US-China trade deal: Damage done won’t be undone, further damage is being avoided

By: |
January 20, 2020 12:39 AM

Notwithstanding the agreement, tariffs imposed by both sides on each other’s products during the last two years, continue. To that extent, the maximum comfort that can be derived from the deal is the signal that while the damage done won’t be undone, further damage is being avoided.

trade, us tradeIllustration: Rohnit Phore

Coming nearly two years after the US and China embarked on a trade war, the Economic and Trade Agreement between the countries—popularly referred to as Phase 1 of a bilateral deal—is a welcome development. It is not an indication of the world’s two largest economies having erased all differences on trade. Neither is a guarantee that trade tensions won’t flare again. Nevertheless, it is a signal that both are willing to engage to identify a possible common ground.

Compared with expectations that the deal would be more of a face-saving, politically symbolic agreement, it certainly turns out to be more substantive. The substance though is not uniform. The most detailed are Chapters 1 (intellectual property), 3 (trade in food and agricultural products) and 6 (expanding trade). The depth and range of content in these chapters, particularly those on intellectual property, trade in food and agricultural products, and expanding trade, are very much in line with the grievances that the US has aired for a long time. The detailed provisions on safeguard of intellectual property are in line with US findings with respect to China, under the Section 301 of the Omnibus Trade Act of 1988. Intellectual property theft and violations have been major concerns of the US that have been flagged repeatedly for China, year after year, in the Special 301 reports of the USTR. The interesting part of the provisions is the effort to outline conditions under which wilful theft of trade secrets might invite criminal action. The US has been able to get away with the rather audacious provision that US holders of trade secrets need not ‘establish actual losses as a prerequisite to initiation of a criminal investigation for misappropriation of a trade secret’. It remains to be seen how forcefully the conditions are implemented in future.

Similarly, on the short chapter on technology transfer (chapter 2), the emphasis is on non-insistence of transfer of technology by host governments from foreign businesses with respect to licensing arrangements. The interesting part of this chapter is that unlike chapter 1 on intellectual property, which is primarily on what China would, or wouldn’t ‘do’ for safeguarding US intellectual property, the technology transfer chapter doesn’t mention China or the US even once. Instead it is confined to the safe reference of ‘both parties’. This is clearly an area where much work remains to be done before specificities are reached.

Chapters 3 and 6 are the two most politically important chapters. Chapter 3 aims to address many regulatory issues in the Chinese market, prevalent as sanitary and phytosanitary measures (SPS) that affect access of US food and agricultural products. The key US exports identified by the chapter are dairy, infant formula, poultry, beef, pork, meat, seafood, rice, food additives and pet food. While making efforts to remove qualitative restrictions on US exports of these items to China, Chapter 6 provides targets on how much China should import from the US. It is projected that during the period January 1, 2020 – December 31, 2021, China’s imports from the US should be $200 billion more than what they were in the baseline year 2017. The higher imports are across four broad categories: manufactured goods, agriculture, energy products and services. The maximum imports ($77.7 billion) are projected for manufactured goods, including industrial machinery, electrical equipment, pharmaceuticals, aircrafts and iron & steel. These are followed by imports of $52.4 billion of energy products (LNG, crude oil, refined products and coal); $37.9 billion for services (IP fees, tourism, financial services, cloud services) and $32 billion for agriculture (oilseeds, meat, cereals, cotton, seafood). The targets set out in Chapter 6, along with the provisions in Chapter 3, would enable president Trump to reach out to trade-oriented domestic constituencies in the election year. This includes both agricultural farming groups as well as industrial producers, who have been unhappy over the limited access they have been having in the Chinese market.

Chapters 4 and 5, which deal with financial services and macroeconomic policies and exchange rate, are again relatively less in content. On financial services, the emphasis is primarily on China liberalising foreign equity caps and limitations on scope of business operations for US service suppliers in insurance, banking, credit rating, electronic payments and securities services. Interestingly, this is a chapter where China appears to have been successful in pushing through reciprocal measures with the US committing to expeditious processing of pending applications of various Chinese financial service suppliers. Chapter 5, like Chapter 2 earlier, is largely prescriptive with an eye on avoiding currency manipulations. It is interesting that a couple of days before the deal was announced, China was taken off the list of currency manipulators maintained by the US. Finally, chapter 7, which formalises the arrangements and structure for implementing the deal, puts in place a high-ranking mechanism, comprising the USTR and a Chinese vice-premier, reflecting the importance both sides have attached to the agreement.

Notwithstanding the agreement, tariffs imposed by both sides on each other’s products during the last two years, continue. To that extent, the maximum comfort that can be derived from the deal is the signal that while the damage done won’t be undone, further damage is being avoided. The possibility of the deal falling through, though, remains. While the import targets might be fulfilled, the crucial test of the deal will be on the success achieved by Chapter 1. US satisfaction over the improvement of the quality of protection for the IP held by its businesses would mean much in progressing on the next stages of the deal. In the meantime, truce might hold, given the ‘substantive’ achievements of the deal that can be showcased for US domestic constituencies.

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