There has been a lot of anticipation for what the Phase 1 agreement between the U.S. and China actually contains. Earlier today, following the signing ceremony at the White House, The Economic and Trade Agreement Between the United States of America and the People’s Republic of China, Phase 1 was released. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf
I’ve just finished reading through the agreement. My first blush read is that the agreement has a lot of positive potential for the United States. While enforcability is always a critical consideration and particularly based on the U.S. experience with other commitments made by China in the past, there are some chapters which have both great specificity on obligations and specific timeline commitments that should make at least those chapters potential important improvements.
A quick overview of the agreement follows.
Chapter 1 on intellectual property is quite interesting as it lays out a large number of obligations China is taking on by individual IP issue and confirms that US system already has such obligations. The chapter is broken into the following topics:
Trade secrets and confidential business information;
Pharmaceutical-related intellectual property;
Manufacture and export of pirated and counterfeit goods;
Bilateral cooperation on intellectual property protection;
The specificity of commitments and timing for action are important in hopefully making this a really important chapter for companies with intellectual property needs and current concerns in China’s performance on such matters. USTR’s fact sheet on the IP chapter presents the Administration’s view of what was achieved. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-IP_Fact_Sheet.pdf. My own view is that Chapter 1 is an important plus for the U.S.
Forced Technology Transfer
The technology transfer chapter is limited and doesn’t appear to be more enforceable than the multiple laws, etc. China has had for years. While the chapter states the obligations, China has historically been of the view that technology transfer is not enforced in fact. The Administration understandably views the chapter as important, and the pressure of the 301 investigation and tariffs that remain may make the chapter more valuable than the general statements it consists of suggest. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Technology_Transfer_Fact_Sheet.pdf In my view, this is more of a placeholder chapter. Hopefully it will be honored in fact but the past doesn’t show that as a high probability.
Trade in Food and Agricultural Products
The third chapter on agriculture could be very important for changing the U.S. agricultural export scene as the chapter goes through a large number of products, establishes timelines and standards against which US products will be evaluated and or requires acceptance of various US products that have met US standards. The Administration gets straight A’s for the breadth and depth of this chapter in my view. There are seventeen annexes that take up the following topics or products:
Annex 1, agricultural cooperation
Annex 2, dairy and infant formula
Annex 3, poultry
Annex 4, beef
Annex 5, live breeding cattle
Annex 6, pork
Annex 7, meat, poultry and processed meat
Annex 8, electronic meat and poultry information system
Annex 9, aquatic products
Annex 10, rice
Annex 11, plant health
Annex 12, feed additives, premixes, compound feed, distillers’ dried grains, and distillers’ dried grains with solubles
Annex 13, pet food and non-ruminant derived animal feed
Annex 14, tariff rate quotas
Annex 15, domestic support
Annex 16, agricultural biotechnology
Annex 17, food safety
The chapter also includes an Appendix which lists beef, pork and poultry products considered not eligible for import into China which US producers will need to review. There are also side letters released with the agreement that address products and producers who will have immediate access to China consistent with the chapter. The Administration has a fact sheet on agriculture chapter in total and then on individual products. The chapter fact sheet’s link follows. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Ag_Summary_Long_Fact_Sheet.pdf
The fourth chapter on financial services is also quite interesting and is the one chapter where there are specific US obligations identified (typically considering expeditiously pending applications by Chinese financial service providers in specific areas). US companies have had many problems for the last 20 years in terms of China’s permitting access. Looks to me that the chapter, if implemented (and there are timelines, etc.) could be important for US companies. Subjects covered include banking services, credit rating services, electronic payment services, financial asset management (distressed debt) services, insurance services, and securities, fund management, futures services. The Administration’s fact sheet on financial services provides its views on the importance of the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Financial_Services_Fact_Sheet.pdf
Macroeconomic Policies and Exchange Rate Matters and Transparency
The fifth chapter on currency contains four articles. One is on general provisions. The second is on exchange rate practices. The third addresses transparency. And the fourth article covers the enforcement mechanism. While China was widely viewed as engaging in reducing the value of its currency for many years and was last year found by the Trump Administration to be a currency manipulator, most economists have viewed China as less problematic on its currency in recent years. It is important to have a chapter focused on transparency and currency practices. Unclear how effective the enforcement provisions outlined will be in fact. But hopefully, China’s actions will not raise concerns under this chapter going forward. The Administration’s fact sheet presents its views of what was accomplished in the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Macroeconomic_Fact_Sheet.pdf
The sixth chapter is potentially commercially important as it addresses China’s commitments to increase purchases from the United States in both goods and services. The actual text clarifies that the $200 billion additional imports by China over 2017 levels are the combination of increases over 2017 in 2020 and 2021 versus being a requirement for each year. Such growth is more achievable and less unrealistic in my view.
The targets for growth are presented in four groups – manufactured goods, agricultural goods, energy, services and then the categories that are considered within each of the four groups are shown on pages 6-4 – 6-23 of the Agreement. The growth above 2017 levels for the four broad categories is shown below.
|manufactured goods||$32.9 BN||$44.8 BN||$77.7 BN|
|agriculture||$12.5 BN||$19.5 BN||$32.0 BN|
|energy||$18.5 BN||$33.9 BN||$52.4 BN|
|services||$12.8 BN||$25.1 BN||$37.9 BN|
|Total||$76.7 BN||$123.3 BN||$200.0 BN|
A lot of attention will be focused on whether the purchases actually happen. Actions under Chapter 3 will directly improve US exports of agricultural goods and those of Chapter 4 will improve the financial services portion of the services target. The IP chapter could be affect manufactured goods, etc. So much of the Phase 1 Agreement should result in a natural increase in imports from the U.S. as longstanding barriers are removed or otherwise overcome.
The Administration’s fact sheet on expanded trade can be found here. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Expanding_Trade_Fact_Sheet.pdf
Bilateral Evaluation and Dispute Resolution
A lot of focus will be given to Chapter 7 because of the importance of enforcement. However, as noted above, enforcement should be easier where there has been the level of detail/specificity as to obligations and timelines for implementing individual obligations that exists in many of the chapters.
On enforcement, Chapter 7, lays out the basic purpose of the bilateral evaluation and dispute resolution arrangement in Article 7.1. Paragraph 2 of that Article provides the objectives, reflecting both the U.S. desire for speed and the Chinese desire for mutual respect and avoidance of escalation.
“The purpose and madate of the Arrangaement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.”
There are various elements to the chapter including a high level Trade Framework Group (USTR and designated Vice Premier of the PRC). Each country will have a Bilateral Evaluation and Dispute Resolution Office which will, inter alia, handle disputes and includes opportunities for appeals on short time lines, referral to USTR and the Vice Premier and the ability of the complaining party to take action if not resolved with either no retaliation (complained against party views action taken as in good faith) or the need to withdraw from the agreement for the party complained against if the belief is that the action was not taken in good faith.
I believe that the Chapter will effectively help the Parties resolve disputes particularly with regard to the commitments in Chapter 1, 3, 4 and 6.
The Phase 1 Agreement is an important agreement that will achieve some significant market access opening for U.S. producers into the Chinese market, improved intellectual property protection in China, expanded market access for U.S. financial service providers and hopefully make some progress on reducing or eliminating forced technology transfer and limit concerns about currency misalignment. My hat’s off to the negotiators for an impressive result. There remain important issues not yet addressed bilaterally that will hopefully be taken up in Phase 2 talks, but Phase 1 is an important accomplishment.