The U.S.-China “Phase One” Deal: A Backgrounder

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May 26, 2020

The Economic and Trade Agreement between the United States and China (“Phase One Trade Deal”) was signed in Washington on January 15, 2020.1 The agreement will enter into force by February 14, 2020.

Pursuant to the agreement, China will increase its imports of US goods and services by at least $200 billion (over 2017 levels) and has committed to undertake structural reforms to its economic and trade regime in respect of agriculture, currency and foreign exchange, financial services, intellectual property, and technology transfer. In return, the United States will partially reduce or suspend tariffs imposed under Section 301 of the Trade Act of 1974. Furthermore, the Phase One Trade Deal establishes a robust dispute resolution scheme.

China’s Purchases of US Goods and Services

China pledges to import no less than $200 billion of US goods and services over the next two years on top of the amounts that it imported in 2017 in four broad categories:

  • Food, agricultural and seafood products: $32 billion
  • Manufactured goods, including industrial machinery, iron and steel, and vehicles: $78 billion
  • Energy products, including liquefied natural gas and crude oil: $52 billion
  • Services, such as business travel, financial services and insurance: $38 billion

Agriculture

Food safety underpins the facilitation of agricultural exports, where China and the United States have agreed not to implement regulations or assessments that are not science- or risk-based, and China will improve its sanitary and phytosanitary (“SPS”) measures in numerous products. Similarly, with respect to agricultural biotechnology, China has agreed to implement a transparent, predictable, efficient, science- and risk-based regulatory process for evaluation and authorization.

China recognizes oversight of US meat and poultry facilities by the Food Safety and Inspection Service (“FSIS”) of the US Department of Agriculture (“USDA”), thereby eliminating any unique registration requirements. In this context, China has pledged to broaden the scope of US imports, such as allowing imports of processed products that are certified by USDA’s FSIS for human consumption. China has also lifted the ban on pet food with ruminant ingredients.

China has streamlined, and committed to further improve, the timeline and procedures for registering US facilities and products to provide regulatory certainty and market stability. For example, the General Administration of Customs of China (“GACC”) will update the list of approved US facilities eligible to export to China upon notification by the relevant US agency within 20 business days, for products such as certain dairy products, rice, seafood, feed-additive products and pet food.

China has agreed to comply with its World Trade Organization obligations on the transparency of its domestic measures and its administration of tariff-rate quotas (“TRQs”) concerning wheat, corn and rice. China has also committed to fully lifting the ban on other US poultry commodities, including live bird and live breeding cattle.

Currency and Foreign Exchange

The Phase One Trade Deal includes a chapter dealing with policy and transparency commitments on currency issues. This chapter “addresses unfair currency practices by requiring high-standard commitments to refrain from competitive devaluations and targeting of exchange rates, while promoting transparency and providing mechanisms for accountability and enforcement.”2

Financial Services

The Phase One Trade Deal provides that, by April 1, 2020, China will eliminate the foreign equity cap requirement and ensure market access on a non-discriminatory basis for (i) securities companies; (ii) suppliers of life, health and pension insurance services; (iii) fund management companies; and (iv) futures companies. Another example of barrier removal is the removal of barriers against US suppliers of credit rating services, which will allow them to rate all types of domestic bonds sold to domestic and international investors.

China will also open up its market by broadening its licensing regime. For instance, China will create an “improved and timely licensing process” to help US companies sell their services in China’s growing electronic payment sector, as well as allow US financial services suppliers to secure provincial-level licenses to acquire non-performing loans directly from Chinese banks. Another breakthrough is that China will allow US companies to acquire a majority stake in their existing joint ventures with Chinese companies.

Intellectual Property

Intellectual property (“IP”) protection and enforcement have been central to the US Sec. 301 investigation, and the agreement reflects this. The Phase One Trade Deal requires China to promulgate an Action Plan that will outline the structural changes to its IP regime, addressing a number of concerns in the areas of trade secrets, patents and pharmaceutical-related IP, geographical indications (“GI”), trademarks, and enforcement against pirated and counterfeit goods. China is obliged to provide a public comment period of at least 45 days for all proposed implementation measures. Notable IP protections are highlighted as follows:

  • Require the transfer of cases from administrative authorities to criminal authorities when there is a reasonable suspicion of a criminal violation
  • Expand the definition of trade secret theft to include electronic intrusion and breach of confidentiality
  • Ensure criminal penalties for willful trade secret misappropriation and intellectual property theft are available
  • Establish a mechanism for early resolution of potential pharmaceutical patent disputes and lower the hurdle to obtain preliminary injunctions in trade secret disputes
  • Ensure that any GI measures taken in connection with an international agreement do not undermine US market access
  • Provide effective and expeditious action against infringement in the online environment, including requiring expeditious takedowns and ensuring the validity of notices and counter-notices

Additional IP issues will be discussed in future negotiations, including data protection for pharmaceuticals, unauthorized camcording of motion pictures and copyright protection for sporting event broadcasts.

Technology Transfer

The Phase One Trade Deal requires China to stop pressuring US companies to share technology with local joint-venture partners or sell licensing to their technology at below-market prices for access to China’s market. Furthermore, China commits to refrain from directing or supporting outbound investments with the objective of acquiring foreign technology pursuant to China’s industrial policies.

Dispute Resolution

The Bilateral Evaluation and Dispute Resolution chapter sets forth an arrangement to allow the parties to resolve disputes in a fair and expeditious manner. Regular bilateral consultation at both the principal level and the working level will be conducted, and “strong procedures” will be in place for dispute resolution and will allow each party to take a “remedial measure in a proportionate way” as it deems appropriate if consensus cannot be reached. Such proportionate responsive actions are likely to mean the imposition of remedial tariffs.

US Action

In anticipation of the Phase One Trade Deal, the United States Trade Representative (“USTR”) issued a notice on the Federal Register to suspend the December 15 scheduled tariff (i.e., Tranche 4B)3 on December 18, 2019. USTR also issued a press release on December 13, 2019, announcing its commitment to lower the rate from 15 percent to 7.5 percent for the $120 billion-worth tariff (i.e., Tranche 4A)4 and is expected to issue a Federal Register notice shortly, which formally cuts the tariff rate 30 days after publication.

Nevertheless, Section 301 tariffs under Tranches 1, 2, and 3 covering $250 billion in annual trade will remain in place. Treasury Secretary Steven Mnuchin stated that the United States would not consider additional tariff relief until the parties sign a “Phase Two” trade deal.5

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