Eye on China: Special Edition: Decoding The US-China Trade Deal

The US and China have finally signed the long-anticipated Phase 1 trade deal. Ahead of the deal, the US removed China from a list of countries considered currency manipulators. The final agreement has now been made public. It’s a 96-page document that comprises 8 chapters and annexes. The agreement comes into force within 30 days from Jan. 15, 2020, and either party can walk out giving a 60-day written notice. 

What’s in the Deal?

Below is an issue and chapter-wise summation of the text of the agreement. I’ve tried to incorporate as much as possible.

Trade & Goods Purchases: This is dealt with in Chapter 6 of the deal. But since this is the headline figure, I am putting it here. China agreed to increase purchases of American products and services by at least $200 billion over the next two years, over a baseline established in 2017, with increased imports of U.S. goods and services to “continue on this same trajectory for several years after 2021.” China bought $130 billion in U.S. goods in 2017, before the trade war began, and $56 billion in services. The purchases will include agricultural, manufacturing, energy and services products. 

Meanwhile, as Reuters explains, the US will cut by half the tariff rate it imposed on Sept. 1 on a $120 billion list of Chinese goods, to 7.5%. U.S. tariffs of 25% on $250 billion worth of Chinese goods put in place earlier will remain immediately unchanged.

IP and Tech Transfer:  These issues are covered in the first two chapters. The IP chapter discusses a broad range of issues, outlining commitments that China must fulfil. However, much of this appears aspirational as opposed to tangible outcomes. In other words, there are legislative and regulatory changes that China must undertake. What’s, however, interesting is that there is a deadline of sorts, with China being required to promulgate an Action Plan to strengthen intellectual property protection, which “shall include, but not be limited to, measures that China will take to implement its obligations under this Chapter and the date by which each measure will go into effect.” On tech transfer issues, there are merely commitments about not supporting outbound investments with the aim of acquiring foreign technology and pressuring entities to force transfer of technology for market access. But it seems short of specifics.

Food and Agriculture Products: These are covered in Chapter 3. There’s a pledge to buy more. The agreement stipulates that China will make purchases far in excess of what it bought in 2017, totalling $32 billion over the next two years. It provides for $12.5 billion in 2020 and $19.5 billion in 2021. And there’s this remark about the parties “project(ing) that the trajectory of increases” will continue through 2025. NYT’s assessment of the deal, argues that as per the agreement, China “will get rid of certain health standards that Chinese officials have used to block a variety of American agricultural goods. Beijing is also relaxing licensing, inspection and registration rules that the United States has viewed as barriers to trade. The changes will affect products including meat, poultry, pet food, seafood, animal feed, baby formula, dairy and biotech.”

Financial Services & Exchange Rate: Chapters 4 & 5 cover these issues. Essentially, this is a win for financial institutions on both sides along with credit rating agencies, electronic payment and insurance service providers and firms operating in the securities, fund management, and futures sectors. The agreement here suggests clear reciprocity. And there are specific timeframes for processing applications and ensuring access. For Beijing, this wouldn’t really be a concession. It was anyway fast-tracking the opening of these sectors. On the exchange rate, there are pledges to pledges to refrain from competitive devaluations and avoiding manipulating exchange rates. Both sides seek to achieve and maintain a market-determined exchange rate regime. Disputes will be dealt with bilaterally, and if needed, the IMF can be involved.

Dispute Resolution Mechanism: Chapter 7 outlines the Bilateral Evaluation and Dispute Resolution Arrangement. This entails the creation of a Trade Framework Group headed by USTR and China’s Vice Premier, although the US Treasury Secretary will also be involved. This group will meet every six months. Also, a Bilateral Evaluation and Dispute Resolution Office will be created by both sides, which will meet quarterly. This office will “(a) assess specific issues relating to implementation of this Agreement, (b) receive complaints regarding implementation submitted by either Party, and (c) attempt to resolve disputes through consultations.” There would be an appeals mechanism to raise a dispute and if lower level officials cannot resolve the issue, then it’ll go up the official chain. If a dispute cannot be resolved at the highest levels too, then action can be taken by specific parties. The timeline for resolving a complaint is 21 days, and increases as things go up the chain.

Importantly, there’s nothing in principle here that suggests that the US can unilaterally raise tariffs or do something to that effect. In fact, on the complaints issue, in case of a failure to agree, here’s what the agreement says that parties can do: “the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship.”

Also there has been some speculation about which version of the agreement will trump in a dispute over translation. The document clearly says: “The English and Chinese versions of this Agreement are equally authentic.” So let’s see how this plays out.

II. My Thoughts

While there’s a lot that’s been touched upon, there’s little that suggests the Chinese side will be undertaking structural changes to address issues that are fundamental to the PRC’s political economy, i.e., its industrial policy, state subsidies for domestic firms and indigenisation targets for tech sectors. The bit about not supporting acquisition of foreign technology is also likely to be extremely difficult to monitor and curtail.

The US, on the other hand, appears to have given really nothing away apart from minimal tariff reduction. Just about every section essentially lays out obligations that the Chinese side has to fulfil, and in some cases, there are timelines attached. The financial services bit, however, does include some US commitments to reciprocate on granting of licences. What’s been done to balance this sense of inequality throughout the agreement is the placement of this sentence: “The United States affirms that existing U.S. measures afford treatment equivalent to that provided for in this Article.” That’s clever optics. 

I also concur with this post by Yun Jiang, co-editor of China Neican, which discusses the adverse impact of the deal on the multilateral trading order and the impact of Chinese purchase commitments on its other trading partners, like say Brazil or India.

III. Chinese Media Coverage

Liu He read out a letter from Xi during the signing ceremony in Washington. Xi wrote that the conclusion of the deal “is good for China, for the United States and for the whole world…It also shows that our two countries have the ability to act on the basis of equality and mutual respect, and work through dialogue and consultation to properly handle and effectively resolve relevant issues.” That’s the big message that Beijing will be hoping to hammer home to its domestic constituency. This People’s Daily piece added more meat to this message, arguing that the agreement was based on “equality and mutual respect.” The piece quotes a bunch of Chinese experts analysing the agreement. Broadly, the argument is that IPR and tech transfer commitments along with the opening of the financial sector are a continuation of China’s reform and opening up policies. Agricultural purchases are explained as “conducive to satisfying China’s consumer demand” and importantly, these “must be based on market principles and make decisions by market players.” There’s also a call for US firms to become more competitive. There’s also an unambiguous statement that this deal isn’t the Plaza Accord. 

For more on how Chinese media is responding, read this Brendan Murray piece in Bloomberg: China Tries to Counter Narrative That ‘We Lost’ in Trade Deal With Trump

IV. Reactions in the US

“This is something that is going to be so special to our manufacturers, farmers, our bankers, our service people—nobody has ever seen anything like it. This is the biggest deal there is anywhere in the world by far.” That’s how Donald Trump has sold the deal back home. So what’s been the reaction in the US so far? 

WSJ reports that “U.S. business leaders generally applauded the signing of a U.S.-China trade pact but stressed the need to keep negotiations going on an accord that could result in a lifting of tariffs on Chinese imports. Corporate executives see the deal as a sign of de-escalation that can improve conditions for investment and raise hopes for a more comprehensive truce to come.” The Dow and S&P 500 closed at record highs on Wednesday as the deal was signed. However, politics over the deal continues. Senate Minority Leader Chuck Schumer was among the first to hit out. “By giving away leverage with a temporary deal…these structural issues will only become more challenging to address in future negotiations,” he argued.

V. What Next?

There remain serious structural differences between the US and China that need to be addressed and tech competition will continue to intensify going forward. But looking ahead, first, one will have to see how the deal plays out over this year, and to be honest, what is politically convenient for Trump in an election year. Second, while this deal was being signed, reports inform of continuing friction in the technology domain. 

For instance, WSJ reports that “the Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said. Some lawmakers and national-security experts have said Huawei’s equipment would allow Chinese leaders to spy on Americans, which the company has regularly denied.”

At the same time, the US is pressuring allies like the UK to exclude Huawei from its 5G networks. The State Department is clearly suggesting that it will back Huawei’s rivals. In fact, a bipartisan group of US senators have proposed the Utilizing Strategic Allied Telecommunications Act. This act would essentially promise around $750 million for companies developing 5G, wireless technology and creates a separate $500 million fund for companies that deploy “trusted and secure” equipment around the world. The US also wants the TSMC to produce its military-use chips in the US, in order to ensure that high-security components free from potential Chinese interference, reports Nikkei Asian Review.

On the other hand, China is also looking at further pushing towards meeting indigenisation targets. Speaking at an event this week, former industry and information technology minister minister Li Yizhong said that China is planning to create 40 “national manufacturing innovation centers” by 2025. He highlighted China’s weakness in core parts and components, adding that the aim going forward is to reduce dependence on imports. China is aiming to increase its reliance on domestic production for key components, including chips and controlling systems, to 75 per cent by 2025, he said.

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