McGuireWoods China and the U.S. have finally signed “Phase 1” of a trade deal. Given Phase 1 took almost two years, the countries are likely in for the long haul because “Phase 2” is certain to be more complicated. Variously referred to as a “phase one,” “mini,” “skinny,” “partial” or “interim” deal, the agreement tackles important issues, but lacks a framework for lasting peace. That might have to come in Phase 2 if at all.
Read the full text of the U.S.-China trade pact.
The United States Trade Representative announced in December the deal would address longstanding concerns relating to intellectual property, unfair technology transfer practices, barriers to trade in goods, barriers to trade in financial services and banking, transparency commitments related to currency, and a mechanism for the timely resolution of disputes.
What the agreement forestalls until later are many of the thornier structural issues at the heart of the U.S.-China trade dispute.
One outstanding issue is China’s massive subsidies. The Chinese government supports the corporate sector in a way that leads to overcapacity in certain areas like steel and aluminum, and provides Chinese companies an unfair competitive advantage in the global markets.
A second lingering problem that remains untouched is China’s digital and data discrimination. The Chinese government discriminates against foreign cloud-computing providers, requires companies to store data locally, and limits the amount of transfer of data that can be transferred overseas. Such practices curb U.S. companies’ ability to operate independently overseas.
A third structural problem the agreement touches upon without resolving is forced technology transfers. In order to gain access to the lucrative Chinese market, foreign companies, which are sometimes required to form joint ventures with local firms in some industries in order to operate, are pressured to hand over sensitive technology as a “cost” of doing business.
In the process, China has accessed technologies from foreign competitors, acquiring a leg-up in the innovation race.
A lot is at stake as this innovation race will define the U.S.-China relationship in the foreseeable future. Without addressing the broader conflict with respect to emerging technologies, the trade deal kicks the can a little further down the road.
Competition between the U.S. and China in areas such as artificial intelligence, fifth-generation telecommunications networking (5G), nanotechnology and biotechnology, robotics, the Internet of Things, and quantum computing will determine the future balance of economic and military power between the two superpowers and those that align themselves with either side.
Instead of developing synergistically, technological decoupling between the U.S. and China could create a permanent divide whereby systems become inoperable with one another and the globe is divided.
This is not to say that Phase 1 of the agreement should be discounted altogether.
Under the terms of the new agreement, the U.S. agreed to postpone the so-called 4B tariffs (the 15% tariffs that were scheduled to go into effect Dec.15, 2019), but maintain the List 1, 2 and 3 tariffs of 25% on select Chinese imports. List 4A tariffs, which launched Sept. 1, 2019, were reduced to 7.5% from 15% on roughly $120 billion of Chinese imports including shoes and apparel.
China agreed to significantly boost its purchase of U.S. goods and services by at least $200 billion over the next two years, remove foreign ownership limits in the financial sector, refrain from competitive currency devaluation, and strengthen protections for intellectual property like copyrights and trademarks.
Prior to the deal’s signing, in a mostly symbolic gesture, the U.S. Treasury dropped China from its list of currency manipulators.
As many have pointed out, such concessions from China are hardly “fait accompli” in that the real issue concerns enforceability. If the agreement is violated, either side would be free to impose tariffs.
China has repeatedly made promises to strengthen its economic and trade laws around intellectual property rights and to further open and liberalize its economy in the past, including when joining the World Trade Organization in 2001, but little has been seen in terms of tangible results.
A bilateral consultation and dispute settlement mechanism under Phase 1 may appear to tick off U.S. demands for enforcement provisions, but questions about how well and efficiently it will work still remain.
Whereas President Donald Trump briskly stated in mid-December that the second phase of trade negotiations will commence immediately following the signing of the first stage of the agreement, the incentive for talks to progress expeditiously on either side is slim.
Unless there are changes, Trump’s tariffs will continue to cover nearly two-thirds of all U.S. imports from China.
There is also little impetus for Chinese to push ahead on ambitious stage two negotiations. Officials there will certainly want to see Trump’s fate in the U.S. election and who they will be negotiating with for the upcoming four years. There is no incentive to acquiesce to U.S. interests and demands or to move too quickly.
The trade war may have gone from burning hot to smoldering and be the status quo for the foreseeable future.
While a ceasefire is certainly welcome, it is not so easy to disentangle industry from its mindset of high alert over the past 20-plus months. It will take a considerable amount of time for jitters to ease and relations between the two countries to improve. Whether they do at all remains an open-ended question.
Dr. Nicole Cohen is a vice president at McGuireWoods Consulting, serving domestic and international clients on public law and policy matters. Her practice is at the nexus of emerging technologies, disruptive innovation and international relations. Also contributing was Ryan Bernstein, a senior vice president on McGuireWoods Consulting’s federal public affairs team, assisting clients with matters before Congress, regulatory agencies and the executive branch with a focus on trade, agriculture and energy issues.
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