Trade Agreement: US - China - Phase One

Updated: Jan 24


Last update: 01/24/2020



The trade dispute between the US and China is not over, but both sides on 15 January 2020 sent clear signs of relaxation: Almost two years after the trade dispute began, US President Donald Trump and China's Vice Premier Liu He signed the 94-page partial agreement, which is limited in content to certain topics. The US government sees the agreement as to the first phase of a comprehensive trade agreement, that President Trump has said may come in as many as three sections.


Can you summarize the deal in one sentence?

The US trade representative summarised the deal like this "The U.S. & China have reached a historic & enforceable agreement on a Phase One trade deal that will bring structural reforms to China’s economic & trade regime in the areas of IP, agriculture, financial services, & tech transfer".


What does the deal mean in practice?

No new punitive tariffs on both sides for the time being against Chinese or US products, in return for wide-ranging commitments to purchase substantial amounts of US goods and change some controversial Chinese trade practices. Nevertheless, the additional duties imposed since 2018 will essentially remain in place for the time being.

This means that the agreement halves US additional tariff rates on $120bn worth of Chinese goods imported into the US. However, higher duties - some $360bn of Chinese goods and more than $100bn worth of US exports - remain in place. (source)


Who loses out on additional tariffs?

Economists have found that the costs - more than $40bn so far - are being borne entirely by US companies and consumers. And that figure does not even try to measure lost business due to retaliation.


Overall, the Congressional Budget Office estimates that tariff-related uncertainty and costs have shaved 0.3% off of US economic growth, while reducing household income by an average of $580 since 2018.


The CBO's estimates take into account all new tariffs imposed since January 2018 - not just those involving China - but analysts say a more limited look would yield similar findings.


What changes has the US agreed to make? The US has agreed to modify its Section 301 tariff actions in a significant way. The US agreed to reduce the level of additional duties from 15 percent to 7.5 percent on products of China covered by Annex A of the US August 20 Notice, effective February 14, 2020. This is in relation to US$120 billion worth of products, imposed Sep 1, on consumer goods like clothing. This was announced in the US Federal Register on January 22nd, 2020. HTS Change

Effective with respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. Eastern Standard Time on February 14, 2020, subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States is modified:

1. By amending U.S. Note 20(r), as established by the U.S. Trade Representative in a determination contained in 84 FR 43304 (August 20, 2019), and as modified by 84 FR 45821 (August 30, 2019), by deleting “15 percent” each place that it appears, and inserting “7.5 percent” in lieu thereof; and

2. By amending the Rates of Duty 1-General column of heading 9903.88.15, as established by the U.S. Trade Representative in a determination contained in 84 FR 43304 (August 20, 2019), and as modified by 84 FR 45821 (August 30, 2019), by deleting “15%”, and inserting “7.5%” in lieu thereof.

ENTRY INTO FORCE ON VALENTINES DAY

The agreement is scheduled to enter into force 30 days after signature so on February 14, 2020.

What Top 5 trade practices changes did China agree to?

  1. China agreed to end its practice of forcing foreign companies to transfer their technology to Chinese companies in order to gain market access.

  2. China will address numerous longstanding intellectual property concerns in the areas of trade secrets, trademarks, enforcement against pirated and counterfeit goods, and more.

  3. China agreed to strong commitments on currency practices regarding currency devaluations and exchange rates.

  4. The agreement addresses a wide range of trade and investment barriers that have prevented American financial services companies from being able to compete in China.

  5. The agreement addresses structural barriers that have unfairly limited United States food and agricultural exports.

China agrees to purchase more

The US president is said to have originally started the trade conflict because China exports much more to the US than vice versa. Among manufacturers, the Federal Reserve has found employment losses, stemming from the higher import costs and China's retaliation. In the agreement, China commits to significantly increase its imports from the United States and make substantial additional purchases of at least $200 billion worth of U.S. goods and services over the next two years. Goods include manufactured goods, agriculture (between $40 and $50 billion, each year) energy, and service.


More detail

The Expanding Trade chapter includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. China’s commitments cover a variety of U.S. manufactured goods, food, agricultural and seafood products, energy products, and services. China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.


Agriculture

The BBC has reported that "[US] farmers, who have been targeted by China's tariffs, have seen bankruptcies soar, prompting a $28bn federal bailout" . So action had to be taken on agriculture in the deal. In particular, under the agreement, China will:

  • eliminate over 50 government measures that have restricted imports of a long list of U.S. farm goods, including beef, pork, poultry, seafood, dairy, rice, potatoes and pet food.

  • China will also accelerate the lagging approval process for GM crops, especially certain varieties of US corn and soybeans: More US sales of GM crops to China.


More detail

The Agriculture chapter in this agreement addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. A multitude of non-tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.


China promises to protect intellectual property

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The agreement aims to solve longstanding intellectual property protection concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.

China commit to "increase criminal penalties for copyright theft to the level where they act as a deterrent". The chapter “ gives procedures, it gives penalties, it sets standards,” US Trade Representative Lighthizer said. “It’s not the gold standard, but it’s close to the gold standard of what you need in the intellectual property area.”


China’s commitments to the US on intellectual property rights protection, technology transfers and financial markets access would also apply to other trading partners, Chinese Vice-Premier Liu He said


Technology Transfer

The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government.


A US-China dispute resolution mechanism

The White House stated that the reforms included in the agreement are fully enforceable and include a strong dispute resolution system to ensure effective implementation and enforcement.


More detail

The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.


Even more detail

The provision allows the government or companies to lodge complaints with the respective governments. If the issue cannot be resolved at lower government levels, the dispute can be escalated up the chain of command until it reaches the desks of the US Trade Representative or the Chinese Trade Minister. If this is not enough to solve the dispute, the complaining party can respond “by suspending an obligation under this agreement, or by adopting a remedial measure in a proportionate way,” as per the text of the agreement. However, both parties agree to act in “in good faith.” Finally, if the going gets too tough, either party can provide written notice to withdraw from the agreement.


Is the deal in line with WTO principles?

“We stuck to two important conditions during negotiations [with the US]. The first was that it won’t hurt any third party, and the second was that it sticks to the principles of the World Trade Organisation,” Chinese Vice-Premier Liu He was quoted as saying by Chinese business magazine Caixin.


What's not in the deal?

1. Industrial subsidies and 'Made in China 2025'

2. Huawei

3. Access for foreign financial services firms

4. Enforcement and interpretation

5. Further reductions in tariffs

Taken from: https://www.bbc.com/news/business-51130434


What's in Part 2 of the Trade Agreement?

“The phase two deal may involve more difficult domestic regulatory issues such as subsidies, state-owned enterprises, and internet supervision,” said Wang Heng, a professor focused on trade law from the University of New South Wales in Australia. “Due to the complexity of the negotiations, it remains to be seen whether the two parties can reach a second-stage agreement. If market competition rules such as subsidies are not agreed upon, economic and trade frictions may continue and affect the two countries and the international economy.”


References