A Few Details on the US‐​China “Phase One” Trade Deal

Last Friday, the U.S. Trade Representative’s Office released a “fact sheet” about the U.S. — China trade deal that it had just announced. Reports suggest that the deal will be signed in early January, with the text released some time after that. A full analysis of the deal will have to wait until then, but in this post, we offer some comments on the details set out in the fact sheet.

The first issues mentioned are intellectual property and technology transfer. The fact sheet addresses these as follows:

• Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding 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 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. 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.

With regard to these issues, two points are worth noting. First, there are already rules on these issues at the World Trade Organization (the “For the first time in any trade agreement” claim related to forced technology transfer is not accurate). When the text of the U.S.-China deal is released, it will be interesting to compare and see if there is anything new here, or if the deal just restates existing WTO obligations.

Second, China was in the process of making domestic law changes in these areas anyway (examples can be found in a new Foreign Investment Law, and in 2019 Chinese amendments to its Trademark Law and pending revisions to its Patent Law), so the commitments in this deal will not necessarily lead to any new legislative actions.

Next up is agriculture:

• 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 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.

With regard to “structural barriers to trade,” there are rules at the WTO as well. Again, when we see the text, we can see if there is anything new here. In addition, China is having some problems with meeting its demands for agricultural products (most famously pork, due to an outbreak of swine flu), so it would not be a surprise to see an increase in Chinese purchases of these products.

And on financial services, the fact sheet says:

• Financial Services: The Financial Services chapter addresses a number of longstanding 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 service providers to compete on a more level playing field and expand their services export offerings in the Chinese market.

China was in the process of changing its domestic law here as well, and there are also some existing WTO obligations in this area to compare this with.

With regard to other issues, the fact sheet talks about currency, which will probably mean provisions similar to those in the U.S.-Mexico-Canada Agreement.

And then there is a section indicating that China will buy a massive additional amount of U.S. exports of goods and services, as follows:

• 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 $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.

Total U.S. exports of goods and services to China in 2017 was $188 billion. Exceeding that amount over the next two years by “no less than $200 billion” is a little hard to fathom. Do U.S. producers have that much to sell to China? Will there just be a shift of purchases by buyers and sellers, so U.S. companies sell less to the rest of the world and more to China? In a press conference last Friday, Chinese officials emphasized that trade expansion would be based on market principles and WTO rules. How will this work when there is an express trade volume quota to meet?

Finally, there is dispute resolution. The fact sheet tells us this:

• 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 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.

The fact sheet details are vague, but based on other statements by the Trump administration, it seems like this process will not involve neutral adjudication of disputes about compliance. Rather, if consultations fail, the United States will simply decide on its own whether China is in violation of the agreement, and then decide on its own what tariff penalties are appropriate. In our view, this is not really a dispute resolution mechanism, but simply a process to restart the tariff war if one side is unhappy with the arrangement (and which could have been restarted without such a provision in place). But this is still a bit speculative, and we need to see the final text first.