Both countries get some items they wanted; key U.S. goals delayed for further talks
* U.S. and China agreed upon an initial trade deal in a 19-month-long trade war
— U.S./China trade policy update:
- The compromise. China agreed to purchase more products from American farmers and other exports (link to USTR statement). In return, the U.S. suspended new tariffs on around $160 billion of Chinese products set to take effect Dec. 15 and agreed to reduce some existing levies — the U.S. will reduce the tariff rate in half on roughly $120 billion of goods affected on Sept. 1, from 15% to 7.5%. President Trump in the Oval Office on Dec. 13 said that the U.S. would continue to use the remaining tariffs as leverage in future negotiations with China. U.S. tariffs of 25% would remain on around $250 billion in Chinese goods, including machinery, electronics and furniture. The U.S. Trade Representative's office also said the U.S. has “agreed to modify its Section 301 tariff actions in a significant way."
From the Chinese side, they agreed to not put higher tariffs in place on Dec. 15 of 10% and 5% on more than 3,300 types of U.S. goods, including auto parts and chemicals. China didn’t agree to specific tariff reductions in the deal. Instead, the nation’s obligation is to make commodity purchases and to have an exclusion process for its tariffs. The country has in recent months lowered some retaliatory tariffs including some on cars imported from the United States. The U.S. also agreed to increase the number of tariff exceptions it will grant Chinese imports that are still subject to duties, said Liao Min, China’s vice minister of finance.
Bottom line: Trump still has tariffs in place on about $370 billion of Chinese imports, including 25% on many parts used in manufacturing, especially for autos. Those tariffs will likely stay in place as other phased negotiations drag on. It took far longer to get a more easy Phase 1 accomplished. “I think what China’s expectation is, is you have future phases and future reductions,” said U.S. Trade Representative (USTR) Bob Lighthizer.
- Purchase commitments by China... farm products and total goods and services. “We have divided the U.S. exports into four categories: agricultural goods, manufactured goods, energy and services,” Lighthizer said. Beijing has committed to buying $32 billion more in farm products over the next two years, or about $16 billion a year (66% increase from 2017 base), Lighthizer told reporters at the White House, on top of a baseline of $24 billion in Chinese purchases in 2017, making the commitment of $40 billion in Chinese buys of U.S. farm products. In addition, Beijing said it would make a big effort to spend an additional $5 billion a year (which if realized would make the total purchases of U.S. farm products at $50 billion potentially).
“To me it’s an enormously important first step in our relationship,” Lighthizer said. “This is China taking real commitments to do real things in a reasonable period of time, that’s enforceable.”
The farm product purchases would be part of total additional exports of $200 billion over two years, but Lighthizer didn’t provide specifics. China bought $130 billion in U.S. goods in 2017, before the trade war began, and $56 billion in services, U.S. Bureau of Economic Analysis data show. A USTR fact sheet (link and see box, below) refers to this as the Expanding Trade chapter. Lighthizer told reporters “these are numbers that are realistic and that we arrived at together.” He said China would be free to buy things when “it’s the perfect time in the market to buy things.” The specific breakdown of targets for individual commodities will be classified and not disclosed to the public.
Lighthizer said China also agreed to buy more U.S. manufactured goods, energy and services, but provided no details. He said the agreement included specific targets for those broad areas that would be published later, and specific targets for specific products that would remain classified.
Chinese officials have yet to confirm any dollar amount and timeline for U.S. farm product or other purchases. “The import of agricultural products from the United States will not affect China’s agricultural industry,” said Han Jun, vice minister of agriculture. He added that imports of corn, wheat and rice will not exceed established quotas, and that the deal will provide gains for certain Chinese agricultural exports to the U.S. — specifically pears, citrus, dates and dairy products. Chinese officials made clear, however, that any purchases will be based on market demand and in line with China’s commitments at the World Trade Organization (WTO). Ning Jizhe, vice chairman of China’s National Development and Reform Commission, warned that expanding trade shouldn’t jeopardize China’s other trading partners. “I need to stress here that larger trade cooperation must be based on market principles and WTO rules,” he said at a press conference, adding that U.S. imports must meet Chinese standards on quality, price and regulatory requirements.
- U.S. trade deficit with China. In all, the U.S. expects a $200 billion boost in exports over two years as a result of the deal. “We expect the trade deficit to go down for sure,” Lighthizer said. “Everything is written,” he said. “Everything is completely finished.”
- China comments on purchases. In their briefing in Beijing on Dec. 13, Chinese officials indicated that corn, wheat, cotton and rice would be involved in the increased buys. But they also noted the broader categories of energy, agriculture, pharmaceutical products and financial services, according to Ning Jizhe, vice chairman of the National Development and Reform Commission.
Asked specifically about the purchases of at least $40 billion in U.S. ag products, Chinese officials did not confirm any such level of purchases. Officials would only say that the imports would not disrupt the domestic Chinese market. China has not been a major buyer of U.S. corn, wheat or rice in the past — though in recent years it has been the No. 3 or 4 buyer of one particular variety of wheat, U.S. spring wheat used for blending. China was a top 5 buyer of U.S. corn from 2011 to 2014 but has not been a major buyer since. Soybeans made up half of China’s agricultural purchases in 2017.
Asked about President Trump’s $50 billion figure for eventual Chinese buys of U.S. farm products, officials in Beijing said on Friday that details would be disclosed later.
Chinese officials didn’t mention any specific targets but listed energy and manufactured goods as well as medical and financial services as areas of opportunity. “It is up to the business sector and the market to say whether it is a good agreement or not,” said Liao, the vice minister of finance.
- Other topics in Phase 1. Lighthizer said China made specific commitments on currency and foreign exchange, intellectual property, including counterfeiting, patent and trademark issues and pharmaceutical rights, as well as on preventing the forced transfer of technology from firms entering the Chinese market, language on structural agriculture issues and financial services.
A senior U.S. official said the currency rules would be enforceable, meaning that a violation could be punished with more tariffs. The currency agreement is based on provisions in the U.S.-Mexico-Canada Agreement (USMCA) trade deal, which require the three countries to disclose monthly data on international reserve balances and intervention in foreign exchange markets, along with quarterly balance-of-payments data and other public reporting to the International Monetary Fund.
Chinese Vice Minister of Commerce Wang Shouwen said the two sides reached a consensus on dealing with intellectual property theft and cracking down on counterfeit goods, but China will set the pace for protections on intellectual property. The agreement will also further protect foreign firms’ interest in China and will protect Chinese firms’ legal interest in dealings with the U.S., Wang said.
Beijing agreed to address several longstanding non-tariff trade barriers to U.S. agricultural exports, Lighthizer said. “Some of the areas on which there’s a multitude of non-tariff barriers, some of the areas where those have been stripped away are beef, poultry, seafood, rice, dairy, infant formula, animal feed, feed additives, pet food and a variety of other agriculture biotechnology products,” he said.
The deal contains commitments by China to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers.
China also agreed to refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans — transactions already restricted by stronger U.S. security reviews. China's state-run Global Times newspaper said that not all foreign institutions would be able to tap China's financial market. "Naturally, entities from countries which are friendly to China will be favored by the Chinese people," the paper said in a commentary.
- Phase 1 signing and implementation and duration dates. Lighthizer indicated the signing would likely take place the first week of January in Washington, likely at his level and Vice Premier Liu He Chinese and not by Trump and Chinese President Xi Jinping.
The agreement would be in place indefinitely and would take effect 30 days after being signed to go into effect.
The USTR fact sheet said, “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.”
Lawyers are now reviewing the text so that it’s ready to be signed in the first week of January. It’s also being translated.
- Text. Lighthizer brought a print-out of an 86-page document to a briefing with reporters Friday afternoon as a “show-and-tell” to prove that it’s all done and written up. It contains nine chapters.
No text was officially released by either the U.S. or China. National Economic Council (NEC) Director Larry Kudlow said the text of the deal will be released within a few weeks.
- Enforcement: What if China reneges on any commitment of purchases of U.S. farm and other products? “A skeptic would say, ‘We’ll see,’” Lighthizer said. “And that’s probably a wise position to take. But our expectation is that they’ll keep their obligations. And in any event, they’re enforceable.″
Lighthizer said in his briefing that he does not expect the U.S. to raise tariffs on China outside of the enforcement process in the deal. That could be a signal there are provisions in the text that would penalize China if they do not live up to terms of the deal, but that is not yet clear. USTR said there is a “strong dispute resolution system that ensures prompt and effective implementation and enforcement.” But omitted are any indications of what's actually meant by "a strong dispute resolution system that ensures prompt implementation and enforcement."
The biggest concession China made in this deal is to agree to penalties if it doesn’t hold up its end of the bargain, but there is a long process both countries will reportedly go through before imposing punitive tariffs. The deal will establish a dispute settlement process. Complaints can first be brought up before working-level officials and then elevated as high as the minister-level if they can’t be resolved. The enforcement process would give Lighthizer the last say in whether China had violated the agreement. “Our expectation is that if we take our actions in good faith throughout this process that either side, the United States or China, will be able to take appropriate action and the other won’t be able to retaliate,” Lighthizer said.
- Phase 2 or more. “There are still a lot of outstanding issues that you’re all aware of between the United States and China which are very serious issues,” Lighthizer said in a Dec. 13 briefing. “Our sense is we’re better off doing this in phases than to sit and make no progress at all.”
Negotiations will continue on remaining issues, with President Trump saying “immediately” after the signing of Phase 1. But Lighthizer declined to specify when the two countries would begin active negotiations on Phase 2. Key is whether and when those talks conclude, with most predicting after U.S. 2020 elections if there is any further agreements. The next phase of a trade deal between the U.S. and China could come in stages and is yet to be determined, according to U.S. Treasury Secretary Steven Mnuchin. “We are going to go into a very short period of time of having the translation scrubbed, the deal will be signed in early January and then we will start on phase two,” Mnuchin told CNBC’s Hadley Gamble at the Doha Forum on Saturday. “Phase 2 may be 2a, 2b, 2c, we’ll see, but this is unto itself a huge accomplishment for the president,” he added.
As for China, asked when the two sides will start Phase 2 discussions, Liao Min, China’s Vice Finance Minister, said: “The urgent task right now is to get the Phase 1 agreement signed and implemented.” China did not agree to scale back any of its government subsidies for industries like steel.
- Additional China comments and differences surface. In a press event on Dec. 13, Chinese officials confirmed that both sides had reached an agreement in “concept.” Vice Commerce Minister Wang Shouwen, one of China’s lead negotiators, said the U.S. had agreed to remove the remaining tariffs on Chinese products “in stages.” Lighthizer said there was no agreement on that, and suggested China believes further reductions could be negotiated in subsequent phases of the deal.
AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND THE PEOPLE’S REPUBLIC OF CHINA
The United States and China have reached an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The Phase 1 agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement. The United States has agreed to modify its Section 301 tariff actions in a significant way.
Information on specific chapters of the Phase One agreement is provided below: