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What’s Inside the U.S.-China Phase One Deal?

Matthew Goodman,Scott Kennedy,William Reinsch,Stephanie Segal,&Jack Caporal

January 15, 2020 （美东时间，美国战略与国际研究中心CSIS）

On January 15, President Donald Trump and China’s Vice Premier Liu He held along-anticipated ceremony in the East Room of the White House to sign a “PhaseOne” U.S.-China trade deal. The document, entitled “Economic and Trade AgreementBetween the United States of America and the People’s Republic of China,”runs to 96 pages with eight chapters, covering intellectual property,technology transfer, trade in food and agriculture products, financialservices, macroeconomic policies and currency, expanding trade, and disputeresolution. As part of the deal, China has agreed to increase its purchases ofU.S. goods and services by at least $200 billion over the next two yearscompared to 2017 imports. For its part, the United States will trim sometariffs but maintain them on $360 billion worth of Chinese imports, the bulk ofthe bilateral trade.

The deal is written like a traditional trade agreement, with a range ofsubstantive and process commitments by both sides that will only be as strongas the degree to which they are implemented by both sides. For now, it puts apause on trade tensions between the world’s two largest economies that had beenescalating for much of the past two years. However, it leaves many structuralissues—notably Chinese subsidies and other industrial policies—unaddressed.Whether, when, and how “Phase Two” negotiations between the two sides moveahead remains unclear.

Q1: What did the two sides agree to on intellectual property?

A1: China’s theftof U.S. intellectual property and its relatively weak intellectual property(IP) protections were among the original core complaints highlighted in theOffice of the U.S. Trade Representative’s (USTR) Section 301 Report.China has made commitments to improve its intellectual property environment inthe past; however, the Phase One agreement includes some procedural innovationsthat may result in better monitoring, implementation, and enforcement ofChina’s obligations. The agreement requires that China publish an action planthat details how and when China will implement its IP obligations. Theagreement also requires that China increase IP enforcement actions in a numberof areas and regularly publish data on the impact of those actions. The actionplan, along with regularly published data on IP enforcement, should provide theUnited States benchmarks to measure China’s implementation of its obligations.

The Phase One agreement requires that China beef up its intellectual propertyregime in a number of areas, including in connection to counterfeit and piratedgoods and pharmaceuticals. It also requires that China improve its protectionof trade secrets and business confidential information. China has also agreedto harsher penalties for IP theft in order to deter theft from occurring.

Notably, the chapter does not require the United States to change or introduceany new measures. Rather, it affirms that the existing U.S. measures complywith the obligations in the IP chapter.

Q2: How significant are the agricultural commitments?

A2: U.S.agricultural exports to China have plummeted since 2017 when China was theUnited States’ second-largest destination for agricultural and relatedproducts. Amid the winnowing of a massive export market, two years of terribleweather, and collapsing commodity prices, farm bankruptcies and total farm debtreached record levels in 2019. The Phase One agreement on agriculture willprovide two much-needed shots in the arm for farmers.

Chinese purchasing commitments are the first shot in the arm. The agreementrequires that China purchase at least $40 billion in U.S. agricultural andrelated products annually for the next two years. While that purchasecommitment locks China in as a destination for U.S. crops and keeps U.S.farmers busy, it is not clear that the United States can supply that amount ofagricultural goods to China. At a minimum, the United States may have to divertexports that would have gone to other markets to China. Also unclear is whetherChina would allow itself to become more reliant on U.S. agricultural importsthan ever before, or whether U.S. farmers are willing to put all their eggs inthe China basket. U.S. agricultural exports to China peaked in 2013, when U.S.farmers sent some $29 billion worth of product to China, $11 billion below thePhase One obligation. Finally, purchasing commitments are more in line with astate-driven economic model than a market-driven model, the latter of which theUnited States aims for China to adopt.

The second shot in the arm comes from the elimination of Chinese non-tariffbarriers, which have limited a variety of U.S. agricultural exports. Theelimination of those barriers should create more long-lasting, structuralimprovement in the outlook for agricultural exports to China.

Q3: What commitments does the agreement include on currency and financialmarket opening?

A3: Commitmentsunder the “Macroeconomic Policies and Exchange Rate Matters” chapter of thePhase One agreement do not go beyond what has already been agreed in thecontext of the G20, specifically to refrain from competitive devaluations andthe targeting of exchange rates for competitive purposes; and the InternationalMonetary Fund (IMF), specifically to avoid exchange rate manipulation. In fact,transparency commitments under the agreement explicitly acknowledge the absenceof new commitments, indicating the United States and China “shall continueto disclose publicly” international reserves and balance of payments data. Whatis new is the potential dilution of Treasury’s role when it comes to resolvingany disputes, which will be directed to the Bilateral Evaluation and DisputeResolution Arrangement under USTR. USTR, in turn, may consult with otheragencies, but there is no obligation, putting Treasury in a secondary role onmacroeconomic and exchange rate matters. (On this point, it’s worth noting theagreement’s affirmation of monetary policy autonomy for both the United Statesand China; and that either party may request the involvement of the IMF.)Another aspect of the agreement is the tension between exchange rateflexibility—along the goal of U.S. engagement with China on exchange rates—andexchange rate stability. This tension likely reflects U.S. concerns that marketforces may well weaken the Chinese renminbi against the dollar, a sentimentreflected in Treasury’s most recent foreign exchange report, which, while itlifted the August 2019 designation of China as a currency manipulator, notedconcern with “continued dollar strength.”

Similarly, the financial services chapter largely affirms market-opening commitments made by VicePremier Li last summer to end foreign investor ownership limits in thefinancial sector in 2020. On the margins, specific pledges—for instance, takinga parent company’s overseas assets into account when granting licenses inChina—should lower barriers to entry in the Chinese market, while theenforcement mechanism may help achieve greater compliance with thesecommitments. While the chapter emphasizes the “mutually beneficial” nature ofmarket opening, the idea may be challenged by an increased sensitivity tonational security factors in both countries. Despite the traditional Chinesefocus on “reciprocity” in negotiated documents, U.S. commitments in thefinancial services chapter essentially boil down to the United Statesacknowledging pending Chinese applications in banking, insurance, andsecurities sectors.

Q4: How strong is the enforcement component of the agreement?

A4: If measured by size, coming in at just six pages, the “BilateralEvaluation and Dispute Resolution” chapter is the least significant element ofthe deal. But that doesn’t do justice to the significance of this component,which is relatively clear and straightforward. There is a tiered process. Atthe top will sit the U.S. trade representative and designated vice premier andbelow them the deputy U.S. trade representative and a designated vice minister.For day-to-day matters, both sides will create a “Bilateral Evaluation andDispute Resolution Office.” If one side feels the other party isn’t keeping totheir commitments, it may submit an “appeal” to the other side. If the standingoffices can’t reach a resolution, the dispute is escalated to the deputies andthen to the top leaders. Should no resolution be achieved, “the ComplainingParty may resort to taking action based on facts provided during theconsultations, including by suspending an obligation under this Agreement or byadopting a remedial measure in a proportionate way that it considersappropriate with the purpose of preventing the escalation of the situation andmaintaining the normal bilateral trade relationship.” Critically, should oneside take such a remedial action, the agreement states that the other side isforbidden from taking counter penalties; instead, the only remedy is towithdraw from the agreement, which either party can do with 60-day writtennotice.
Other U.S. trade agreements have had enforcement provisions, but this one isdistinctive in the level of unilateral authority it gives both parties.Although U.S. commitments are most often summarized by the statement, “TheUnited States affirms that existing U.S. measures afford treatment equivalentto that provided for in this Article,” China would also be within its rights toadopt penalties should it find the United States not in compliance, and theUnited States itself could not respond in kind.
What is unclear is how broadly the agreement applies to the relationship. Itappears that enforcement only applies to the specific commitments in thisagreement, but one can expect that there will be pressure from the U.S. sidefor other issues outside the deal to be addressed through this process.Conversely, another challenge will be what happens when either side takesmarket-restricting actions that they claim are not related to this agreement,yet the other side finds discriminatory and broadly relevant to the traderelationship.

In sum,although the enforcement element of the deal looks rather robust and could helpkeep China to its commitments, it is also possible to see how this element isnot airtight and could generate unforeseen challenges in the future. As aresult, successful enforcement will depend heavily on the consistent good-faitheffort of both sides.

 

MatthewP. Goodman is senior vice president, senior adviser for Asian economics, andholds the Simon Chair in Political Economy at the Center for Strategic andInternational Studies (CSIS) in Washington, D.C. Scott Kennedy is senioradviser and the Trustee Chair in Chinese Business and Economics at CSIS.William Reinsch holds the Scholl Chair in International Business at CSIS.Stephanie Segal is a senior fellow of the CSIS Simon Chair in PoliticalEconomy. Jack Caporal is an associate fellow with the CSIS Scholl Chair inInternational Business．