U.S.–China Phase One Trade Deal: What to Make of It?

By Charles C. Foster

As promised, at 9:25 a.m. Central Standard Time on December 13, 2019 President Trump tweeted as follows:  “We have agreed to a very large Phase One Deal with China.  They have agreed to many structural changes, and massive purchases of Agricultural Product, Energy, and Manufacturing Goods, plus much more.” Beijing also announced at the same time, that both countries had reached an agreement.  Rather than try to summarize a summary of the Trade Deal set forth in the December 13, 2019 Fact Sheet on the Agreement Between the United States of America and The People’s Republic of China, it is set forth in its entirety at the end of this article.

But, as it’s often said, the devil’s in the detail. Although a summary is useful, we will have to wait until the final text is finalized and released after signing to fully-understand the extent of the breadth and forcibility of the 86 page Agreement. President Trump is scheduled to sign the Agreement in Washington on January 15, 2020 along with Vice Premier Liu He, who has represented China for nearly two years in the trade negotiations

Nevertheless, the announcement was met with worldwide relief from all sectors that both countries had stepped back from a cliff for if the tit-for-tat tariffs had continued, it would have not only further damaged the world’s two largest economies, but the worldwide economy and prospect for economic growth in 2020, as well.

One must view this announcement, while imperfect, nonetheless as progress and a significant step in the right direction.  While the Chinese concessions may fall short, the U.S. did not give up any significant leverage, and will still be in a position to either respond to meaningful progress by China, or the lack thereof.

While the President’s view of the deal may be exaggerated, at least it cancelled $156 billion in additional  tariffs increases planned for December 15th, and cut in half the $120 billion  block of existing tariffs imposed on September 1, 2019 , in exchange for which China has committed to make very sizable purchases of U.S. goods and services, and to make fundamental changes in its technology practices, which if either is fully-implemented, would be itself be a very large step in the right direction. But tariffs will remain on $360 billion worth of Chinese goods, with levies as high as 25%.

But if the round of U.S. tariff increases scheduled for December 15th had been implemented, it would by any measure have added to the prospects for a diminished global economy.  According to the International Monetary Fund (IMF) estimates, President Trump’s trade wars to date could cost the global economy over $700B, and more tariffs would’ve still cost more. While the President meant to boost the economy,  his tariffs on imports that many economist view as a tax on U.S. consumers, led to job losses and higher prices according to a Federal Reserve study.

Under the terms of the Phase One trade deal, China over the next two years has committed to import additional U.S. goods and services, in an amount that exceeds China’s annual level of imports for goods and services in 2017 “by no less than $200 billion”

While positive, with a U.S. GDP over $21 Trillion, it may not have a huge impact. Furthermore, there are some Chinese negotiators who have raised for some time, a real question as to whether or not the U.S. economy can actually produce sufficient goods that would be available for the Chinese to purchase to meet such lofty goals.  Even if agriculture exports, at the high end of the Administration’s estimates, reaches $40 billion in 2020, where would the additional $160 billion come from?

The biggest American exports to China in 2017 were Boeing aircrafts at $16.3 billion.  Given the problems with Boeing, it is doubtful if there will be any significant increase in aircraft exports.  From a Texas, specifically a Houston point of view, the best bet is that much of these additional U.S. exports to China dollar-wise will be crude oil and LNG, which China needs more of, particularly as its economy will inevitably grow.

There are also significant numbers of U.S. non-tariffs barriers In fact, the U.S. according to the financial services giant Credit Suisse, with a total of almost 450 is ranked as the No. 1 country in the world, as far as non-tariff barriers.  Thus, for example, the ability to significantly increase U.S. semi-conductor exports to China, which would be one of the U.S. products that China could absorb more of, will likely run into barriers in terms of U.S. statutory and regulatory restrictions on the exports  of U.S. products depending upon the technology contained therein.

In terms of concern over technology transfer, U.S. restrictions at best have been a mixed bag, not only having a negative impact on the U.S. economy, but its effectiveness, is also questionable. For example, the Wall Street Journal reported on December 31st that Huawei Technologies Co. reported record revenues of $122. billion for 2019, in spite of the Trump Administration’s campaign to curtail its global business, and  being on the U.S. blacklist, cutting it off from certain U.S. technologies.

With respect to the provisions on protection of IP, while that may work to satisfy a growing fear regarding same, interestingly, U.S. companies that should be most adversely-concerned with same, are less concerned with Peter Navarro’s, U.S. President Donald Trump Trade Advisors, Issue No. 1 with respect to the theft of intellectual property.  While rampant theft of IP is widely-accepted, in a recent survey of U.S. companies doing business in China, conducted by the U.S.-China Council, IP protection ranks 6th out of pressing concerns regarding doing business in China and only ranked 10th on a similar list comprised by the American Chamber of Commerce in China.

This concern has gradually decreased after 2014, the year that China created the Beijing Intellectual Property Court to handle intellectual property cases.  To date, the Court has consistently ruled for the foreign firms.  In 2015, foreign firms with patent-infringement cases, in the specialized court, ruled in favor of the foreign firms in all 63 cases. This in part is due to the fact that China now, as they say in Texas, has a “dog in the fight” because intellectual property protection serves China’s own competitive interests; the largest filer of patents worldwide, last year was the Chinese telecommunications giant, Huawei.

As a free market society, there are other issues.  For example, producers of agriculture are not necessarily wedded to one country purchaser over another.  Many agricultural producers have already entered into long-term commitments with buyers in other foreign nations in order to fill the market vacuum caused by the Chinese tariffs, so agricultural producers may not have the flexibility of  selling to Chinese buyers as much in agriculture, as would be necessary in order for China to meet its commitment on purchasing U.S. agricultural exports.

Given the fact that the U.S.-China deal also commits China to lowering barriers in financials services, the real increase in U.S. exports may be in U.S. services resulting from the fact that it should be easier for American financial companies to invest in China and to provide more in banking services to China at a time that Beijing needs more foreign financing.

The Phase One deal also includes a unique dispute resolution provision requiring three rounds of talks and if not settled then the possibility of what U.S. trade Representative Robert Lighthizer calls a “proportionate reaction “, meaning the U.S. reimposing more tariffs.

President Trump has pledged to go to Beijing “at a later date” to begin talks on the second phase of the trade deal. It may prove to be  more intractable to resolve more fundamental differences with China over its subsidies to Chinese industry, particularly the state-owned enterprises and over U.S. allegations that Beijing requires forced transfer of U.S. company technology before granting it market access. But at least  Phase One as stated above, is a step in the right direction and is expected to be approved.  Unlike the U.S.-Mexico-Canada Agreement, the Phase One of the  U.S.-China Trade Agreement does not need to be ratified by Congress, as it is more of a Memorandum of Understanding between the two economic super powers.

Only time will tell if both parties will act constructively, and while China may not live up to every aspect, only time will also tell whether or not there’s significant progress in the areas covered by Phase One, as set forth below in the December 13, 2019 Fact Sheet:

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AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND THE
PEOPLE’S REPUBLIC OF CHINA

December 13, 2019

Fact Sheet

The United States and China have reached an historic and enforceable and enforceable agreement on phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.  The Phase One Agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years.  Importantly, the Agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.  The U.S. has agreed to modify its Section 301 tariff actions in a significant way.

Information on specific chapters of the Phase One Agreement is provided below:

• Intellectual Property:  The Intellectual Property (IP) chapter addresses numerous long-standing concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.

• Technology Transfer:  The Technology Transfer chapter sets out binding and enforceable obligations to address several of he 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.  China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.  Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.

• Agriculture:  The Agriculture Chapter 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 outcome, 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 bio-technology.

• Financial Services:  The Financial Services chapter addresses a number of long-standing trade and investment barriers to U.S. providers of a wide range of financial services, including banking, insurance, securities, and credit rating services, among others.  These barriers include foreign equity limitations and discriminatory regulatory requirements.  Removal of these barriers should allow U.S. financial services to compete on a more level-playing field, and expand their services export offerings in the Chinese market.

• Currency:  The chapter on Macro-economic Policies and Exchange Rate Matters includes policy and transparency commitments related to currency issues.  The chapter addresses unfair currency practices by requiring high-standard commitments to refrain from competitive devaluations and targeting of exchange rates, while promoting transparency and providing mechanisms for accountability and enforcement.  This approach will help reinforce macro-economic and exchange rate stability and help ensure that China cannot use currency practices to unfairly compete against U.S. exporters.

• Expanding Trade:  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 $200B.  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 re-balancing of the U.S.-China trade relationship.

• Dispute Resolution:  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 and working levels.  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.

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Charles C. Foster, Chairman, Foster LLP, Vice Chairman, George H.W Bush Foundation on U.S.-China Relations and Chairman, U.S.-China Partnerships.