U.S./China Phase 1 Accord: What You Need to Know

Posted on 01/16/2020 4:38 AM

Purchase commitments | Dispute resolution | Structural changes to boost ag trade

U.S. President Donald Trump and Chinese Vice Premier Liu He on Jan. 15 signed the Phase 1 agreement in the East Room of the White House, with over 200 onlookers including Cabinet members, lawmakers, ambassadors and business officials. Depending on who is assessing it, the accord is being labeled a landmark or a first step. “Far beyond this deal, it’s going to lead to even more world peace. We now have a big investment in each other,” Trump said. “The doubling of United States agricultural exports to China’s a huge deal,” USDA Secretary Sonny Perdue said.

China’s Liu noted the “win-win” agreement, adding there is a saying in China that “the beginning is the most difficult part” and there is a similar phrase in America that says “a good beginning is half the success.”

A hallmark of the agreement is that it is “totally and fully enforceable,” Trump stated, adding it “tears down” various barriers for U.S. beef, pork, poultry, seafood, rice, dairy products, infant formula and covers issues on biotechnology.

Regarding living up to the terms of the deal, Liu stated, “China will strictly honor the agreement,” pledging there would be “good implementation” of the provisions.

U.S. Trade Representative Bob Lighthizer said it was “important to have things where we can both prosper.” The agreement is “a big step forward in writing the rules needed and developing practices we must have going forward,” he declared.

The agreement enters into force within 30 days of being signed.

Phase 1 provisions allow for termination by either party after providing written notice, taking effect 60 days after any such written notice or “on such other date as the Parties may decide.” The “Parties” are the U.S. and China. “The English and Chinese versions of this Agreement are equally authentic.”

Tariff Relief: Prior to the deal, the U.S. agreed to cut the tariff rate to 7.5% from 15% for charges it had imposed on roughly $120 billion in Chinese products. The U.S. also held off on tariffs of 15% on roughly $156 billion in consumer products, including smartphones, that were set to take effect in December. The deal does not amend that prior agreement.

Regarding U.S. tariffs in place on Chinese goods totaling $370 billion (about three-quarters of Chinese imports to the U.S.), Trump stated, “All tariffs will come off when we finish Phase 2.” China, too, will keep its existing tariffs in place, likely authorizing waivers of its tariffs in their coming purchases of U.S. products and service.

What’s next? President Trump said negotiations for Phase 2 of the deal will start immediately, but Chinese officials have offered no similar timeline. Those talks will include Chinese subsidies to domestic companies and Beijing’s oversight of Chinese state-owned firms and will not likely conclude until after Nov. elections. U.S. Trade Representative Bob Lighthizer was vague on when Phase 2 talks would begin, saying the first priority for both countries is implementation of the current commitments. The new deal enters into force in 30 days and “we’ll be meeting with them soon after that to see what they’re doing,” Lighthizer said. “We’re not going to break off and not talk.”

What happens after the two-year Phase 1 accord. China is only agreeing to make purchases for the next two years and is vague about what happens after. But the agreement says the countries “project that the trajectory” of increased purchases would continue through 2025.

Link to text of the trade agreement, including HS codes for the products covered under the deal.

Link to access fact sheets covering the provisions of the Phase 1 agreement.

 

The Phase 1 language between the U.S. and China includes protections for U.S. intellectual property, addresses forced technology transfers and currency issues and includes Beijing commitments on purchases.

Purchase commitments of U.S. agricultural, energy, manufacture products and services totaling an additional $200 billion over two years would, if realized, dramatically reduce the current large U.S. trade deficit with China, a key goal of Trump from the first day of his presidency.

Across the two years of 2020 and 2021, the targets call for China to boost its purchasing above the levels seen in 2017, by $77.7 billion in manufacturing, by an extra $32 billion of agriculture, by $52.4 billion of energy and by $37.9 billion of services. The deal said targets have been agreed on for narrower categories of items, but these targets weren’t disclosed, the administration said, to avoid distorting markets. In 2017, the U.S. exported $186 billion of goods and services. To fulfill the targets in the deal, U.S. exports to China would need to climb to $263 billion in 2020 and $309 billion in 2021, an increase without precedent in the history of U.S. trade.

Liu said “as the living standard of Chinese people rises, they will buy” quality products like U.S. ag goods. While the agreement spells out the dollar amounts of ag purchases, Liu also for the first-time confirmed China will buy $40 billion in U.S. ag products each year over the two-year purchase accord. “If the demand is strong, [Chinese] companies may buy more,” Liu said, a reference to the mention that China could buy an additional $5 billion in U.S. ag products that would meet the $50 billion figure referenced by Trump.

For agriculture, the purchase commitments on the part of China are for $12.5 billion above the 2017 baseline of $24 billion for a total of $36.5 billion in 2020. For 2021, the purchase commitments are for China to buy $19.5 billion beyond the $24 billion 2017 baseline for a total of $43.5 billion. The two-year total is $80 billion. Besides the purchase targets, China has agreed to steps that allow more market access for U.S. dairy products, poultry, beef, fish, rice and pet food.

Regarding specific ag products, the agreement details the HS codes but lists the general categories as counting as purchases of ag products: Oilseeds, meat, cereals, cotton, other agricultural commodities (Includes all other agricultural products, including alfalfa, citrus, dairy, dietary supplements, distilled spirits, dried distiller grains, essential oils, ethanol, fresh baby carrots, fruits and vegetables, ginseng, pet food, processed foods, tree nuts, and wine) and seafood (includes lobster).

“Purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year,” according to the agreement.

The deal includes some terms that some observers say China could use to claim that the U.S. is at fault if it doesn’t meet the purchase targets. For example, China could request consultations if China’s purchases are “affected by an action or inaction by the United States,” the text says. That could come into play if U.S. export rules limit the technology products the U.S. lets China buy. A senior administration official said the provision just allows for discussions and wouldn’t be a basis for China to claim it can’t fulfill its commitments.

What China and the U.S. have to report. The text says the U.S. and China will disclose publicly:

(a) monthly foreign exchange reserves data and forward positions according to the IMF’s Data Template on International Reserves and Foreign Currency Liquidity, no later than 30 days after the end of each month;

(b) quarterly balance of payments for the sub-components of the financial account, including direct investment, portfolio investment, and other investment (loans and receivables), no later than 90 days after the end of each quarter; and

(c) quarterly exports and imports of goods and services, no later than 90 days after the end of each quarter.

The agreement seeks to make it easier to identify and punish intellectual property theft and counterfeiting. It adds several provisions to protect confidential information considered to be trade secrets, which American businesses say are not well protected under Chinese law. Those protections also include “electronic intrusions,” a reference to hacking of computer systems. The pharmaceutical industry secured significant gains, including commitments by the Chinese government to do more to protect patent owners from copycats.

The deal also contains commitments to halt the forced transfer of American technology to Chinese competitors. Companies have long complained that to do business in China, they had to hand over valuable technology and trade secrets. China has pledged not to require such transfers, including when companies apply for certain licenses or government approvals. The two pages on technology transfer go beyond other agreements China has signed that dealt with that issue.

China also pledged not to “support or direct” acquisitions and investment by Chinese companies of foreign technology in “industries targeted by its industrial plans that create distortion.” American officials say it is targeted at addressing the issues created by industrial plans like Made in China 2025.

The section doesn’t require China to change any law or regulation to fulfill its obligations.

Regarding services, the agreement requires China to act quickly to accept applications from bank cards and payments systems seeking to access the Chinese market, and the deal’s text cites Mastercard, Visa and American Express by name. The U.S. pledged to continue to open its market to China’s UnionPay system.

Regarding currency manipulation, China commited not to devalue its currency or make persistent intervention in its currency market. China also commits to a schedule of regular disclosures of data regarding its foreign-exchange holdings.

There are several provisions detailing dispute resolution processes and the following clause would be the “safety valve” relative to provisions in the deal: “In the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other.”

The deal creates the Bilateral Evaluation and Dispute Resolution Offices to receive and evaluate complaints. The deal also includes an appeals process where issues can be elevated from midlevel officials all the way up to the offices of the United States trade representative and the vice premier of China. If those talks can’t resolve the dispute, more tariffs will go into effect. Under such a scenario, the other party promises not to retaliate with tariffs of its own. If they do, either country can give written notice and withdraw from the deal. So long as the tariff imposition is in good faith, Beijing agreed not to retaliate.

China committed to some big changes to its agricultural policy. The country will get rid of certain health standards that Chinese officials have used to block a variety of American agricultural goods.

Beijing is also relaxing licensing, inspection and registration rules that the United States has viewed as barriers to trade. The changes will affect products including meat, poultry, pet food, seafood, animal feed, baby formula, dairy and biotech.

The following are some key changes under the agricultural provisions that will impact the sales ability not only under terms of this agreement but in the future:

Wheat, rice and corn tariff rate quotas (TRQs):

China agreed to ensure that, from Dec. 31, 2019, its TRQ measures for wheat, rice, and corn are in conformity with the Panel Report in China-Tariff Rate Quotas for Certain Agricultural Products and the WTO agreements, including China’s commitments under its accession agreement to the WTO.

China has to allocate the TRQs for wheat, rice, and corn (WRC TRQs) for each year by Jan. 1 of that year to end-users. China shall ensure that it does not inhibit the filling of its WRC TRQs.

China will reallocate all unused and returned WRC TRQ amounts, including all unused and returned amounts allocated to STEs or designated as part of the “STE share,” by Oct. 1 of each year.

China will make all WRC TRQ allocations in commercially viable shipping amounts. It will also ensure that a sufficient number of STE and non-STE entities, including new quota applicants, are eligible to receive WRC TRQ allocations, and that the full utilization of its WRC TRQs is not inhibited.

Consistent with China’s WTO obligations, at the request of the United States, China will provide the relevant WRC TRQ allocation and reallocation information requested.

Biotechnology

China agreed to implement a transparent, predictable, efficient, science- and risk-based regulatory process for safety evaluation and authorization of products of agricultural biotechnology. For agricultural biotechnology products for feed or further processing, China shall significantly reduce, to no more than 24 months, the average amount of time between: (a) the submission of a formal application for authorization of such a product; and (b) the final decision on approval or disapproval of the product.

China will establish an authorization period of at least five years for any agricultural biotechnology product.

China, within 12 months of the date of entry into force of this Agreement, will establish and make public a simplified, predictable, science- and risk-based, and efficient safety assessment procedure for approval of food ingredients derived from genetically modified microorganisms.

If there is what the agreement calls “an occurrence of low-level presence (LLP) affecting a U.S. shipment to China,” the country shall not delay in notifying the importer of the occurrence and any additional information needed to help China make a decision on the management of the event and they have to provide the U.S. with a summary of any risk or safety assessment conducted relative to the LLP occurrence. They also have to take into account any U.S. or foreign country safety assessment relative to managing the LLP occurrence.

“China shall evaluate inadvertent or technically unavoidable LLP occurrences on a case-by-case basis to minimize trade disruptions,” according to the agreement. “The Parties agree to organize experts to conduct further studies on the issue of LLP and to collaborate internationally on practical approaches to addressing LLP.”

Meat and poultry

When the U.S. provides China with an updated and complete list of FSIS-approved facilities, China shall, within 20 working days of receipt, publish the list on the General Administration of Customs of the People’s Republic of China (GACC) website and allow the importation into China of products from all facilities on the list.

Beef

China and the U.S. are to continue implementing the 2017 Protocol for the importation of U.S. beef and beef products into China; “however, this Agreement shall prevail over any requirements in the Protocol that are inconsistent with this Agreement. The two Parties may revise the Protocol according to this Agreement if appropriate.”

China agrees to eliminate the age requirement on imports of U.S. beef and beef products within one month of the agreement entering into force.

China recognizes the U.S. beef and beef products traceability system. If the U.S. maintains its negligible risk status for BSE under the World Animal Health Organization (OIE), China “shall not impose new import restrictions or requirements related to that disease on imports of U.S. beef. Should the United States’ negligible risk status change, China shall administer the regulations for imports of U.S. beef in accordance with the 2018 OIE Terrestrial Animal Health Code.”

Within one month of the agreement entering into force, China will permit imports of U.S. beef and beef products except those that are not eligible to be shipped to China.

Beef hormones are also addressed, with China committing within one month of the agreement entering into force that they “shall adopt maximum residue limits (MRLs) for zeranol, trenbolone acetate, and melangesterol acetate for imported beef. For beef tissues for which Codex has established MRLs for these hormones, China shall adopt the Codex MRLs. For beef tissues for which Codex has not established MRLs for these hormones, China shall adopt its MRLs by following Codex standards and guidelines and referring to MRLs established by other countries that have performed science-based risk assessments.”

Pork

The U.S. and China will “promote cooperative activities within the Global African Swine Fever Research Alliance (GARA) to share publicly-available scientific knowledge and information to contribute to the progressive control and eradication of African swine fever (ASF).”

Within 10 working days of the agreement entering into force, “China shall permit the importation into China of those pork and pork products” inspected by the Food Safety and Inspection Service (FSIS) in an FSIS-approved facility.

The agreement also touches on the issue of ractopamine, requiring China to conduct a study. “In consultation with U.S. experts, China shall conduct a risk assessment for ractopamine in cattle and swine as soon as possible without undue delay, and in a manner consistent both with Codex and FAO/World Health Organization (WHO) Joint Expert Committee on Food Additives (JECFA) risk assessment guidance and with the risk assessment for ractopamine previously conducted by the FAO/WHO JECFA. The risk assessment shall be based on verifiable data and the approved conditions of ractopamine use in the United States. China and the United States shall establish a joint working group to discuss the steps to be taken based on the results of the risk assessment.”

Poultry

China agrees to maintain measures consistent with 2018 OIE provisions. The U.S. agrees to launch within 30 days an evaluation of a region of China “for avian disease-free recognition” by the Animal and Plant Health Inspection Service (APHIS). China will also recognize FSIS oversight of U.S. meat and poultry plants relative to imports of those products.


 

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