U.S.-China “Phase One” Trade Deal Takes Effect, but Most Tariffs Remain

The “Phase One” trade deal between the United States and China, which took effect February 14, 2020, commits China to increased purchases of U.S. goods and services and addresses some of China’s controversial trade practices in exchange for a reduction in some U.S. tariffs on Chinese goods. The Economic and Trade Agreement between the United States and China is a major step in easing U.S.-China trade tensions after more than a year of escalation, but the agreement leaves several key issues for future negotiations.

The agreement includes a commitment by China to increase purchases of U.S. goods by $200 billion, including $40 billion in U.S. agriculture, as well as commitments from China on intellectual property, technology transfer, agriculture, financial services and currency manipulation. In return, the United States reduced tariffs on approximately $120 billion of Chinese goods from 15% to 7.5% but kept other tariffs in place.

Background: U.S.-China Trade Tensions

In 2017, the United States Trade Representative (USTR) began an investigation under Section 301 of the Trade Act of 1974 into China’s acts, policies, and practices related to technology transfer, intellectual property and innovation. The USTR reported in April 2018 that China’s trade practices in these areas were “unreasonable or discriminatory and burden or restrict U.S. commerce” and President Donald Trump authorized a series of tariffs on imports of Chinese goods. The USTR implemented the tariffs in four lists beginning in July 2018. After a series of negotiations over a number of trade issues, China and the United States reached an agreement in principle in October 2019 and completed the formal agreement in December 2019. President Trump and Chinese Vice Premier Liu He signed the trade agreement on January 15, 2020.

Tariff Reduction

The United States agreed to reduce the List 4A tariffs on approximately $120 billion of Chinese products from 15% to 7.5%, effective February 14, 2020. The United States suspended indefinitely the scheduled List 4B tariff increase on approximately $160 billion in Chinese goods; that tariff increase was previously suspended and had been on hold since December. Tariffs for Lists 1-3, which cover approximately $250 billion in trade, remain at 25%. U.S. officials have stated that additional tariff reductions depend on China’s compliance with the agreement, which will be reviewed no sooner than 10 months after the effective date. For its part, China reduced two groups of retaliatory tariffs that cover $75 billion of U.S. products, reducing tariffs from 10% to 5% and from 5% to 2.5%.

Key Areas of the Final Agreement

The Phase One agreement includes seven chapters that cover intellectual property (IP), technology transfer, food and agriculture, financial services, macroeconomic policies and currency matters, Chinese purchases of U.S. goods, and dispute resolution.

Intellectual property: The parties made a number of specific commitments, including comments related to:

• Protection of trade secrets and confidential business information
• Protection and enforcement of pharmaceutical-related intellectual property
• Patent term extension
• Piracy and counterfeiting on e-commerce platforms
• Geographical indications
• Manufacture and export of pirated and counterfeit goods, including medicines and goods with health and safety risks
• Bad-faith trademarks
• Judicial enforcement and procedure in intellectual property cases
• Bilateral cooperation on intellectual property protection

To implement these changes, the agreement requires China to develop an “Action Plan to strengthen intellectual property protection” within 30 days of the agreement’s entry into force.

Technology transfer: The agreement affirmed that the transfer of technology should occur on “voluntary, market-based terms,” and requires China to stop pressuring U.S. companies to share technology with local joint-venture partners or sell licensing to their technology in order to gain market access. The agreement states that any transfer or licensing of technology “must be based on market terms that are voluntary and reflect mutual agreement.” China is also required to “not support or direct the outbound foreign direct investment activities of its persons aimed at acquiring foreign technology with respect to sectors and industries targeted by its industrial plans that create distortion.”

Food and agriculture: The parties emphasized the need to improve trust and cooperation on issues affecting agricultural trade, including in agricultural science and agricultural technology. The agreement addressed a number of non-tariff barriers for U.S. food and agriculture exports to China, including inspection and certification issues. China also agreed to allow more market access for U.S. dairy products, infant formula, poultry, beef, fish, rice, pet food and agriculture biotechnology products.

Financial services: China committed to increase market access for U.S. financial services firms, which includes commitments to:

• Improve licensing procedures for banking services
• Allow access to U.S. credit rating services to allow them to “rate all types of domestic bonds sold to domestic and international investors”
• Review license applications of electronic payment services within three months of the treaty entering into force
• Improve the licensing process for U.S. electronic payment suppliers
• Allow U.S. financial services suppliers to apply for licenses to acquire non-performing loans directly from Chinese banks
• Eliminate the foreign equity limits in the life, pension, and health insurance sectors by April 1, 2020
• Eliminate the foreign equity limits in the securities, fund management, and futures sectors by April 1, 2020

Currency: China committed to a “market determined” exchange rate, to refrain from “competitive devaluations,” and not to “target exchange rates for competitive purposes.” China also committed to scheduled disclosures of certain foreign-exchange information. Notably, on January 13, 2020, the United States removed China from its list of currency manipulators.

Chinese purchases of U.S. goods and services: China committed to increase imports of U.S. goods and services by $200 billion over the 2017 baseline of $186 billion during the next two years. The imports will be in four categories:

• Agriculture: China agreed to at least double its annual purchases of U.S. agriculture, including soybeans and pork, by a minimum of $32 billion over two years. This would require purchases of at least $12.5 billion in 2020 and $19.5 billion in 2021.
• Energy: China agreed to increase imports of U.S. energy products, including LNG, by a minimum of $52.4 billion over two years. This would require purchases of at least $18.5 billion in 2020 and $33.9 billion in 2021.
• Manufactured goods: Chinese agreed to increase imports of U.S. manufactured goods by a minimum of $77.7 billion over two years. This would require purchases of at least $32.9 billion in 2020 and $44.8 billion in 2021. This includes industrial machinery, pharmaceutical products, vehicles, and iron and steel.
• Services: China agreed to increase imports of U.S. services by a minimum of $37.9 billion over two years. This would require purchases of at least $12.8 billion in 2020 and $25.1 billion in 2021. This includes business travel and tourism, financial services, and cloud and related services.

Dispute resolution: The agreement also established a bilateral evaluation and dispute resolution mechanism that is a significant departure from the World Trade Organization’s multilateral adjudication process. The system focuses on increased high-level and working-level communication and includes information sharing requirements, a dispute resolution process, and an appeals process. Importantly, if the parties are unable to resolve a dispute, they may suspend an obligation of the agreement or adopt a proportionate remedial measure, including tariffs. The agreement also allows either party to terminate the agreement 60 days after providing formal written notice.

Next Steps

The “Phase One” trade deal provides some relief for U.S. businesses, particularly agriculture, affected by the U.S.-China trade tensions. It also provides a political win for the Trump administration as the U.S. presidential election year begins. The agreement, however, leaves several key issues for future negotiations. These include subsidies, state-owned businesses, cyber security and privacy, additional intellectual property issues, information technology, and the Made in China 2025 technology program.

Critics have argued that China has already made, or already plans to make, many of the concessions outlined in the deal, including increased foreign ownership in its financial sector, strengthened intellectual property laws, a ban on forced technology transfers, increased agricultural imports, and the need to stabilize its currency. They have also argued that China’s commitment to increase imports of U.S. goods by $200 billion is a move away from free trade toward “managed trade” and are skeptical that China can meet those targets, particularly with growing concerns over the impact of the coronavirus on China’s economy. There are also concerns that the agreement violates the World Trade Organization’s principle of non-discrimination.

The difficulty in completing the “Phase One” deal points to increased challenges in negotiating a more ambitious “Phase Two.” Other issues in U.S.-China economic relations could further complicate matters, including the U.S. blacklisting of Chinese telecommunications equipment maker Huawei and issues of technology and national security. With the number of complex issues unresolved, the trade war with China and the related uncertainty looks likely to continue.

TABLE: Updated Section 301 U.S. Tariffs on Chinese Imports

©2020