On December 13, 2019, the United States and China announced they have reached a historic and enforceable agreement on a "Phase One" trade deal. The United States has been negotiating with China to obtain the elimination of certain acts, policies, and practices covered in the U.S. Trade Representative's (USTR) determination as a result of its investigation under Section 301 of the Trade Act of 1974 (discussed in our 2017 Legal Update). The Phase One deal includes commitments from China to undertake structural reforms and other changes to its economic and trade regime and make substantial additional purchases of U.S. goods and services in the coming years. In response, the United States has agreed to modify the additional tariffs it is imposing as a result of its Section 301 investigation.

I. Overview of Phase One Deal

A. Structural Commitments

The structural commitments are contained in a series of chapters focused on specific issue areas, including intellectual property rights, technology transfer, agriculture, financial services, and currency and foreign exchange. In a fact sheet, USTR provides information on chapters of the Phase One agreement. Among the chapter descriptions the fact sheet provides:

  • Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.
  • Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness and due process in administrative proceedings, and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that cause trade distortions.
  • Agriculture: The Agriculture [c]hapter addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. A multitude of non-tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.
  • Financial Services: The Financial Services chapter addresses a number of longstanding trade and investment barriers to U.S. providers of a wide range of financial services, including banking, insurance, securities, and credit rating services, among others. These barriers include foreign equity limitations and discriminatory regulatory requirements. Removal of these barriers should allow U.S. financial service providers to compete on a more level playing field and expand their service export offerings in the Chinese market.
  • Currency: The chapter on Macroeconomic Policies and Exchange Rate Matters includes policy and transparency commitments related to currency issues. The chapter mirrors that of the U.S.-Mexico-Canada Agreement and 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. This approach will help reinforce macroeconomic and exchange rate stability and help ensure that China cannot use currency practices to unfairly compete against U.S. exporters.

B. Purchase Commitments

According to the fact sheet, the Phase One deal includes “commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. China’s commitments cover a variety of U.S. manufactured goods, food, agricultural and seafood products, energy products, and services. China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.”

C. Tariff Modification

In light of progress in the negotiations with China, and at the direction of President Trump, the U.S. Trade Representative has determined that the imposition of certain tariffs announced pursuant to Section 301 are no longer appropriate. Specifically, the U.S. Trade Representative issued a Federal Register notice on December 18 (84 Fed. Reg. 69447) announcing the indefinite suspension of the additional duties of 15 percent on products of China that otherwise would have been effective on December 15, 2019 (Annex B, 84 Fed. Reg. 43304 (August 20, 2019)). In the near future, the U.S. Trade Representative expects to issue a notice reducing the rate of additional duty applicable to the products of China covered by Annex A of the August 20 notice from 15 percent to 7.5 percent.

D. Dispute Resolution

According to the fact sheet, “the Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes robust procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.” When a party has taken a proportionate responsive action in good faith, the other party is obligated under the Dispute Resolution chapter to refrain from retaliating.

II. What Is Not Covered

Both the United States and China have measures relating to national security in place and under consideration (e.g., sanctions, export controls, foreign investment security reviews, etc.). For the most part, these issues are being considered separately from the trade negotiations; however, there are some signals that China may delay the publication of its "unreliable entities list" once the Phase One deal is signed.

III. Next Steps

The Phase One agreement is currently undergoing a legal review and translation. The United States and China are expected to sign the agreement in early January and the agreement will take effect 30 days after signing.

Because the Phase One agreement is not a Free Trade Agreement, and was instead negotiated pursuant to Section 301, it does not have to be ratified by the U.S. Congress.

While the Phase One agreement made progress in a number of areas that were the focus of the Section 301 investigation, other important issues remain on the table. The United States and China will move right away into a second phase of negotiations that are expected to address a range of issues, including cybersecurity, market access, subsidies, and state-owned enterprises. There is no deadline for concluding negotiations of a Phase Two agreement.