from Renewing America

What to Look for in the “Phase One” U.S.-China Trade Deal

U.S. President Donald Trump looks on during a meeting with China's Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer (R) in the Oval Office at the White House in Washington, U.S., February 22, 2019. Carlos Barria/Reuters

January 14, 2020

U.S. President Donald Trump looks on during a meeting with China's Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer (R) in the Oval Office at the White House in Washington, U.S., February 22, 2019. Carlos Barria/Reuters
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

On Wednesday, January 15, Chinese Vice Premier Liu He and U.S. President Donald J. Trump will sign the “phase one” trade agreement that has been in the works since the March 22, 2018, determination under Section 301 that China’s policies and practices related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce. The Office of the United States Trade Representative (USTR) has indicated that the text of the phase one deal will be released to the public shortly after it has been signed on January 15.

But given what we already know about the agreement, what should we be looking for when we finally get our hands on the text?

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Technology Transfer—USTR says the United States will be getting “an agreement by China to stop forcing or pressuring companies to transfer their technology to Chinese companies as a condition for obtaining market access or administrative approvals.” The trick here is that China already promised exactly this when it joined the World Trade Organization (WTO) in 2001. Section 7.3 of China’s Protocol of Accession (and binding paragraph 207 of its Working Party Report) says “any means of approval for importation . . . or investment” shall not be conditioned on . . . “the transfer of technology.” The focus here should be on what, if anything, is different this time.

Financial Services—USTR says the agreement will “address” foreign equity limitations in financial services. We should be on the lookout for whether “address” means eliminate them, or something less than that. Also look at whether the agreement moves beyond the lifting of limits spelled out by China’s Securities Regulatory Commission on October 11, 2019, which permit 100 percent foreign ownership of futures companies as of January 1, 2020; of mutual fund management companies by April 1, 2020; and of securities companies by December 1, 2020.

Currency—USTR says the agreement will require “high standards commitments to refrain from competitive devaluations and targeting of exchange rates.” While probably not part of the formal agreement, yesterday the United States rescinded its August 2019 declaration that China is a currency manipulator. The difficulty in enforcing trade agreement provisions affecting currency has always been, in part, the requirement to prove that interventions were done with the intent to gain an unfair trade advantage. Few governments have been willing to accuse others of the requisite malicious intent. Moreover, the WTO Agreements (General Agreement on Tariffs and Trade Article XV) require a finding from the International Monetary Fund (IMF) that a country has violated the provisions of the IMF’s Articles of Agreement. The phase one deal should be examined both for whether it requires a showing that China intervened in order to make its exports cheaper or its imports more expensive and whether the U.S. can decide for itself, without reference to the IMF or outside benchmarks, whether China has engaged in currency manipulation.

Dispute Resolution—USTR says that the agreement will allow the United States to take “proportionate responsive actions that it deems appropriate” for disputes “related to the agreement.” This implies two things: (1) that the United States has the right to determine unilaterally that China has violated the agreement along with the appropriate amount of penalties (presumably additional tariffs imposed under Section 301’s authorization to modify any existing Section 301action); and (2) that these new dispute provisions will be used for violations of this agreement that do not also constitute a WTO violation. It appears that many of the provisions in the agreement may simply be reiterations of existing WTO rules. Be on the lookout for whether the agreement makes clear that violations that contravene the WTO rules or China’s Protocol of Accession to the WTO must be brought to the WTO for adjudication under the WTO’s Dispute Settlement Understanding.

Increased Chinese Purchases—USTR says that China has committed over the next two years to import $200 billion more in U.S. goods and services than it imported in 2017. If those commitments specify a certain volume of specific goods that China will import only from the United States, such commitments might be viewed as a quota, in violation of China’s obligations under the WTO rules (GATT Article XI) not to utilize quantitative restrictions, and would violate China’s general most-favored-nation obligation (GATT Article I) to grant all WTO members the same advantage or privilege that it grants to the United States.

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Finally, worth noting is what we are not likely to see in this agreement—any provisions addressing the key structural problems with China—its extensive use of subsidies to prop up companies that ought to fail or to support companies that create significant overcapacity with goods flooding the world market, suppressing prices and displacing domestic production; any provisions addressing the growth in the size and reach of China’s State Owned Enterprises; or any provisions addressing the increasing levels of Communist Party control over the Chinese economy. It is also unlikely that this agreement will include provisions resolving the looming tech war between the U.S. and China over everything from artificial intelligence to 5G networks to national security related tech. Less clear is whether the agreement will spell out what China needs to do to get out from under the $350 billion in Section 301 tariffs that will remain in place even after this phase one agreement is signed.

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