Checking their privilege: Beijing’s threat to Hong Kong

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Hello and welcome to the intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. The pandemic has brought with it plenty of worrying downward trends, but one curve is encouraging. Lockdowns have driven down rates of crime. Well, some crimes. The crisis is making others harder to track and even creating new nefarious opportunities. And the alcohol industry had been enjoying something of a golden age before the pandemic. Even though many of us have been indulging a bit more under lockdown, the booze business now seems destined for a long term fall. But first, China's annual parliamentary meeting, the National People's Congress, closed today with an overwhelming vote in favor of drafting sweeping new national security legislation for Hong Kong. The proposed law would allow Beijing to impose its own restrictions on the territory to silence its critics, to put down demonstrations like those that gripped Hong Kong for months last year. Year. In response, pro democracy activists defied government warnings and marched through the city to protest against the bill. They fear that Hong Kong's way of life, enshrined under the principle of one country, two systems, will soon come to an end. It's a concern shared by America's administration. Yesterday, Secretary of State Mike Pompeo told Congress that Hong Kong no longer merits special treatment under American law. The details of Beijing's plan are still being discussed, as is America's formal response. But the battle lines for Hong Kong's future are being drawn.

Well, the significance of what Mike Pompeo has said is quite profound.

Dominic Ziegler is the Economist's senior Asia correspondent and writes Banyan our column on Asian affairs.

Under American law, the Secretary of State has to inform Congress each year about whether Hong Kong is a separate place from China, one that is autonomous from the mainland. And for the first time ever, he said that it is not. Potentially, it means that America may treat Hong Kong as if it were just simply part of mainland China and therefore liable to the same kinds of tariffs, the same kinds of visa restrictions that apply for Chinese. And so this would, at a stroke, wholly alter Hong Kong status.

So what's your view that? Is Mr. Pompeo right in asserting that Hong Kong has lost its autonomy in light of this new security law?

Well, the fact that Mr. Pompeo's statement comes as a huge surprise to many China watchers suggests that not everybody thinks that Hong Kong has yet wholly lost its autonomy. But still, the National Security Law that the National People's Congress today decided should be drawn up and promulgated does mark a profound change for Hong Kong because it involves China imposing upon Hong Kong laws surrounding separatism, subversion of state power, terrorism, and very vaguely defined activities by foreign and overseas forces. And the guarantees of Hong Kong's autonomy to date have really been enshrined in the territory's mini constitution, which is called the Basic Law. And that law makes it very clear that Hong Kong is responsible for drawing up its own laws. So the fact that China is imposing its own version of national security legislation really does drive a coach and horses through the guarantees that were made for Hong Kong before its handover from Britain to China.

And surely some of that comes from the fact that there were these enormous demonstrations on the streets of Hong Kong last year. I mean, won't this just feed that same beast? Won't that excite the protesters once again?

Well, there's no doubt that this national security legislation is coming because China has lost patience with Hong Kong, both with its local government led by Carrie Lam, which has failed to pass anti subversion legislation itself and impatience over the government's failure to crack down on anti government protests last year. And indeed just this week, protests have started up. Even though there are pandemic related restrictions on the number of people who may gather on the streets. The police in Hong Kong have been ready for them it seems to me almost certain that whatever the scale of protests, Hong Kong might now see that Beijing's mind is set on promulgating this law.

But what will that mean for international businesses? I mean, the deal has always been that Hong Kong is independent, autonomous and free of the kind of law that's being suggested here.

Well, Chinese officials are at pains to say that this law simply won't affect foreign business. But nevertheless, the wording around foreign forces and foreign involvement in the National Security Law does cause a degree of unease amongst foreign business people. But I think it's important to point out that one argument for why China wouldn't meddle in Hong Kong was that Hong Kong was this goose that kept on laying the golden egg. And I think it's time that we disabuse ourselves of that notion, not least because Hong Kong's importance to China has grown much smaller over the years. At the time of the handover, Hong Kong's economy was equivalent to about a fifth of China's. And today Hong Kong's GDP is really only about 3% of China. So much less important, it has, though paradoxically, grown the territory in importance for China as a center for raising international capital. So from that point of view, Hong Kong remains important to China. And I would expect over the years that this China centered business in Hong Kong will grow only more important. The multinational presence will, in relative terms, diminish.

And in the meantime, as the mainland turns the screws on Hong Kong, how should the west respond? I mean, how do you think Mr. Pompeo's statement about this fits into the wider international picture?

Well, President Trump has promised to act, and at the extreme, he could suspend all of the terms that recognize Hong Kong as a free and open economy and in effect, treat Hong Kong as just another city in China. In practice, that would greatly hurt not only Hong Kong people, but American businesses. So I think that that nuclear option is the least likely one. Instead, what I hope the administration will do is take a more tailored approach. For instance, imposing sanctions on Chinese officials involved with national security in Hong Kong. That's the sort of dark side of the Chinese state, the Ministry of State Security, for instance. And not just sanctions, but also freezes on assets. That will certainly annoy the Chinese, but it won't have much impact on Hong Kong, not just America. The UK can act too. To its credit, the uk, Canada and Australia have already issued a joint statement condemning the national security moves. What the UK can do is make it clear that Hong Kong holders of a kind of second class British passport have the right to move to the UK in extremis.

And what about wider implications for China's influence over other territories and the like? Hong Kong isn't the only place that it wants to throw its weight around.

That's absolutely right. I mean, what the National Security Law underscores is that under President Xi Jinping, China has a very orthodox and brittle view about what is Chinese and what is not, and it wants its part of the world to conform to that. So, yes, Hong Kong now, but obviously next is Taiwan. China says that Taiwan belongs to the motherland and must return. Interestingly, at these latest National People's Congress meetings, the Prime Minister, Li Keqiang for the first time talked about unification, but without the adjective peaceful before it as China's aspiration. So there is a case of China baring its teeth and yes, in effect, the whole tussle over Hong Kong and the whole question about the nature of one country, two systems is really in the end all about Taiwan. This was the formula that had been offered to Taiwan as a means to entice it back into the fold. But of course, if one country, two systems is dead in Hong Kong, well then it's not a model that China can ever hope to use to bring back Taiwan.

Tom, thank you very much for joining us.

Thank you, Jason.

For a lot more analysis like this, subscribe to the economist. To get 12 issues for $12 or $12, just go to economies economist.com radiooffer Karachi, the largest city in Pakistan, is normally among the most crime ridden cities in Asia. But for eight days in March, after it was put into lockdown, not a single car was reported stolen. That same month, El Salvador had four days without a murder. The number of crimes reported in Italy dropped by 2/3. But COVID 19 hasn't entirely shut down crime, just shifted it.

The same factors that are changing our legal lives, being stuck at home, being quite short tempered, are affecting the way in which criminals can operate.

Josie Delap is the Economist's international editor.

So if everybody is in their home, it's quite hard to burgle people. And so it looks as though the rates of things like burglaries in a lot of countries have gone down.

But are there any crimes for which the numbers have actually gone up? I mean, are there any crimes sparked by the virus that you might not have seen before?

There definitely seems to be an opportunity for particular kinds of crime, sometimes related to the virus and the pandemic itself that you wouldn't have seen before. So in South Africa, the reserve bank there had to deny that it had sent collectors house to house to recover banknotes in case they'd been contaminated by the virus, because local crooks were trying to take advantage of it. The enormous contracts for personal protective equipment are going through in lots of countries around the world, and the speed at which they're happening means that governments are sometimes having to waive the normal procurement controls. So in the German state of North Rhine Westphalia, the state government there paid almost two and a half million euros as a down payment for masks. There were 50 vehicles lined up to fetch them. And it turned out that this was a complete ruse involving a website that was registered in Spain, an intermediary in Ireland, a firm in the Netherlands that had a website that turned out to have been cloned by scammers, and you had half a million dollars on the way to Nigeria before the police managed to shut it down.

You say some of these rises in crime are down to opportunities provided by the pandemic, but what about sort of more, dare I say, classic crimes?

Yeah, the old fashioned ones. Things like drug trafficking and human trafficking, running prostitution rings, all of that is quite a lot harder to do during this pandemic because it relies on people being able to move around. Extortion, which is obviously an important source of income for a lot of criminal groups, is hard both because the businesses that they usually get this money from aren't operating and don't have the cash, and also because they're literally shut down. And so it's very hard to get to these places to get the money. And so in Guatemala and El Salvador in March, you saw a 9% and 17% fall respectively in extortion incidents that were registered by the police, although obviously most incidents are not reported at all. In Honduras, you've seen a decline of about 80%, but the gangs are forcing people to agree that they will pay the money retrospectively, once life gets up and going again.

And so how's it affecting the drugs trade? Another classic crime.

Right. And it's one that's the source of an enormous amount of income for criminal groups. Lockdowns have definitely disrupted business flows, but they haven't stopped them. And the disruptions do seem to be temporary. So on the production side anyway, Afghanistan's opium harvest hasn't been affected. Coca farmers in Colombia have had their best year on record. There were some problems for people producing methamphetamines for a while because the closure of pharmaceutical plants in China meant that the precursors used in production weren't available. But these interruptions were all temporary. It has been harder to distribute goods. The wholesale distribution, getting stuff onto flights across the US border is obviously impossible when there aren't any flights. So gangs are turning to tunnels and drones instead. Drug seizures in Brazil between February and April actually went up by about 10%. But we think that's probably because traffickers are taking more risks to try and get their stuff out there as they deal with the pandemic themselves.

What about at street level though, the.

Kind of last mile question about drugs?

Right. The retail side of things, now that's really the hardest thing because everybody is locked down. So Interpol thinks that quite a lot of dealers have been using food deliveries to get their wares out to customers, because that's one of the things that has still continued in a lot of countries despite even the strictest lockdowns. So in Ireland, police found eight kilos of cocaine and two handguns hidden inside a couple of pizza boxes. And in the Cape Flats just outside Cape Town, gangs are delivering drugs along with emergency food parcels.

Wait, so the gangs are getting into the charity business as a way to keep up their regular business, right?

Exactly. I mean, it has a lot of benefits. On the one hand, it's a way of actually keeping their businesses going in terms of the drugs things. And on the other hand, it also creates a certain amount of goodwill. You've got mobsters delivering food to poor people in Mexico and Italy. In El Salvador and Brazil, they've been enforcing curfews. In Japan, the Yakuza offered to disinfect a quarantined cruise liner. Now, I mean, even if they are doing this in a sort of, you know, positive way, even if they're not delivering drugs, say alongside this, it's not an entirely benign set of activities. It enhances their popularity. You know, they kind of set themselves up as latter day Robin Hood's and it also really undermines the role of the state. So in the long term, this can actually have quite a pernicious influence.

And what about more generally, the trends that you see and these behaviors that fit the situation? What do you think that will mean to the bigger picture of crime in the world after this passes or at least lessens?

Well, I mean, I think worryingly, in the long term, this creates an enormous number of opportunities for organised groups. The very high unemployment levels that we are already seeing and are likely to continue to see in a lot of countries are going to make recruitment easier. You know, it's sort of very easy in the midst of the crisis of the pandemic for governments to overlook something like this. It's not an immediate threat to people's health and safety, but in the long term, the impact of this could be really serious. And so it's something that governments shouldn't forget.

Josie thank you very much for joining us.

Jason. My pleasure.

For booze lovers, the variety on offer has never been better. Artisan distilleries and craft breweries have been springing up everywhere and many of us have been dealing with lockdowns by indulging in a drink or two. But a lot of breweries, distilleries, pubs and bars are closed. The pandemic may hasten a hangover that the industry might have seen coming.

The alcohol industry has been going through something of a golden era in recent.

Years, Henry Tricks, writes Schumpeter, the Economist's column on global business.

Although at least in the west, we're drinking less, profits have been booming. That's partly because people are drinking higher quality wines and spirits, champagnes. In addition to this, there's been this fascinating effervescence in the whole craft beer and craft spirits industry, which also underpinned the boom in the industry. This pattern of higher profits and premium drinking had been expected to continue into the foreseeable future. But as soon as lockdown came and bars were shut, it's basically come to a screeching halt.

How has the pandemic affected the industry so far?

Probably I'm not alone in using lockdown to exhaust my drinks cabinet. Certainly there has been more volume of alcohol consumed during lockdowns in many different countries. The trouble is is that as you look forward, you can see damage coming on two fronts. Firstly, social distancing. This is a killer, especially for wines and spirits.

So.

So the bars and the nightclubs have shut where they used to be able to peddle some of their more expensive alcohol. And of course, duty free shopping is dead for as long as air transport is dead. Duty free shopping was very good for the booze industry. Extremely high markups on those gins and whiskies and whatever that you were carrying through. Layered on top of that is the economic hardship. The experience from the financial crisis a decade ago is that beer and cider sales in particular were hit. That's likely to be repeated this time round. It's possible that brewers will be hurt more from the slump in economic activity, maybe even than spirits and wine cellars.

But what about the bump that's seen in the industry for people under lockdown now? Would that not continue? Is this not a matter of just Shifting where people drink it, not what and how much.

We'll probably continue to buy alcohol at the supermarkets, but I think that what you'll see is that the drinks companies, as they survey a landscape in which people have less spending money in general, they will be reducing their offer to more mainstream, slightly down market brands because those are the ones that are likely to sell. It's going to be harder to get some of those really delicious peaty whiskies that we used to see on the top shelves at the supermarkets. And there'll be less sales of champagnes and expensive wines, for example.

But what about the slightly longer term when that downturn turns up a bit? I mean, do you see a return to the golden era that we were seeing before COVID 19 well, clearly some.

People are hoping eventually the social distancing restrictions are relaxed, then people will trundle back to bars with the same enthusiasm that they had before the crisis. The trouble is is that there are longer term trends that are also threatening alcohol consumption. One of them is demography, which is the rise of the incredibly sober Gen Zs. And they've shown a propensity to shun alcohol, basically, at least compared to the previous Gen Z generations. The second trend, youngsters are likely to smoke pot rather than drink.

You're painting a fairly dark picture for the industry as a whole, both in the short and the long term.

There's some comfort, I guess, from looking at China. The Chinese have come back to drinking surprisingly fast. They're in some of the big cities in China. There are queues outside the bars on a Friday night. The other thing, I guess, and what the industry hopes will be its lifeline in these troubled times will be E commerce. So they can start bringing your booze to your door. And that doesn't just mean that you get delivery. It also means that they get to know a lot more about you. We're likely to see some innovation in the business models that alcohol companies use to sell to you, but we'll see less, I guess, of that sort of really exciting innovation that we saw in the form of gins from your local local area or your craft brewer. We'll see less of that for the time being at least.

Henry, thanks for your time and cheers.

Thank you, Jason. I wish I could raise a glass to you.

That's all for this episode of the Intelligence. If you like us, give us a rating reading on Apple Podcasts and see you back here tomorrow.