South China Morning Post | 21 November 2021

US-China phase-one trade deal gets a reality check after nearly two years

by Ji Siqi

As the two-year deadline for the phase-one trade deal between the world’s two largest economies is approaching, all eyes are on the next step.

Signed in January 2020, the deal was considered a ceasefire agreement between China and the United States following a two-year trade war that originated from a Section 301 investigation by the US in 2018, when Washington said Beijing had engaged in unfair trade practices such as intellectual property (IP) theft and granted excessive government subsidies to a wide range of domestic industries.

The Trump administration first imposed a 25 per cent tariff on US$50 billion worth of Chinese products, then extended the range to US$200 billion. In retaliation, China imposed tariffs ranging from 5 to 25 per cent on various US goods, including agricultural products and vehicles.

A direct result of the phase-one trade deal has been the suspension of more tariffs on both sides. The US suspended a planned increase in tariffs on about US$162 billion on Chinese goods and lowered an existing duty on imports worth US$110 billion. China has also announced rounds of tariff exclusions that exempt American products such as pork, soybeans, liquefied natural gas and medical disinfectants.

But not long after the agreement was signed, the Covid-19 pandemic hit and reshaped the momentum of the global economy. China has fallen behind in some of the commitments it made in the agreement, sparking speculation on fresh trade tensions between the world’s largest two economies.

US Trade Representative Katherine Tai told reporters earlier this month that the Biden administration is “getting traction” with China and intends to hold China accountable to the two-year phase-one trade deal while exploring all weaknesses in China’s performance, according to Reuters.

An additional US$200 billion purchase

Included in the deal is a commitment from Beijing to buy, over two years, at least US$200 billion of American goods and services more than it did in 2017. Those additional purchases will comprise about US$77 billion in manufacturing, US$52 billion in energy, US$32 billion in agricultural goods and US$38 billion in services such as tourism, financial services and cloud services.

According to an October report by the Peterson Institute for International Economics (PIIE), China’s total purchases of US goods from January 2020 to September 2021 reached only 62 per cent of the pledged total, according to Chinese import data, or 60 per cent based on US export data.

The pandemic has long ruled out the possibility of China meeting the purchasing target within the two-year period, said Lu Xiang, a US-China scholar at the Chinese Academy of Social Sciences (CASS).

“The pandemic has caused turbulence on both the supply and demand sides; the purchase part in the deal has become meaningless since last year,” Lu said.

So far, China is closest to the two-year target in purchasing agricultural products. As of September 2021, total purchases of agricultural products reached US$50.3 billion, or 76 per cent of the target based on Chinese import data, while US export data put the figure at 82 per cent, according to the PIIE.

The record volumes of crop and meat shipments across the Pacific have pleased US farmers, created profits for agribusinesses and lifted commodity prices. US Agriculture Secretary Tom Vilsack said in February that he believed China was “living up to its responsibilities” in buying agricultural products, while taking the pandemic into consideration.

But in October, Vilsack took a harder line, pointing out that China was still about US$5 billion short of the purchasing total agreed upon in the deal.

“It is important that we again continue to press the Chinese for compliance with phase one. If you reach an agreement, we want to make sure that there’s performance behind that agreement,” he said.

The pandemic and an excessive supply of pork and increased grain output in China this year have also suppressed Chinese demand for imported agricultural products, said Pan Chenjun, an analyst with Rabobank.

“I think it would be very hard for China to achieve the phase-one target [for agricultural products] in the remaining time,” Pan said.

The pandemic has also slashed China’s demand for items such as Boeing planes – big-ticket orders that could have edged China closer to its goal. As it was, purchases of manufactured products reached 61 per cent of the two-year target as of September, according to Chinese import data, or 59 per cent based on US export figures.

Boeing’s biggest offering to China, the 737 MAX, has been grounded since 2019 following two fatal crashes, and its business has also been caught up in the trade war between the United States and China that started the previous year.

For energy products, China’s purchases reached only 49 per cent of the phase-one target as of September, based on Chinese imports, or 38 per cent based on US exports.

“The problem cannot be solved solely from the China side,” Lu from the CASS said. “The two sides should have had frequent communications in the past few months on the subject matter – how to eventually achieve the US$200 billion target. I think from the China side it is still achievable – if it cannot be done this year maybe next year, and the year after China can make some compensatory trade.”

As the pandemic has reshaped the global supply chain, balancing trade with China should no longer be a priority for the US, said Wang Huiyao, president of the Beijing-based Centre for China and Globalisation.

“The shelves in supermarkets would all be empty in the US if they stick to balancing trade,” Wang said. “The US actually needs to buy more Chinese products to solve its supply-chain crisis.”

Other commitments

Other Chinese commitments in the deal include making structural reforms in the areas of intellectual property technology transfer, agriculture, financial services and currency – all of which aim to provide more protections and expand access for American businesses operating in China.

The Chinese government often requires foreign companies to set up a joint venture with a Chinese partner – prompting regular complaints from Western firms that this leads to IP theft. They have also said they face pressure to transfer technology in exchange for market access.

A foreign-investment law that took effect last year was designed to address concerns, including those over unfair treatment in terms of market access and government procurements; forced technology transfers to Chinese partners; and the theft of commercial secrets from foreign businesses in China.

But its implementation is still a work in progress, based on foreign assessments. According to a 2020 survey by the European Union Chamber of Commerce in China, 16 per cent of respondents said they still felt compelled to transfer their technology to Chinese partners after the introduction of the new law.

Meanwhile, a US-China Business Council survey in 2020 also found that 13 per cent of companies said they had been asked by their Chinese partners to transfer technology – the figure had also risen from the previous year.

A report released by the office of the US Trade Representative (USTR) in April also accused China of not initiating enough reforms on IP protection, while flagging emerging concerns about other IP policies. The report attributed more than 80 per cent of US counterfeit seizures to China, including Hong Kong.

China remains on the USTR’s “priority watch list”, to be monitored closely for IP-related infringements.

China has also been easing foreign-investment restrictions, by reducing the number of sectors and industries that are either restricted or prohibited for foreign investors, known as the “negative list”. The 2020 list was trimmed to 123, down from 131 sectors a year earlier.

The Chinese government has reiterated that it will further cut the negative list that restricts foreign investment; continue to open up its manufacturing, service and agriculture sectors to investors; and allow them to take control of their enterprises in more areas.

In terms of opening up China’s financial markets, Beijing has granted a series of licences to Wall Street banks and overseas asset managers, allowing them to take full control of securities joint ventures on the mainland. In August, JP Morgan Chase become the first to win approval.

China has also agreed to establish a nationwide mechanism for the early resolution of potential pharmaceutical patent disputes as part of the phase-one deal. The country amended the Patent Law, effective June 2021, to enact patent-term extensions in compensation for delays in patent and marketing approvals.

Meanwhile, China has sped up its drug approvals. In 2019, the review procedure for a drug’s registration was shortened to 300 days – way down from 900 days in the past, according to a June report by the Greenberg Traurig law firm. And in 2020, the procedure was required to be finished within 200 working days.

Also included in the phase-one deal is a chapter on dispute resolution, which calls for regular bilateral consultations and aims to ensure the effective implementation of the agreement. But so far, the vision has not been realised as expected, especially in the final year of the Trump era, largely due to the worsening bilateral relations amid the pandemic.

Long road ahead

China’s subsidies for state-owned enterprises – perhaps the most significant impetus behind the trade war – were not addressed in the deal. Tai said in October that the Biden administration believes that Beijing is resistant to making “meaningful reforms” in its economic system.

“In recent years, Beijing has doubled down on its state-centred economic system,” Tai said. “It is increasingly clear that China’s plans do not include meaningful reforms to address the concerns that have been shared by the United States and many other countries.

“We will discuss with China its performance under the phase-one agreement. China made commitments that benefit certain American industries, including agriculture, that we must enforce.”

Tai also said the US will begin a new “targeted tariff-exclusion process” to provide relief to US importers adversely affected by the tariffs that remain on nearly two-thirds – or roughly US$335 billion worth – of US imports from China, according to figures from PIIE.

On November 8, the USTR extended the expiration date for tariff exemptions on 81 out of 99 types of personal protective equipment for six more months, until May. But the tariff exemptions for the remaining 18 products will expire at the end of this month, including certain types of face masks, hand sanitisers and disposable gloves.

Despite high inflation in the US and growing pressure from business groups to reduce the tariffs on Chinese goods, Tai said on November 10 that the USTR was viewing the “Section 301” tariffs on Chinese goods as part of a strategy to seek an advantageous position to more effectively compete with China, according to Reuters.

“High tariffs are likely to persist in China-US trade in the long term,” said Shi Yinhong, an international relations professor at Renmin University and an adviser to the State Council. “But the level of the tariffs might be lower in the future compared with now.”