no interference. If the United States believes that Hong Kong is losing a sufficient degree of autonomy within the framework of “one country, two systems,” then the US authorities can suspend China’s special trade status. For example, due to the suppression of protests by the Chinese authorities, and as a result creating an obstacle to democratic change the US could remove China’s special trade status. The special trading status frees Hong Kong from the restrictions of mainland China in trade with the United States.

In accordance with the law, the US Department of Commerce has 180 days to prepare a report to assess whether China used special trade status to import advanced “dual-use” technologies. By which it means technologies that have both commercial and military applications.

Note that the bill considerably expands Trump’s toolkit for countermeasures and sanctions against China. It not only complicates determining the space of outcomes for various “event risks” but also ensures Hong Kong could become the second biggest front of the US-Sino war.

It is important to note that the Senate approved the Hong Kong bill without opposition on November 20, with a majority that prevents the president from vetoing (veto-proof majority). This is probably why there was a high probability that Trump would not go against his party and would be forced to sign a bill, which produced little surprise on the markets.

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