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U.S., China tensions rise, as more American companies 'risk map their strategies in Hong Kong'

President Donald Trump is expected to make an announcement regarding relations between the U.S. and China on Friday. Arthur Dong, Georgetown University Professor, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss that more.

Video transcript

ALEXIS CHRISTOFOROUS: Well, today President Trump is expected to provide more details about the fate of a US-China trade deal. This comes after China voted to override Hong Kong's autonomy yesterday with a new national-security law.

Here to discuss this is Georgetown Professor Arthur Dong. Professor, thanks for being with us today. I would love to get your thoughts on what's happening right now with regards to Hong Kong.

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I mean, Hong Kong is seen as a financial hub. It has always had a special trading status with the US. That may now go up in smoke. What are the ramifications if this national-security law were to go through? What are some of the ramifications for the relationship between the US and Hong Kong?

ARTHUR DONG: This is a very serious matter, Alexis. What China has essentially done was take the basic law that they had signed in 1997 as a part of the handover of Hong Kong from Great Britain back to China. And the rule of law that has prevailed in Hong Kong, this notion that Hong Kong would be treated independently under one system but two different countries and two different systems, has really supported the success of Hong Kong as a global trading base as well as one of the world's great financial centers.

Well, that was pretty much put through the shredder yesterday as China's People Congress has enacted a new regulation, which is the Security Act of Hong Kong, pretty much sending a message to not only Hong Kong but the rest of the world that they are going to not only, you know, be less in terms of conservative towards their approach Hong Kong but actually now consideration of actual martial law as well as the imposition of greater military authority over Hong Kong. Now, this is being seen as a very provocative act by the president as well as there's a great deal of bipartisan support here on Capitol Hill where there's going to be a rising chorus of opposition to China's latest move.

BRIAN SOZZI: Professor, what should-- what should American businesses expect that are-- those companies that are doing business in Hong Kong, what should they expect this summer? You know, I recall last summer you had the protests, a pretty significant event, and it hurt a lot of global multinational businesses.

ARTHUR DONG: This is-- Brian, that's a great question. This is only going to accelerate the trend whereby American companies and all the American investment banks who have a great presence in the Hong Kong marketplace are going to have to now risk map their strategies moving forward.

Now up until this point, China was rather restrained in terms of what it was going to do, although it sent an implied message that if things fall apart, we're going to roll the tanks. And now it's become very clear that that possibility and that prospect is going to be a very, very real option that's being put on the table.

So American companies that have headquarters-- many of them-- European companies, Western companies, American companies-- have their regional Asia headquarters based in Hong Kong. A lot of them are now going have to risk map the possibility of exiting Hong Kong and looking for a new home, possibly places like Singapore.

ALEXIS CHRISTOFOROUS: Do you think-- I mean, President Trump has threatened-- has gone through with and now is threatening another round of tariffs against China. Do you think that this just makes that more likely, the fact that China is doing this to Hong Kong? And what other tools might President Trump have at his disposal other than tariffs?

ARTHUR DONG: You know, President Trump has sort of treaded carefully with regard to this question of Hong Kong's, you know, freedoms and the existence of a separate system from China. We're going to see the acceleration. In other words, he's going to throw a log on the fire now, and he's got several tools that are at his disposal, including denial of Chinese listings on American stock exchanges, including increasing the amount of scrutiny that's being placed on companies such as Alibaba that are already listed in the United States in terms of their accounting transparency.

We're going to talk about perhaps increased tariffs, and most importantly, the revocation of the special privileges that Hong Kong has year after year with regard to tariffs. In other words, even though we've imposed tariffs on China, Hong Kong largely has escaped that, and China has been channeling and using Hong Kong as a base in which to funnel goods through Hong Kong and enter the US market tariff free. So that special exemption is going to disappear, and as a result, that is going to be the catalyst that sort of resets the entire financial arrangements and all the benefits that Hong Kong has enjoyed vis-a-vis the United States.

BRIAN SOZZI: Professor, handicap this for us. If President Trump does enact new tariffs on China, do you think China would retaliate? Look, their economy has just restarted. Things have started to come back to life after the coronavirus quarantine. Do they want to go back and get in this tit-for-tat trade war?

ARTHUR DONG: Hong Kong-- China is in a very seriously impaired condition right now. The Chinese economy, although official media has been making pronouncements that it's more like a V-shaped recovery, I don't believe it. I believe within China the official unemployment numbers are actually not a real reflection of the amount of unemployment that's occurring in China because largely a lot of migrant workers who are now unemployed in China don't show up in the official unemployment statistics.

And yes, China's economy is incredibly impaired as a result of the global lockdown. Demand all over the world has shrunk and is in a comatose state. And so therefore any of those exports that China is good at making, there's simply no market for them right now.

And so while the supply side of the equation has restored itself and factories are coming back to life, there's simply no buyers. And as a result of that, China is in kind of a bad position right now to be waging-- you know, increasing this trade war at a moment of time when they can least afford it.

Now, in terms of handicapping this in terms of how this is going to move forward, I would say this, that things are going to get worse before they get better. As a matter of pride, China will respond. They believe that they do not need America's permission with regard to their activities over their-- and their sovereignty over the rule of Hong Kong.

And so therefore-- and should they concede to any US demands, they will feel embarrassed. And so as a result of that, whether they like it or not, they're being pushed in a position where they're going to harden their stance with regard to anything that emanates from Capitol Hill or anything that emanates from the current White House.

ALEXIS CHRISTOFOROUS: All right, Professor Arthur Dong of Georgetown University, thanks for those insights this morning, and be well.

ARTHUR DONG: Thank you.