USTR Lighthizer

The next Director-General of the WTO — USTR Lighthizer’s comments to the Financial Times

· January 19, 2021 · Selection of WTO Director-General · , , , · One Comment

In an article in today’s Financial Times, Ambassador Robert Lighthizer, the outgoing U.S. Trade Representative, is reported as panning Dr. Ngozi Okonjo-Iweala for the position of Director-General of the World Trade Organization on the basis that she has no trade experience. Financial Times, Outgoing US trade chief says leading WTO candidate lacks experience, January 19, 2021, https://www.ft.com/content/baca66bb-5987-47e1-861d-3375a6f6d01b. The key quotes from Amb. Lighthizer in the article are copied below.

“’We need a person who actually knows trade, not somebody from the World Bank who does
development,’ said Mr Lighthizer, referring to Ms Okonjo-Iweala’s credentials.

“”We need a trade person with real trade experience,’ he added. “’And there are very few areas
where you would say, ‘here’s an organisation in very bad shape, let’s get someone who knows
nothing about its core mission’.’”

An early issue for the Biden Administration in its trade agenda will be whether the U.S. withdraws its refusal to join the consensus to appoint Dr. Okonjo-Iweala of Nigeria as the next Director-General. In an earlier post, I have indicated that such an action by the Biden Administration early in its term would be desirable. Without a Director-General, it is hard to imagine the WTO making progress on WTO reform. See, e.g., December 12, 2020, The Incoming Biden Administration and International Trade – Katherine Tai, nominee for U.S. Trade Representative, https://currentthoughtsontrade.com/2020/12/12/the-incoming-biden-administration-and-international-trade-katherine-tai-nominee-for-u-s-trade-representative/ (“On the World Trade Organization, the Biden Administration will have a potentially full docket but some important issues for early consideration. The first issue where an early action is important is who should be the next Director-General. The Trump Administration has indicated it did not agree to join a consensus on the candidate for the Director-General position who is the candidate with broadest and deepest support, Dr. Ngozi Okonjo-Iweala of Nigeria. Procedures adopted by the General Council in 2002 for selecting Directors-General was followed this year. The Chair of the General Council indicated he was prepared to recommend Dr. Okonjo to the General Council back in early November but has not done so in light of the U.S. position. Both Dr. Okonjo and Minister Yoo of Korea are well qualified candidates. While the Trump Administration may prefer Minister Yoo, in this writer’s view, either candidate will do an excellent job. U.S. refusal to join a consensus is contrary to procedures the U.S. and others agreed to. Because of the U.S. position and the failure of the Korean candidate to withdraw from the process, the WTO continues to operate without a new Director-General. The incoming Biden Administration should communicate with Korea that it intends to indicate the U.S. will join the consensus and then notify the Chair of the General Council. This can and should be done as quickly as possible by the Biden Administration to permit the WTO to get a new Director-General in place early in 2021.”).

While Dr. Okonjo-Iweala has argued that she has some trade experience, referring to the Nigerian customs service being under her jurisdiction when she was Finance Minister and having had some role apparently in Nigeria’s Trade Facilitation Agreement activities, there is little doubt that her background at the World Bank and in the Nigerian government were largely non-trade in nature. In comparison the Korea Trade Minister’s entire career in government has been in trade. So if deep trade experience is critical to performing the function of Director-General at the WTO, then someone other than Dr. Okonjo-Iweala would have been the logical choice for the membership. With the exception of the U.S. under Trump, Members do not have that concern about the qualifications of the next Director-General.

Indeed, deep trade experience has not been a requirement of former Directors-General nor of former senior trade officials in major countries. Peter Sutherland, who was brought in to complete the Uruguay Round in 1993, was not a trade person but rather had a background in banking and had been a prior EC Commissioner of Competition Policy. See Peter Sutherland, GATT and WTO Director-General, 1993 to 1995, https://www.wto.org/english/thewto_e/dg_e/ps_e.htm. Other Directors-General of the GATT and WTO had limited trade backgrounds. See, e.g., Supachai Panitchpakdi, WTO Director-General, 2002-2005, https://www.wto.org/english/thewto_e/dg_e/sp_e.htm. The view that individuals with political, diplomatic and other skills can step into an important trade function is not unique to the WTO. National governments, including the United States, often have trade ministries headed by people with little or no trade background prior to the individual’s appointment. Prior U.S. Trade Representatives Robert Strauss (1977-79), Michael Kantor (1993-96) and Ronald Kirk (2009-2013) would be examples. And at least some former U.S. Trade Representatives don’t view prior trade experience as critical to being an effective Director-General. See WITA, WITA Webinar: Three Former USTRs on the WTO in a Time of Change, 07/16/2020, https://www.wita.org/event-videos/wita-webinar-three-former-ustrs-on-the-wto-in-a-time-of-change (former USTRs Froman and Schwab). Dr. Ngozi Okonjo-Iweala has political and diplomatic stature and significant career accomplishments that make her an extremely well qualified candidate to be the next Director-General of the WTO regardless of the depth of her trade background.

Thus, while it has obviously been the Trump Administration’s view that a trade background is critical for the next Director-General, it is to be hoped that the incoming Biden Administration will take a different view, permit a consensus to be formed and let the WTO get back to having a Director-General and move towards much needed WTO reform on issues that the Trump Administration ably laid out as critical (dispute settlement, convergence vs. coexistence of different economic systems (and reforms of rules to address distortions flowing from non-market economic systems), role of Special and Differential Treatment, transparency, and addressing of critical issues like e-commerce, fisheries subsidies, etc.

USTR releases report from Section 301 investigation on Vietnam’s currency valuation

· January 15, 2021 · currency manipulators · , , · No Comments

USTR started two 301 investigations on actions by Vietnam, one of which dealt with Vietnam’s currency valuation and whether Vietnam’s actions violate Section 301. On January 15, 2021, USTR released a press release announcing the results of the investigation.

“The U.S. Trade Representative has issued findings in the Section 301 investigation of Vietnam’s acts, policies, and practices related to currency valuation, concluding that Vietnam ’s acts, policies, and practices including excessive foreign exchange market interventions and other related actions, taken in their totality, are unreasonable and burden or restrict U.S. commerce. In making these findings, USTR has consulted with the Department of the Treasury as to matters of currency valuation and Vietnam’s exchange rate policy. The findings in this investigation are supported by a comprehensive report, which is being published today on USTR’s website.

“‘Unfair acts, policies and practices that contribute to currency undervaluation harm U.S. workers and businesses, and need to be addressed,’ stated U.S. Trade Representative Robert E. Lighthizer. ‘I hope that the United States and Vietnam can find a path for addressing our concerns.’”

USTR press release, USTR Releases Findings in Section 301 Investigation of Vietnam’s Acts, Policies, and Practices Related to Currency Valuation, January 15, 2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/january/ustr-releases-findings-section-301-investigation-vietnams-acts-policies-and-practices-related.

The report and notice sent to the Federal Register are embedded below. USTR has not recommended action at this point, leaving resolution to the next Administration.

Vietnamcurrency301report

VietnamCurrencyFRN

As reviewed in a prior post, Vietnam’s currency practices have been found countervailable by the U.S. Department of Commerce, and Vietnam has been found to be a currency manipulator by the Department of the Treasury in the most recent semi-annual report. See December 21, 2020, Vietnam and Switzerland found to be “currency manipulators” in latest U.S. Treasury semiannual report, https://currentthoughtsontrade.com/2020/12/21/vietnam-and-switzerland-found-to-be-currency-manipulators-in-latest-u-s-treasury-semiannual-report/.

Vietnam has had rapid export growth to the United States and through 11 months of 2020 had the third largest trade surplus with the U.S. at $63.68 billion, trailing only China and Mexico. The U.S. trade deficit with Vietnam has surged from a 2017 deficit of $38.34 billion (full year). Thus, problems of currency valuation to the extent it supports an artificially undervalued currency encourages exports to the U.S. and limits U.S. exports to Vietnam. U.S. imports for consumption for the first eleven months of 2020 from Vietnam were $71.21 billion, with sixteen 4-digit HS categories showing imports from Vietnam of more than $1 billion in 2020 (the largest being over $11 billion). Failure to resolve the matter bilaterally to the satisfaction of the U.S. could result in additional duties being applied to all imported goods from Vietnam.

While U.S. importers who have shifted supply from China to Vietnam for products are assuming additional duties will be imposed, the current USTR is taking no action, meaning whatever action occurs will be left to the incoming Biden team. Unlike many press releases, USTR Lighthizer has indicated that he hopes “that the United States and Vietnam can find a path for addressing our concerns.’” Considering the stakes, look for a resolution without additional duties during the first quarter of 2021.

USTR Lighthizer on WTO dispute settlement, answers to Congressional questions from June 17 hearings

· August 9, 2020 · WTO Dispute Settlement · , , , , , · No Comments

At the June 17 hearings before the U.S. House and Ways Committee and the U.S. Senate Finance Committee, the U.S. Trade Representative Robert Lighthizer testified about the Trump Administration’s 2020 trade agenda. While there were few questions during the hearing that were addressed to dispute settlement at the WTO, the Committees forwarded follow-up questions to Amb. Lighthizer for responses. Several dealt with WTO dispute settlement, in particular, reform of the Appellate Body (“AB”).

For example, Senate Finance Chairman Chuck Grassley (question 4) and Ranking Member Ron Wyden (question 16) each inquired about the next steps by the U.S. to achieving AB reform. Both Chairman and Ranking Member are strong supporters of achieving Appellate Body reform and limiting the Appellate Body to the role envisioned in the Dispute Settlement Understanding. Amb. Lighthizer’s answer to them was the same. Both questions asked and Amb. Lighthizer’s answer are provided below.

Chairman Grassley, Question 4
“I’m a strong supporter of reforming the WTO Appellate Body, but I’m worried that we still have not made any concrete proposal of our own for reforming dispute settlement. A number of allies who have been supportive of WTO reform have told me that they are discouraged by the continued lack of a proposal from the United States. Unfortunately, many of these countries are now signing up for the EU’s alternative: the Multiparty Interim Arbitration Arrangement.

“I believe we need to do more than identify problems. We need to propose and build consensus for solutions that will carry out what Congress understood it approved in 1995: binding dispute settlement on certain rules carefully negotiated by Members, not discovered by appointed judges. Accordingly, we need solutions that address overreach and other problems like the AB’s failure to follow the 90 day rule.

“What efforts are you taking to develop a proposal that we can rally our allies around, and will you commit to working with Congress on it – as is required by the constitution and the law?“

Ranking Member Wyden Question 16

“For more than a year, this Administration blocked approval for new Appellate Body Members in an effort to draw attention to concerns regarding the WTO dispute resolution system. I share these concerns, and I want them to be addressed. Last December these concerns captured the world’s attention when the Appellate Body became unable to hear new cases after the retirement of two judges left only one remaining judge. The United States has yet to put forward a reform proposal despite opposing other WTO members’ reform suggestions.

“What are the next steps in addressing the problems at the WTO?“

“Amb. Lighthizer Answer: The Administration is committed to working with any interested WTO Member to find solutions to the failure of the Appellate Body to follow WTO rules. This means first understanding what is the root of the problem: Why has the Appellate Body consistently broken WTO rules – that is, those rules agreed by WTO Members in the Uruguay Round and approved by the Congress in the Uruguay Round Agreements Act – despite every effort by U.S. Administrations to get it to stop.

“By exercising our right not to approve new members to the Appellate Body, the Administration has forced the WTO to engage in a long-overdue debate on this problem. My office also comprehensively detailed the Appellate Body’s pervasive rule-breaking in its Report on the Appellate Body earlier this year.1 The Report details the concerns expressed by the United States for more than 20 years and the repeated failure of the Appellate Body to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements. The Report also highlights several examples of how the Appellate Body has altered WTO Members’ rights and obligations through erroneous interpretations of WTO agreements.

“Appellate Body overreaching has unfairly taken away U.S. rights and advantaged China. Through a series of deeply flawed reports, the Appellate Body has eroded the U.S. ability under WTO rules to counteract economic distortions caused by China’s non-market practices that harm our workers and businesses. For example, the Appellate Body’s erroneous interpretation of “public body” threatens the ability of WTO Members to counteract trade-distorting subsidies provided through state-owned enterprises, favoring non-market economies at the expense of market economies.

“The dispute settlement system should support, rather than weaken, the WTO as a forum for discussion, monitoring, and negotiation. The Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved – and could not achieve — through negotiation. If WTO Members believe in a rules-based trading system, then we must ensure the dispute settlement system follows the rules that WTO Members established. Without understanding the problem of why the Appellate Body has not followed the rules Members agreed to for it, simply writing new rules or affirming the existing rules in whatever form will not fix the problem. This is why we have continued to insist that Members need to understand why the Appellate Body does not consider itself bound by the rules so that we can find real, lasting solutions.

“Unfortunately, some of our trading partners – prominently, the EU and China – continue to deny that the Appellate Body has broken the rules. Rather than seeking reform in the areas of concern raised by the United States and other WTO Members, the EU and China have pursued an arbitration arrangement that incorporates and exacerbates some of the worst aspects of the Appellate Body’s practices. The numerous departures from agreed WTO rules in the EU-China arrangement highlight a fundamental difference among WTO Members: Some Members prefer an appellate “court” with expansive powers to write new rules and impose new obligations on the United States, instead of the more narrow appellate review as agreed to by Members in the DSU.

“The United States continues to engage with our trading partners and remains committed to working with any WTO Member that acknowledges U.S. concerns and is willing to work together to find real solutions and reform. I look forward to continuing to work with you and the Committee on these important issues.

“1 United States Trade Representative, Report on the Appellate Body of the World Trade Organization, February 2020, available at: https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf.”

In the questions from the House Ways and Means Committee members, one question dealt with WTO reform, and the answer from Amb. Lighthizer included not only reform of the WTO generally but also the needs for addressing Appellate Body overreach. See question 1 from Rep. Jason Smith:

“Rep. Jason Smith

“1. The World Trade Organization (WTO) is in urgent need of reform and modernization. For too long, the WTO has been left stagnant, unable to adapt to the challenges presented by a rapidly changing global economy. As a result, American manufacturing and other critical U.S. industries have suffered the consequences of a body that has time and again, sought to diminish US. sovereignty. I am pleased that you and President Trump have taken on this task and have put forth a vision for a reformed WTO that will better serve the interests of America and our allies. With that in mind, what steps are you and your team taking this year to advance the necessary solutions the WTO system desperately needs?

“Answer: We continue to engage extensively with WTO Members to pursue meaningful reform of the WTO. The United States is pleased that Brazil, Costa Rica, Korea, and Singapore have responded to our reform initiatives by agreeing to forego special and differential treatment in future WTO negotiations. We are continuing to work to ensure all countries are contributing to the WTO commensurate with their role in the global economy. The United States is also leading an effort to bring the WTO back to upholding its core principle of market orientation to ensure a level playing field for U.S. workers, farmers, and businesses. We have also advanced work on transparency, ensuring timely notifications that can help get the WTO back to its core function of negotiating new trade rules.

“Additionally, we cannot allow overreaching by the Appellate Body to continue to weaken our ability under WTO rules to address the harm to our workers and businesses caused by non-market practices such as China’s economic distortions. WTO Members must come to terms with the failings of the Appellate Body and understand the causes if we are to achieve lasting and effective reform of the WTO dispute settlement system. The United States will continue to engage with any WTO Member in order to restore the WTO dispute settlement system to the role given to it by WTO Members and to ensure that dispute settlement supports, rather than weakens, the WTO. The United States led a group of 11 Members to issue a statement calling for transparency in dispute settlement through open meetings and public submissions, and we will continue to work to persuade Members who did not join the statement (such as the EU, China, and India) to support greater transparency.”

No movement at the WTO

Now that the Appellate Body has been without three members for nearly eight months, one would have expected that negotiations would be intense to find a solution acceptable to the United States and the membership. But other than certain Members seeking at each Dispute Settlement Body meeting to get agreement to start looking for new Appellate Body members (which is blocked by the United States), there is no indication that any meaningful activities are being pursued in 2020 to resolve the longstanding concerns of the United States.

With Director-General Azevedo’s announcement on May 14 that he would step down as the Director-General at the end of August 2020, much attention within the WTO in recent months has understandably been focused on finding a new Director-General. The selection process will likely continue until early November. This makes it unlikely that any major effort to address U.S. concerns will happen in the remainder of 2020.

Similarly, as we are less than three months from U.S. Presidential elections, many WTO Members will likely prefer to wait to see the results of the election before engaging with the U.S. on its core concerns.

Some major Members, like the EU, keep talking about looking for permanent solutions. See August 3, 2020, European Commission, Directorate-General for Trade, The WTO multi-party interim appeal arrangement gest operational, https://trade.ec.europa.eu/doclib/press/index.cfm?id=2176. “Commissioner for Trade Phil Hogan said: ‘With the agreed pool of arbitrators, the interim appeal arrangement for the WTO disputes is now up and running. * * * It shows that participating WTO members are willing to take concrete action to preserve an independent dispute settlement system with an appeal function. We can now turn our attention to finding a solution to the underlying problems through reform of the WTO Appellate Body and other aspects of the WTO system that need improvement.'” (emphasis added).

However, it has been the EU’s failure to recognize the departure of the Appellate Body from its limited role and the EU’s embrace of an Appellate Body creating rights and obligations that are not part of existing agreements that have significantly contributed to the problems identified by the United States. While Europe has shown some flexibility on addressing process issues, it has not acknowledged the serious overreach problems that the U.S. and many other Members have identified over the years. Thus, the EU concept of permanent solutions to the Appellate Body reform effort ignores core concerns of the U.S.

Conclusion

The U.S. has documented over the last several years the pervasive problems with the WTO’s dispute settlement system, particularly the actions of the Appellate Body. Since the Dispute Settlement Understanding already makes clear the proper role for the Appellate Body and the limitation on panels and the Appellate Body not to create rights or obligations, the U.S. insistence on Members focusing on why the Appellate Body has felt free to ignore the limits on its authority is understandable as a first step to determining what needs to be done to get the dispute settlement system back to what was agreed to by Members at the creation of the WTO. The U.S. concerns also explain its lack of support for a mere reaffirmation of the original Dispute Settlement Understanding language.

In prior posts, I have put forward thoughts on how one could make the original language self-executing or enforceable by Members to a dispute and hence address U.S. concerns if other countries will not focus on why the Appellate Body has been willing to ignore limits on its authority. See, e.g., July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/.

Absent an agreement among Members as to the reasons for Appellate Body departure from its limited role, Members will need to make modifications to the Agreement or to what is contained in binding interpretations that actually prevent future departures from the correct, limited role of the Appellate Body.

Don’t hold your breath that Members will find solutions any time soon.

U.S.-China Trade – Some Possible Progress Announced on October 11, But a Long Road Ahead?

· October 13, 2019 · Uncategorized · , , · No Comments

On Friday, October 11, 2019, President Trump and Vice Premier Liu He of China announced a “phase one” deal, although the President indicated it could be three to five weeks (possibly more) before the deal was in writing and ready for Presidents Trump and Xi to sign.  Topics reportedly covered in this first phase include agricultural market access (which President Trump expressed in terms of anticipated agricultural product purchases by China to be ramped up over the next two years to $40-50 billion/year), addressing some sanitary and phytosanitary issues of concern to the U.S. (including issues involving biotechnology) in China, greater access for U.S. financial service providers, apparently addressing some aspects of intellectual property concerns though others will be addressed in a “phase 2” and agreement around transparency in foreign exchange markets.  See Remarks by President Trump and Vice Premier Liu He of the People’s Republic of China in a Meeting, October 11, 2109, https://www.whitehouse.gov/briefings-statements/remarks-presemt-trump-vice-premier-liu-peoples-republic-china-meeting/.

The President has put off increasing tariffs on $250 billion in imports from China from 25% to 30%, an increase that had been set for October 15.  No decision has been made by the U.S. on the tariffs scheduled on most remaining imports from China which are scheduled for December 15, though Amb. Lighthizer made clear that there was sufficient time for phase one to be completed and signed ahead of that date.  Tariffs already in place remain in place for the time being.

The U.S. had thought it was close to a deal with China in early May 2019 only to have the “papering” of the perceived agreement blow-up as China was perceived by the U.S. as backtracking on a host of issues where the U.S. had understood there was agreement.  Back in late April, early May there was a reported 150 page draft of a comprehensive agreement.  Not surprising, there are concerns in the media and in business that the “papering” of the phase one agreement may yet prove illusive.

But the announcement that the two countries are actively engaged in negotiations and are hopeful of completing a phase one shortly is obviously good news for many groups in the U.S., in China and around the world.

How Important Could a Phase One Agreement Be?

          A. Agriculture

U.S. farmers and ranchers have been particularly hard hit by retaliation of trading partners whether for U.S. actions on national security grounds (Section 232 action on steel and aluminum) or in response to the Administration’s actions under Section 301 in an effort to address various perceived unfair trade practices of China (forced technology transfer, theft of IP, among other issues).

In the case of China, U.S. exports of agricultural products increased from $6.5 billion in 2007 to a high of $22.6 billion in 2013 and 2014 and were still at $18.7 billion in 2017 before retaliation by China commenced in 2018.  U.S. agriculture exports declined $10.2 billion to just $8.5 billion in 2018.  Some increased purchases of soybeans by China in midyear 2018 have resulted in an increase from the extraordinarily low 2018 exports through August of 2019 ($7.6 billion vs. $7.1 billion for first eight months of 2018). 

For the period 2007-2017,  US exports of soybeans accounted for more than half of all US agricultural exports to China (from 54.9% – 75.9%) and were 65.4% of total US agricultural exports in 2017 before retaliation by China on soybeans and other agricultural products resulted in soybeans dropping to just 36.5% of US exports in 2018.  The U.S. exports of soybeans declined $9.1 billion in 2018 from 2017 levels and accounted for 89.2% of total US agricultural export declines to China ($10.2 billion) in 2018.

Not surprisingly, a great deal of focus on the agricultural market access has been to get China to increase imports, particularly of soybeans.  US exports of soybeans to China declined from 31.7 million metric tons in 2017 to just 8.2 million metric tons in 2018 (and are 5.1 million metric tons higher for the first eight months of 2019).  Remarks by President Trump and Vice Premier Liu He on Friday indicated that orders have been placed which either bring the total purchases of U.S. soybeans by China to 20 million metric tons or for an additional 20 million (not clear from the transcript).  2016 saw the largest U.S. exports to China of soybeans, 36.1 million metric tons.

For China to purchase $40-50 billion in agricultural goods will in fact require a significant broadening and deepening of market access by many other competitive U.S. agricultural products, including grains, corn, beef, pork, chicken to name just a few.  Thus, the success of the agricultural market access agreement with China will depend both on the decisions of the Chinese import entities that control certain agricultural products and the elimination by China of tariffs and sanitary and phytosanitary obstacles that have limited U.S. market access to date.

B.  Financial Services and Exchange Rates

The U.S. has a very competitive financial services sector.  Increased liberalization by China would obviously be appreciated by U.S. companies and would benefit China as well.  Press articles from earlier this year indicated that the Chinese were contemplating liberalization of the financial services sector for WTO members generally, thus the agreement between China and the U.S. may simply reflect movement in China’s overall position on financial services.  How important the liberalization will be to US service providers will depend on (1) the text of the agreement reached, (2) how China implements the terms, and (3) what enforcement mechanisms are available should implementation suffer from some of the same types of problems US financial service providers have been dealing with for the last fifteen years.

While currency manipulation/misalignment has been a long term concern of the U.S. with China and with a number of other countries, it is unclear what actions are contemplated by the phase one agreement as outlined last Friday and whether misalignment will be addressable in a meaningful manner if problems arise or are viewed by the U.S. as continuing.

Addressing Market Distortions in Non-Agricultural Goods is Critical to Any Balanced Final Package (Phase 2 or later).

While restoring and improving access for US agricultural products is certainly a very important part of achieving better balance with China, the Section 301 investigation handled by USTR focused on intellectual property issues primarily involving non-agricultural goods.  Other long simmering challenges have included the massive distortions created by China’s enormous subsidies, the continued dominant role played by state-owned and state-invested enterprises in China , and China’s continued state direction of large parts of the economy.

U.S. exports of nonagricultural goods to China have accounted for more than 80% of total U.S. exports to the country in nearly every year since 2007 and were above 92% in 2018 following initial retaliation by China.  While the 2018 decline in total US exports to China were almost 100% in agricultural goods (at the aggregate level not individual HS categories), more than 100% of the decline in the first eight months of 2019 have been to nonagricultural goods, including heavy hits to U.S. exports of motor vehicles and parts and civil aircraft.  Moreover, the US trade deficit with China is entirely in nonagricultural goods.  In 2017, total trade deficit (domestic exports – imports for consumption) was $383.8 billion, with the deficit on nonagricultural goods running $395.5 billion.

While President Trump indicated that there was agreement in the phase one package on some intellectual property issues, the public won’t be able to evaluate the nature of any modifications in nonagricultural trade until the phase one agreement is finished and signed.  Almost certainly the most difficult issues for nonagricultural goods (including state subsidies, China 2025 policies, etc.) are not presently part of the announced phase one package, meaning any addressing of more than 80% of our trade with China will likely not occur until 2020 or later.   

Enforcement is Important; Can it Be Achieved?

USTR Lighthizer has been working hard throughout the process of negotiations with China to obtain an agreement that has meaningful and effective enforcement provisions.  The U.S. experience with China since its accession to the WTO has too often been one of both a failure by China to implement certain commitments and the lack of meaningful and effective enforcement tools when such situations arise and need to be addressed.  It is understood that what enforcement tools the U.S. sought back in April/May 2019 were viewed as problematic and/or unacceptable by China then.  The remarks on Friday by President Trump and others make clear that enforcement issues continue to be worked on the seemingly simpler phase one issues but have not yet been resolved.  This is certainly an area where problems may arise ahead of a phase one agreement and, as significantly, for any later phases.

Conclusion

The U.S.-China trade relationship is obviously important to each country and more generally to the world at large.  The current strains on the global economy and on the two countries’ economies have been increasing periodically over the last year and a half with additional actions taken by each country to increase the challenges for the other while negotiations have been inconclusive.  The facts that a partial deal may be achieved in the next month or so and that further escalation is put on hold should be good news for many businesses in the U.S. and China and elsewhere in the world.   

Whether the U.S. and China will be able to conclude the phase one agreement promptly and move forward expeditiously with the remaining critical issues in a phase two agreement are open questions.  Success would do a lot to move the world to a more sustainable and integrated world trading order.  Failure will deepen an economic malaise taking hold in much of the world to the detriment of many including many of the world’s poorest.

Here’s hoping that success and not failure will mark the October/November 2019 time period.