Canada Changes its Export Policy Toward Hong Kong - Are Economic Sanctions Next?

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In response to the passage of Hong Kong’s national security legislation (“Security Law”), Canada will treat exports and transfers of sensitive goods and technology to Hong Kong the same as those destined for mainland China, and will prohibit exports of sensitive military items to Hong Kong. Global Affairs Canada announced the major policy changes in a Notice to Exporters issued July 7th, 2020.

Under the new policy, all export permit applications for items listed on the Export Control List destined for Hong Kong will be “closely scrutinized”, and permits for exports or technology transfers inconsistent with Canada’s domestic and international legal obligations, foreign policy, or security interests will be denied. Canada currently maintains export controls over a broad range of dual-use goods and technology, including those relating to cybersecurity, information security (encryption), telecommunications, integrated circuits, computers, navigation, avionics, sensors, aerospace and nuclear items, as well as defence and weapons-related items.

Hong Kong National Security Law

The Security Law, which came into effect July 1, 2020, has sparked global controversy. It is widely perceived as a mechanism to suppress Hong Kong’s independence, and human rights activism, by breaking the constitutional arrangement, commonly known as the "one country, two systems" agreement, that made Hong Kong a semi-independent Special Administrative Region of China in July of 1997.

The Security Law introduces four major offenses punishable by life imprisonment: separatism, subversion, terrorism, and collusion with foreign countries. Allegedly, these broadly-worded offences will permit China to target Hong Kong’s pro-democracy activists, who have been staging regular protests against the loss of Hong Kong’s independence from China.

There are concerns that the Security Law could weaken the independence of Hong Kong’s judiciary by enabling China to exercise exclusive jurisdiction over “complex” cases, such as those involving foreign countries or foreign elements, cases where Hong Kong’s government is “unable to effectively enforce” the Security Law, and cases where a “major and imminent threat to national security has occurred”. It is anticipated that the Security Law will also permit the Chinese government to transfer important prosecutions and trials to mainland China, and to hear those cases in a more controlled and less transparent environment, where defendants are afforded fewer protections. 

Furthermore, two newly instituted security bodies operating in Hong Kong but directly accountable to China – the Committee for Safeguarding National Security and the Office for Safeguarding National Security – will be able to directly interfere with Hong Kong’s affairs. Both security bodies have extensive powers, and their decisions are not subject to judicial review.

Canadian Export Policy Changes Toward Hong Kong

Canadian export policy toward Hong Kong was built on the presumption that the former British colony is autonomous from China. The passage of the Security Law, which severely curtails this autonomy, propelled Canada to reconsider its approach. In this sense, the Canadian decision to treat exports of sensitive goods to Hong Kong in the same way as those destined for mainland China is not surprising.

The decision to apply additional scrutiny to export permit applications is likely to significantly impact Canadian exporters to Hong Kong, especially exporters of dual-use items and technologies. This could lead to more stringent permit conditions and longer processing times.   

However, it remains to be seen how the situation with export of military items to Hong Kong will unfold. The Notice to Exporters states that Canada will not issue export permits for “sensitive military items”, but it does not clarify how “sensitive” will be defined. This approach differs from Canada’s recent prohibition against the supply of all military items to Turkey, where new export permit applications were presumptively denied for all Group 2 items.

It should be noted that for exports of military items, the new substantial risk test will be applied. Under this test, introduced into the Export and Import Permits Act in September of 2019, when deciding whether to issue a permit for the export of arms, ammunition, and implements or munitions of war, Canada will take into consideration whether there is an “overriding risk” that granting a permit would contribute to the following:

  • Undermining of peace and security;
  • A serious violation of international humanitarian law or international human rights law;
  • An offense under international conventions or protocols relating to terrorism or transnational organized crime to which Canada is a party;
  • Serious acts of gender-based violence or serious acts of violence against women and children.

To date, the only publicly released assessment under the substantial risk test can be found in the Final report: Review of export permits to Saudi Arabia, where Canada determined there was no substantial risk involved in exporting military items and technology to Saudi Arabia, as there was no credible evidence that Canadian military items were being used to commit violations of international humanitarian or human rights law.

Current Export Permits to Hong Kong

The Government of Canada has not made any public statement concerning the status of preexisting export permits. It may reasonably be assumed that their valid status remains intact, as this approach would be similar to how Canada handled the recent prohibition against the export of military items to Turkey, in that permits issued prior to the prohibition were permitted to continue during their period of validity.

Are Economic Sanctions Against Hong Kong and China Next?

The United States, Canada’s closest and most important trading partner, has responded to the Security Law by implementing the Hong Kong Autonomy Act, which authorizes sanctions on individuals and entities “that materially contribute to China's failure to preserve Hong Kong's autonomy,” as well as an Executive Order ending Hong Kong's preferential trade treatment. The U.S. Secretary of State, Michael R. Pompeo, has also announced that the United States is terminating exports of U.S. defense equipment to Hong Kong, and will now impose the same restrictions on U.S. defense and dual-use technologies transfers to Hong Kong as it does for China.

As a result of amendments made in recent years to Canada’s Special Economic Measures Act and Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law), the Canadian government has expanded authorities to implement economic sanctions against states, individuals, and entities when states or foreign nationals are involved in gross violations of human rights or acts of significant corruption. Under these authorities, Canada has recently implemented sanctions against Saudi Arabia, Russia, Venezuela, Myanmar, Nicaragua, and South Sudan.

To date, Canada has not implemented any economic sanctions in response to Hong Kong’s Security Law, and has provided no indication that such measures are imminent. Recently, 64 members of Canada’s House of Commons and Senate, along with community leaders, issued a letter calling for Canada’s government to impose Magnitsky sanctions against China and Hong Kong in connection with human rights issues in Hong Kong, Xinjiang, and Tibet.

McCarthy Tétrault LLP will continue to monitor the situation and provide updates as any further details or restrictions are released.

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