DW-China Trade Update (38th Edition)

Dickinson Wright

Dickinson Wright

The U.S.-China Phase One Agreement: Does it still have meaning? | 美中第一阶段贸易协议 – 此协议现在是否还有意义?

As many might still remember, at the beginning of 2020, our DW-China team reported a historic event – the signing of an economic and trade agreement between the United States and China, publicly known as the “Phase One Agreement.” This Phase One Agreement, championed by the Trump Administration before the world was turned upside down by the COVID-19 pandemic, became effective on February 14, 2020. The architects of the Agreement in the U.S. promised that it would lead to structural reforms in China’s economic and trade regime, especially in the areas of (1) intellectual property protection, (2) forced technology transfers, (3) the opening of financial services within China, and (4) currency and foreign exchange. The Phase One Agreement also includes a commitment by China to make substantial purchases of U.S. goods and services in the next two years. As representatives from China and the U.S. gathered in the East Room of the White House in January 2020 to sign the historic Agreement, President Trump promised that the U.S. and China are “righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers and families.” He added that the deal has “total and full enforceability.”

许多读者可能还记得,2020年初,我们的迪克森中国团队报道了一件历史性的事件:美国和中国签署了一项经济和贸易协议,即众所周知的《美中第一阶段贸易协议》。该协议,于2020年2月14日生效,是特朗普政府在世界局势由于疫情发生巨大变化之前所积极倡导的。来自美国的协议制定者承诺该协议将促使中国经济和贸易体制的结构性改革,特别是在以下领域: (1)知识产权保护,(2)强制技术转让,(3)开放中国国内金融服务,(4)货币和外汇。第一阶段协议还包括中国承诺在协议生效的两年内大量购买美国商品和服务。在2020年一月,来自中国和美国的贸易代表聚集在白宫东厅签署这一历史性协议的时候,特朗普总统承诺,美国和中国将“纠正过去的错误并且为美国工人,农民和家庭在经济公正和安全领域创造一个光明的未来。”特朗普总统同时补充道,该协议具有“完全的可执行性”。

As the Phase One Agreement runs into its second full year, DW-China Team reviews the current status of this once celebrated trade deal and asks: “Does it have relevance in today’s U.S.-China relationship?”


Before the limelight faded in the East Room, many were convinced that Trump’s trade war with China was waning; others suggested that Trump was simply keen on a deal with Beijing that could be sold to his political base in middle America. Trump’s reelection seemed likely, and a robust trading relationship with China promised greater economic prosperity for both countries, especially the farmers in the Mid-West. Tensions in the South China Sea and Hong Kong had simmered but were tempered by the pro-trade ambitions in the Administration. As the Agreement’s effective date of February 14, 2020 approached, skeptics questioned Beijing’s sincerity, while President Xi’s trade delegation made commitments to significantly increase imports of agriculture products, industrial products, natural resources, and services from the United States.


The Phase One Agreement called for China to increase purchases of U.S. products by $200 billion by December 31, 2021; a goal many believed was impossible, especially since it depended largely on agricultural and aerospace exports. Besides additional purchases of certain U.S. products, China also promised to take on new obligations in the areas of intellectual property protection, forced technology transfer, and regulatory trade barriers for various U.S. goods and services. Trump, for his own account, refused to relent on the vast majority of tariffs he had placed on Chinese goods in the 2-year period leading up to the Agreement, touting this was his leverage against Beijing and its commitments.


As the Agreement went into effect, news started to emerge from China that a novel coronavirus had taken hold in Wuhan, China (a city unknown to most Americans at the time). While the world underestimated its devastating threat, those more hawkish towards China in the Administration began questioning the virus’s origins. As the virus’s severity began to reveal itself in the U.S. and Trump’s leadership was scrutinized, the Administration took a tougher and more caustic approach towards Beijing and blamed it for mishandling the crisis. By summer, the promises of what once was described by Trump as the greatest trade agreement in history seemed like nothing more than ancient history. And, why continue to focus on China’s purchasing commitments; how could China deliver on its promises with businesses shut down, ports closed, and the world all but shuttered for months. For the Trump Administration, as the President’s reelection was now in jeopardy, any association with China in the short term was a liability.

随着协议生效,中国传出新型冠状病毒在中国武汉(当时大多数美国人还不知道的城市)肆虐的消息。当世界低估了它的毁灭性威胁的同时,政府中那些对中国更强硬的人开始质疑病毒的起源。随着疫情的严重性开始在美国显现,特朗普的执政地位也受到了审视,美国政府对北京采取了更为强硬、更严苛的态度,并指责北京处理危机不当。直至2020年夏天,曾被特朗普形容为史上最伟大的贸易协定似乎只是一段古老的历史。为什么要继续关注中国购买商品的承诺? 中国如何能在企业停工、港口关闭、世界几乎停摆数月的情况下兑现承诺?对特朗普政府来说,由于连任面临危险,短期内与中国的任何联系都是一种负担。

Behind the scenes and outside the rhetoric in Washington, business between the two largest economies did continue and was being watched by the trade community. In support of the Phase One Agreement, the Office of the U.S. Trade Representative formed the Bilateral Evaluation and Dispute Resolution Office, which was tasked with monitoring China’s implementation of its commitments and was to liaise with their counterparts in Beijing if concerns related to compliance with the Agreement arose. The U.S. Census Bureau and the General Administration of Customs of the Peoples Republic of China also were charged with tracking data of U.S. exports and Chinese imports.


According to data released by the two agencies in June 2021, the Peterson Institute for International Economics published a report showing that through May 2021, China’s total imports of products covered in the Phase One Agreement from the United States reached 69% of the year-to-date target. Among all products covered in the Phase One Agreement, China’s purchase of agriculture products reached 84%. Agricultural purchases remained closest to reaching the year-to-date target than any other product category. Although Agriculture Secretary Tom Vilsack stated that he was satisfied with China’s purchases, especially taking into account the impact of COVID-19, the new U.S. Trade Representative, Katherine Tai, only stated that the Administration will conduct a comprehensive review of China’s compliance with the Phase One Agreement in the near future.


In addition to purchases of U.S. exports, China took measures required by the Phase One Agreement in other areas of concern, as well. Specifically, on intellectual property protection, China released draft measures around pharmaceutical patents and guiding opinions on protecting trade secrets. The new Foreign Investment Law of the People’s Republic of China establishes specific requirements for the protection of trade secrets from the perspective of the Chinese Administration, and aims to dispel any concerns held by foreign investors. China also made a series of announcements about copyright protection and released a 5-year intellectual property judicial protection plan in April 2021. In addition to IP protection, the new Foreign Investment Law also implements significant changes in laws and regulations with the Chinese government’s intention to promote foreign investment by better protecting the rights and interests of foreign investors and standardizing business practices. Major changes also took place including, whether certain foreign investments should be included in the so-called “Negative List” (a list of industries where foreign investment was limited or restricted), unification of corporate governance rules, and the abandonment of the old WFOE restrictions. Concerning opening the financial services market, China lifted the limitations on the ratio of foreign shareholding in securities and fund management firms, allowing foreign-controlled securities firms to set up joint ventures in mainland China.


Despite making strides to fulfill the objectives of the Phase One Agreement, the U.S. election in 2020 made it all but impossible for the seeds of economic comity planted in January to grow. While the Trump Administration’s China Hawks gained momentum as the election neared and the pandemic did not disappear, Biden signaled that he too would be tough on China, and not just on trade. The Biden Administration had different objectives in 2021, and they did not immediately include stabilizing relations with Beijing. In fact, President Biden has made it clear that he does not intend to tackle trade issues with China any time soon.


Nonetheless, China’s top officials have quietly maintained conversations with high-level trade officials in the Biden administration. On May 27, 2021, trade officials from both countries, U.S. Trade Representative Katherine Tai and Chinese Vice-Premier Liu He held a virtual meeting where they discussed the trade relationship between the two countries. On June 2, Vice-Premier Liu He held an exchange on issues of concern with the U.S. Treasury Secretary Janet Yellen. Although these conversations were described as “candid” and “productive,” both USTR Tai and Treasury Secretary Yellen called for a comprehensive assessment of the implementation of the Phase One Agreement in order to review the U.S.-China trade relationship. To date, while there has been speculation about a Biden/Xi summit, no details have emerged. Should one be scheduled, it is believed the focus will be on regional security concerns in Taiwan, Hong Kong and the South China Sea, not the ongoing impacts of the Trump tariffs or the Phase One Agreement.


Regardless, China’s fulfilling its original commitments as set forth in the Agreement still influences the U.S.-China trade relationship. On the one hand, it would affect the negotiations regarding a potential Phase Two deal between the two countries, building on recent reforms and signaling tariff relief, which has had dire consequences on many Americans. On the other hand, the additional 301 tariffs remain in place on Chinese imports worth over $370 billion U.S. dollars, while litigation rages on in the Court of International Trade over their legality. President Biden previously indicated that he will not immediately abandon the “Phase One” bilateral Agreement or remove the tariffs on Chinese imports as his Administration will conduct a full review of the trade deal. USTR Tai also said that any withdrawal of tariffs on imports from China “would hinge on the conversations with Chinese officials and the effectiveness of the phase one deal.” But any political observer would note that it is unlikely the current Administration will conclude that the Trump Administration’s Phase One Agreement was on track for success. For Biden and Tai, the Administration seems less focused on the 301 tariffs (forced IP transfer, technology theft, trade deficit, etc.) and more intent on forcing issues of national security and human rights. Presumably, the Administration will conclude that China has not done enough to fulfill its commitments in the Phase One Agreement, and it must now also show that Beijing will make strides to ameliorate threats in Taiwan, Hong Kong, the South China Sea and the Xinjiang Uygur Autonomous Region. Until these issues are dealt with, trade talks will be slow and incremental.


Postscript: As this Alert went to Press, the New York Times reported that Secretary Yellen had cast doubt on the merits of the Phase One Agreement and suggested that it had not really effectuated a change in the real concerns involving China. This past week, during a speech in Brussels, Secretary Yellen told finance ministers that they should work together to counter “China’s unfair economic practices, malign behavior and human rights abuses,” a nod more to Biden’s agenda than that of Trump’s objectives as promised in the Phase One Agreement. But, unlike Trump, Biden’s approach seems to be more bilateral, working with the WTO, U.S. allies and promoting the ASEAN regions in ways that Trump refused to do. Will this be the weakness in Xi’s armor, which leads to a more meaningful yet cautious relationship, or will both countries allow the death spiral of conflict to become unhinged. While the future remains uncertain, regional tensions continue to simmer, and nationalistic tendencies run within the veins of both Beijing and Washington. Those depending on healthy economic trade in both countries remain the immediate victims of such rhetoric. Ironically, tariff watchers will take interest in Secretary Yellen’s comment that, in fact, the Trump tariffs have done more harm than good for Americans; could this be a window of light in how best to deal with China in the future?


As always, we will continue to follow news related to the U.S.-China trade relationship and report back with the latest details.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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