Decoding the US-China Trade Agreement

By Biswajit Dhar | Briefing Paper # 32 | January 21, 2020

On March 22, 2018, President Donald Trump signed the “Presidential Memorandum Targeting China’s Economic Aggression” signalling the beginning of a trade war between the two largest economies.[1] President Trump initiated this action in exercise of the powers granted to his administration under Section 301 of the Trade Act of 1974. The Section 301 allows the Trade administration to initiate action against any country, which, in its view, violates intellectual property rights (IPRs) belonging to American firms. But, while President Trump’s action against China was taken ostensibly to “protect [US] domestic technology and intellectual property from certain discriminatory and burdensome trade practices”[2] by its largest trade partner, the President also indicated that his aim was to “reduce the trade deficit immediately by $100 billion.”[3]

Almost 22 months later, the White House was once again witness to President Trump signing a document involving China. This time it was an “Economic and Trade Agreement” between the two countries, signalling a temporary pause in the trade war.[4] The Trump administration termed the agreement as the “phase one,” indicating that the second phase of this agreement would start as soon as the current agreement “kicks in.”[5]

This paper provides an initial assessment of the “Economic and Trade Agreement.” The paper has three main parts. The first captures the extent of the trade war and its implications for the two countries. The second section discusses the terms of the truce agreed to between them. The third section discusses the possible implications of the Agreement for the United States and China.

1. Dimensions of the Trade War

The Trump administration targeted China on two counts — one, for violating intellectual property rights (IPRs) of American companies,[6] and two, for currency manipulation.[7] On both counts, the US became the judge and the jury by first indicting China for the perceived violations and then by imposing higher tariffs to restrict imports from China.

As regards the issue of IPRs, the Trump administration argued that China was forcing American companies to transfer their proprietary technologies. During 2017-18, the United States Trade Representative (USTR) “investigated” this charge using Section 301 of its Trade Act of 1974. The USTR investigations found China guilty of violating IPRs of American companies, and therefore, tariffs were raised from 10% to 25% on more than $200 billion worth of Chinese imports. China’s response was to impose additional tariffs of between 5-25% on US imports valued at $60 billion.

The second charge against China, of currency manipulation, was based on the biannual report of the Department of Treasury to the US Congress on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” The 2019 report concluded that China’s “exchange rate practices continue to lack transparency, including its intervention in foreign exchange markets,” although it found that “direct intervention in foreign exchange markets by the People’s Bank of China (PBOC) over the past several months appears limited.”[8] However, China was targeted for the “long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market.” Based on this evidence, the US Secretary of Treasury invoked the provisions of Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 determined that China was manipulating the “rate of exchange for purposes of purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade” and that the US’ largest trade partner was a “currency manipulator.”[9] This was the first time since 1994 that any country was being labeled as such. Consequent to these findings, the US administration notified its decision to impose 10% tariffs on products imported from China, valued at $300 billion.[10] China announced retaliatory tariffs on more than 5000 products imported from the US by 5-10% worth nearly $75 billion.[11] After this round of tariff increases by the US, and the retaliation by China, nearly all of the US-China bilateral trade as in 2018 was consumed by the trade war.

The impact of the trade war was felt by both countries as well before the final round of the tit-for-tat retaliation played itself out, negotiations were initiated to find an acceptable solution. Bilateral trade data confirmed the imperatives of finding a negotiated outcome. Immediately after the tariff war took effect in August 2018, bilateral trade flows started declining. However, the impact of this decline was not seen on US imports from China, but it did show up in its exports to China.

Table 1: US Trade in Goods with China (in $ billion)

Years Exports to China Imports from China Trade Balance
2017 129.8 505.2 375.4
2018 120.1 539.7 419.5
2019 (up to November) 97.8 418.6 320.8

Source: United States Census Bureau.

The above table shows that the trade war initiated by President Trump met one of his main objectives of decreasing the US’ trade deficit with China by $100 billion. However, the resulting trade compression caused US exports to China to fall by almost 12% in 2019 as compared to the corresponding period in 2018.

2. The Essentials of the “Economic and Trade Agreement”

The Agreement reads like a charter of demands put forth by the US, which China is expected to implement, mostly over the next two years. The “commitments” taken by China cover the following broad areas: (i) intellectual property rights; (ii) technology transfer; (iii) agriculture; (iv) financial services; (v) enhancing imports from the US; and (vi) currency manipulation. The Agreement includes a dispute resolution chapter “to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner.”

(i) Intellectual Property Rights

The focus of commitments taken by China is mostly on issues related to enforcement of intellectual property rights (IPRs), especially in the areas of trade secrets, patents, copyrights, and geographical indications. The two countries have also agreed to prevent the manufacture of pirated and counterfeited goods and trade in such products on e-commerce platforms.

In its narrative on IPRs at multilateral forums and bilateral engagements, the US has frequently emphasised the importance of effective protection of trade secrets and confidential business information. As regards China, the US’ position has been that China’s Anti-Unfair Competition Law is ineffective in preventing misappropriation of trade secrets.[12] The “Economic and Trade Agreement” reflects the efforts that the US has made to improve “liability for trade secret misappropriation provides full coverage for methods of trade secret theft.”[13] This includes the reversal of the burden of proof in cases involving trade secret misappropriation.

The protection of confidential business information, especially data submitted to the government authorities for regulatory approvals, has been an important focus area for the US. Its long-standing position in this regard has been for the adoption of a regime that protects data for 5-10 years, which prevents the use of protected data for subsequent regulatory approvals. Such a regime has been advocated, particularly in the case of pharmaceuticals. However, in its agreement with China, the US has relied mostly on a transparency mechanism to address the issue of the use of confidential business information.

In the area of patent protection, the US and China have agreed that the regime must “compensate for unreasonable delays that occur in granting the patent or during pharmaceutical product marketing approvals.” The two countries have decided to “limit such adjustments to no more than five years and may limit the resulting effective patent term to no more than 14 years from the date of marketing approval” in their respective countries.

(ii) Forced Technology Transfer

The issue of forced technology transfer arose from China’s policies regarding foreign direct investment (FDI), which allow foreign companies to operate in the country only through joint ventures. Businesses and scholars in the United States have argued foreign companies into licensing agreements in exchange for those companies’ access to the Chinese market.[14] Further, the industrial and innovation policies that China has assiduously followed since its opening-up in the late-1970s, are also seen instruments for encouraging forced technology transfer.

The “Economic and Trade Agreement” has addressed this issue through a set of best endeavour provisions that seek to ensure that “transfer of technology occurs on voluntary, market-based terms.”[15] For instance, the US and China have agreed that they would desist from imposing conditions insisting on the transfer of technology in cases of joint ventures, or other investment transactions. Besides, the two countries have decided not to “adopt or maintain administrative and licensing requirements and processes that require or pressure technology transfer.”[16]

(iii) Financial Services

The Agreement seems to be an important step not only towards the opening of the market for financial services in China, but also for introducing regulatory transparency in both countries. China has accepted the commitment to provide access to American companies to China’s insurance market through the removal of the foreign equity cap in the life, pension, and health insurance sectors and to allow access to wholly U.S.-owned insurance companies is an important component of the agreement.[17] Towards this end, China would “remove any business scope limitations, discriminatory regulatory processes and requirements, and overly burdensome licensing and operating requirements for all insurance sectors” and would “review and approve expeditiously any application by U.S. financial services suppliers for licenses to supply insurance services.”[18] Simultaneously, China would open up its market for other financial services, among others, by eliminating foreign equity limits and allowing “wholly U.S.-owned services suppliers to participate in the securities, fund management, and futures sectors.”[19]

(iv) Currency Manipulation

The claim of currency manipulation by China was one of the major arguments that the US used to trigger the trade war. Although successive US administrations have been targeting China for being a currency manipulator, the International Monetary Fund (IMF) seems to have a different view on this issue. In its External Sector Report of 2019, the IMF made the following observation: “Real exchange rate movements have generally supported these current account trends over the past decade, with foreign exchange intervention playing a much more muted role in recent years. The large reduction in China’s current account surplus — from more than 10 percent of GDP in 2007 to 0.4 percent in 2018 — was accompanied by a cumulative 35 percent real appreciation of the renminbi over that period.”[20] In other words, the IMF seems to be suggesting that market forces, rather than policies of intervention, determined the value of the Renminbi.

Given this evidence, it seems hardly surprising that the “Economic and Trade Agreement” does not go beyond the relevant provisions in the Articles of Agreement of the International Monetary Fund. Article IV on the “Obligations Regarding Exchange Arrangements” states that IMF Members “shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.”[21] The “Economic and Trade Agreement,” therefore, includes affirmations by both countries to maintain a market-determined exchange rate regime and to strengthen underlying economic fundamentals, which reinforces the conditions for macroeconomic and exchange rate stability.[22]

(v) Expanding Trade

The above contentious issues notwithstanding, the central issue for the US administration has been its country’s mounting trade imbalance vis-à-vis China.[23] The “Economic and Trade Agreement,” is, therefore, a list of demands that the US has made on China to increase its imports of goods by $162.1 billion and of services by $37.1 billion, in the next two years, over the levels in 2017. It includes $77.7 bn of manufactured goods, $32 bn of agricultural products, $52.4 bn of energy, and $37.9 bn of services.

The commitments that China has taken for resolving the frictions with the US over its trade policies are quite formidable, but can these commitments be realistically implemented over a short period?

The next section makes a brief assessment of China’s commitments.

3. Assessment of the “Economic and Trade Agreement”

There are two ways in which the plethora of commitments taken by China to wriggle out of the trade war should be assessed. The first is with reference to the framework of rules monitored by multilateral institutions, in particular, the World Trade Organization (WTO), the IMF, and the World Intellectual Property Organization (WIPO). The second is to assess the practicality of implementing the commitments.

The US’ approach to settle bilateral trade disputes, as has been reflected in the “Economic and Trade Agreement,” sets bleak precedence in a world where the multilateral framework of rules should have been relied on for the purpose. These rules were put in place precisely to provide a framework for economies to find a negotiated settlement of disputes. This is what John Jackson had referred to as “rule orientation” to the settlement of disputes, which stands in sharp contrast to “power orientation,” the latter being “settlement by negotiation and agreement with reference (explicitly or implicitly) to the relative power status of the parties.”[24] During the implementation of the covered agreements under the WTO, several members of the organization had argued that “unilateral trade measures,” which are manifestations of “power orientation,” are “legally indefensible.”[25]

The shadow of “power orientation” is noticeable in the case of several issues covered in the “Economic and Trade Agreement.” For example, the US is furthering its standards for protecting intellectual property (IP) by requiring China to follow suit. However, in the instance case, China has already taken several steps to adopt a stronger framework for protecting IP.

There are two recent examples where such measures have been taken. The “Implementing Regulations of the Foreign Investment Law of the People’s Republic of China,” the country’s new foreign investment law that became effective on January 1, 2020, “delivers heavier sanctions against IP violations, toughened IP law enforcement, a rapid, coordinated IP protection mechanism, diversified ways to settle IP disputes and impartial treatment of IPRs owned by foreign investors and foreign-invested enterprises.”[26] “The Guideline on Strengthening Intellectual Property Rights Protection,” jointly issued by the general offices of the Communist Party of China Central Committee and the State Council, in December 2019 calls for stronger IP protection with harsher punishments for infringements. The Guideline includes provisions for “patent term extension,” which is one of the demands that the US makes on China.

Possibly the most egregious set of demands of the US are the enhanced market access opportunities that China is expected to provide. The US’ position in this regard is that China denies market access to its products and therefore, China must do so. However, global trade rules provide that if China is indeed guilty of denying market access to its products, the US must take recourse to the dispute settlement mechanism of the WTO to secure enhanced market access.

The Global Times, which represents the views of the Communist Party of China, has provided an interesting perspective on the US’ demands for greater market access for its products: “Because of China’s enormous trade surplus, the US has used it as a political weapon against China. Expanding the amount of imports from the US is a process to dismantle this weapon. The increase in Chinese imports from the US means that more weapons to counter the US will be held in our hands.”[27] It does appear that China is more than adequately prepared to meet US demands.

Endnotes

[1] The White House (2018a), Remarks by President Trump at Signing of a Presidential Memorandum Targeting China’s Economic Aggression, March 22, accessed from: https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-presidential-memorandum-targeting-chinas-economic-aggression/.

 [2] The White House (2018b), Statement on Steps to Protect Domestic Technology and Intellectual Property from China’s Discriminatory and Burdensome Trade Practices, May 29, accessed from: https://www.whitehouse.gov/briefings-statements/statement-steps-protect-domestic-technology-intellectual-property-chinas-discriminatory-burdensome-trade-practices/.

[3] The White House (2018a).

[4] USTR (2020), Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China, January 15, available here: https://bit.ly/38sdyw0.

[5] The White House (2020), Remarks by President Trump at Signing of the US-China Phase One Trade Agreement, January 15, accessed from: https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-u-s-china-phase-one-trade-agreement-2/.

[6] For details, see Dhar, Biswajit (2018), Trade Wars of the United States, Economic and Political Weekly, September 15, Vol LIII, No 37.

[7] Dhar, Biswajit (2019), Calls of duty that’ll hurt the US economy, The Hindu, September 7.

[8] US Department of the Treasury (2019), Report to Congress: Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, May, p. 1, accessed from: https://home.treasury.gov/system/files/206/2019-05-28-May-2019-FX-Report.pdf.

[9] US Department of the Treasury (2019), Treasury Designates China as a Currency Manipulator, August 5, accessed from: https://home.treasury.gov/news/press-releases/sm751.

[10] USTR Announces Next Steps on Proposed 10 Percent Tariff on Imports from China, August 10, accessed from: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/august/ustr-announces-next-steps-proposed.

[11] China starts to impose additional tariffs on some US goods, September 1, 2019, Reuters, accessed from: https://in.reuters.com/article/us-usa-trade-china-tariffs/china-starts-to-impose-additional-tariffs-on-some-u-s-goods-idINKCN1VM0YU?il=0.

[12] USTR (2019), 2019 Special 301 Report, April, p. 42, accessed from: https://ustr.gov/sites/default/files/2019_Special_301_Report.pdf.

[13] USTR (2020).

[14] See, for example, The National Bureau of Asian Research (2013), The IP Commission Report: The Report of Commission on the Theft of American Intellectual Property, p. 17, accessed from: https://www.nbr.org/program/commission-on-the-theft-of-intellectual-property/ ; and Branstetter, Lee (2018), China’s “Forced” Technology Transfer Problem — And What to Do About It, Carnegie Mellon University and Peterson Institute for International Economics, May 31, accessed from: https://www.uscc.gov/sites/default/files/Branstetter.Forced%20Technology.China%205-24%20US-China%20Commission.pdf.

[15] USTR (2020).

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Ibid.

[20] IMF (2019), External Sector Report: The Dynamics of External Adjustment, p.7, Washington DC.

[21] IMF (2016), Articles of agreement of the International Monetary Fund: adopted at the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 22, 1944 (as amended), Article IV, Section 1(iii), Washington, DC.

[22] USTR (2020).

[23] While announcing “Presidential Memorandum Targeting China’s Economic Aggression,” President Trump said the following: “ … we have a trade deficit, depending on the way you calculate, of $504 billion. Now, some people would say it’s really $375 billion. Many different ways of looking at it, but any way you look at it, it is the largest deficit of any country in the history of our world. It’s out of control,” The White House (2018a).

[24] Jackson, John (2008), The Case of the World Trade Organization, International Affairs (Royal Institute of International Affairs), Vol. 84, No.3, p. 439.

[25] See, for instance, WTO (1998), Unilateral Trade Measures by States: Communication from India, WT/GC/W/123, 16 December.

[26] CNIPA (2020), Implementing Regulations of Foreign Investment Law in Effect, Heavier Sanctions Against IP Violations, 8 January, accessed from:  http://english.sipo.gov.cn/news/officialinformation/1145174.htm.

[27] “US faces pressure to increase exports,” Global Times, January 16, 2020, accessed from: https://www.globaltimes.cn/content/1177128.shtml.

Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

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