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latter are being used as a make-weight for any inadequacies in HMG's own actions over sanctions against Iran.
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5. It is difficult to assess the actual damage which Dependent Territories might suffer as a result of having to apply sanctions against Iran. However, Hong Kong does trade with Iran and Hong Kong registered vessels are likely to be carrying goods between Iran and the territory or third ports.
6. A complicating factor with regard to Hong Kong is the fact that China does transship a limited amount of exporty Iran
through the territory. As the Sanctions Order drawn up for the UK prohibits the re-export of goods, the Chinese would have to be told of the sanctions. Although the amount of trade is small, such a move would be seen, for the first time, as a change in Hong Kong's entrepot status and could have a psychological effect on Peking's attitude towards Hong Kong out of all proportion to the practical inconven- ience of not being able to transship goods for Iran through by the Russling, Hong Kong. Alimatively, export, could be excluded
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7. HMG's political relations with Hong Kong are not good at present, and there are a number of specific irritants. These include the Civil Aviation Authority's decision not to
license Cathay Pacific, the Hong Kong airline, to fly on the London/Hong Kong route; changes in British Nationalityb and fees for overseas undergraduates. As a result of these
factors, opinion amongst the small number of people who really count in Hong Kong is at present strongly critical of the United Kingdom in a way in which it has not been for some years. Recently, Hong Kong has made a positive drive to buy British and this has shown up in our export figures (£362 million in 1978 and £442 million in 1979). There is
a real possibility that this export performance could be put to risk if the leading people in Hong Kong conclude that
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our principd interest in Hong Kong is to use the territory for our own foreign policy objectives in such a way that might be damaging to Hong Kong's interests. A row with Hong Kong over Iranian sanctions could be particularly awkward when we are about to try and conclude negotiations with them on the Defence Costs Agreement whereby Hong Kong is being asked to bear 75% of the cost of British troops in the territory. Against this, Hong Kong has cooperated over HIG's position on the Olympics and the Hong Kong team will not be going to Moscow.
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