McLARTY REPORT: Thoughts on the Phase 1 US-China Trade Deal

December 16, 2019

Background

On the afternoon of Friday, December 13, USTR released a fact sheet about the US-China trade agreement announced earlier that day by Ambassador Robert Lighthizer. While initial press reaction and commentary focused on the lack of specifics, with cautious endorsement from trade associations pleased that the trade conflict would move away from confrontation, we now are able to begin to evaluate the different parts of the agreement as described in the Fact Sheet.

Although this US-China agreement is not a Free Trade Agreement (FTA) — that is, with Congressional requirements and procedures — the Administration has described seven different “chapters” of issues, which invokes the cloak of a legally binding FTA. The Administration has said that the signing ceremony will be in Washington in January, likely with Ambassador Cui Tiankai representing his country. But despite some trappings of an FTA, what the two sides will sign will likely be a government-to-government memorandum of understanding; still “binding” in a political sense, particularly in the Chinese context, but clearly different under U.S. law.

This Time is Different

While other trade agreements have had an announcement of completion before the final text is released, this case was somewhat unusual. There was no presidential or ministerial meeting driving the announcement, which seemed more keyed to the December 15 tariff deadline and the House impeachment news cycle. However, unlike several earlier claims of a near-concluded agreement, this announcement was closely coordinated with the Chinese Government, with back-to-back press conferences in Washington and Beijing — an unusual level of coordination against the backdrop of 18 months of US-China trade volatility. The translation and legal scrub as with all trade agreements will be challenging – in this case even more so. It is unclear if the complete final text will be released for public scrutiny, as would be required for an FTA, or if only parts of the agreement will become available.

… but Builds on Past Negotiations

Having spent the last five years in Beijing at the senior USTR official in China (2013-2018), what struck me about the seven chapters is how much the substance and the format are more a sign of continuity than discontinuity in trade negotiations with China over the last decade. Here are the seven substantive chapters outlined in the USTR Fact Sheet:

Intellectual property
Technology transfer
Agriculture
Financial services
Currency
Expanding trade
Dispute resolution

In both the Barack Obama and George W. Bush Administrations, senior officials would meet at regular ministerial meetings or presidential summits and the two government would issue economic/trade fact sheets. Take one Joint Commission on Commerce and Trade (JCCT) at random — say, 2014 — and here is a sampling of the areas of Chinese commitments: medical device and pharmaceutical market access, agricultural biotechnology, competition (anti-trust), government procurement, and over a dozen specific IPR issues (see link). That said, the December 13 fact sheet introduces some novel ideas that will be important to understand better, such as limiting Chinese overseas technology acquisitions and addressing agricultural nontariff barriers. Assuming the final text is released, we will be looking closely at US-Mexico-Canada Agreement language as well as previous Chinese commitments for a sense of how the commitments made here stack up. At 86 pages, this agreement should go into far more detail than previous ministerial or presidential statements.

Given other market access issues on the table earlier in the process — cloud computing for example — this list of seven chapters is modest. The December 13 agreement does address the basic thrust of the Section 301 complaint that began the trade conflict: forced technology transfer and IPR, reserving for the next phase digital economy market access and state capitalism policies. It is our view, however, that serious “Phase II” or “Phase III” advances are unlikely before January 2021 — even initiating those negotiations will prove devilishly difficult if the past is any guide.

There are two major areas of divergence from previous agreements:

A managed-trade approach to compel China to purchase more U.S. goods, services and agricultural products. The numbers remain fuzzy, but we have most often heard from the U.S. side a purchase commitment of $200 billion over the next two years (from a 2017 baseline), including $40-50 billion in annual agricultural purchases. We have not seen the Chinese confirm these numbers. “Success” may take creative accounting of U.S. exports in 2020 and 2021. Our sense is that the $200 billion purchase target was more political theater than a substantive focus for USTR.
Enforcement. Ambassador Lighthizer has characterized previous administrations’ trade dialogues with China as a waste of time and taxpayer money — hundreds of participants spending thousands of hours and millions of dollars for boilerplate commitments. He believes having an enforcement mechanism — renamed the more neutral “dispute resolution system” — will ensure Chinese compliance or give USTR authorization for proportional tariff increases. It remains unclear how this mechanism will work in practice.

This outcome was predictable in some ways and has followed a pattern of Trump Administration decision making on China trade policy: those wanting to close an agreement to calm markets can claim victory, while hardliners can legitimately claim new China commitments. Importantly, that the bulk of the tariffs remain, illustrating Trump’s toughness. While not addressing the key issues driving the 301 investigation, the deal allows President Trump to campaign in 2020 as being aggressive on China, while extolling his support of agricultural exports.

When/if we see the agreement text, we can determine how favorable the “Phase I” outcome might be. A key consideration going forward is if U.S. efforts have addressed the key components motivating the 301 investigation, including structural change to address the global economic distortions introduced by China’s state-run capitalism model. When the United States makes progress on this agenda, we will have begun to change the paradigm on China.

James Green, Senior Advisor, was the Minister Counselor for Trade Affairs at the U.S. Embassy in Beijing, where he was deeply involved in all aspects of trade negotiations, trade enforcement, and reducing market access barriers for American companies, service providers, and farmers. At McLarty Associates, James counsels clients on China and tech matters, with a focus on U.S-China tech transfer and intellectual property issues.