Hong Kong’s leader has slammed a “completely unnecessary” US law that could pave the way for economic sanctions against the government and warned it risks backfiring on more than 1,300 American firms based in the city.

Chief Executive Carrie Lam Cheng Yuet-ngor’s remarks on Tuesday came a week after US President Donald Trump signed the Hong Kong Human Rights and Democracy Act, which allows Washington to impose sanctions on officials deemed to have violated human rights in the city.

Under the legislation, Washington also has the power to suspend Hong Kong’s special trading status if it is deemed to have lost a significant degree of autonomy from Beijing, as promised under the “one country, two systems” framework. As a result, the city will also be subject to an annual assessment of the enforcement of export control laws that limit the sale of sensitive products overseas.

Before her weekly cabinet meeting at the Executive Council on Tuesday, Lam said the legislation was groundless. “We believe it was completely unnecessary and unfounded. Hong Kong’s human rights and freedoms are protected by the Basic Law. I want to ask: which aspect of Hong Kong residents’ freedom was being eroded?” she said.

“We are highly free in many aspects. We have the freedom for media to report news, for people to take part in assemblies, demonstrations and marches, and the freedom of religion. So it is very regrettable that a foreign legislature and government have used their legislation to meddle in Hong Kong affairs.”

Lam said the long-term impact of the American law would depend on Washington’s assessment of the city’s situation. But in the short run, business confidence in Hong Kong would be dampened, she said.

“Now the impact is on confidence, as it has created an unstable environment,” Lam said.

“Businesses will be worried about what kind of action Washington would take as a result of the assessment, and I noticed that all major business chambers were strongly opposing the legislation.

Lam also warned that the new law could deal a blow to US companies in Hong Kong.

“We all know that US corporations play an important role in Hong Kong. There are more than 1,300 US companies in Hong Kong – most of which are regional headquarters,” she said.

She said she had noted Beijing hitting back at the US over the act, announcing on Monday it would suspend visits of US military vessels and aircraft to Hong Kong and sanctioning various NGOs. Lam said her government would follow up on the sanctions announced.

“This is a matter of foreign affairs, so we will cooperate in accordance with the central government’s requirements.”

Peter Levesque, group managing director of container terminal operator Modern Terminals, warned that Trump’s decision to pass the act into law would risk Hong Kong losing transshipment business to rivals such as Singapore.

He said the law, which stipulates an annual review on export controls, could affect transshipment volumes through Hong Kong in both sea freight and airfreight.

“Export controls, when applied to a single destination like Hong Kong, can be ambiguous and difficult to enforce, particularly when similar technologies are readily available in the market. Ambiguity around export controls to Hong Kong will force transshipment business to places like Singapore.”

The city’s biggest business organisation, the Hong Kong General Chamber of Commerce, expressed grave concern over the global business community’s confidence in the city.

“It is regrettable that Hong Kong is being used as a pawn in the US-China trade war,” chamber’s chairman Aron Harilela said. “The signing of the bill will undermine the international business community’s confidence in Hong Kong and make investors think twice about establishing a presence here.”

He added that Hong Kong’s advantages, including its rule of law, independent judiciary, expertise and being the world’s freest economy for 25 consecutive years, should dispel any doubts over the city’s autonomy.