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China Phase One Deal Not Enough but Phase Two Prospects Unclear, Lawmakers Hear

Friday, February 28, 2020
Sandler, Travis & Rosenberg Trade Report

The phase one trade agreement the U.S. recently concluded with China does not sufficiently address many of the most significant problems in the bilateral trade relationship, lawmakers and witnesses said during a Feb. 26 hearing before the House Ways and Means Committee. However, some witnesses said prospects for concluding a subsequent phase two agreement that does tackle those problems are uncertain at best.

The U.S. and China signed Jan. 15 an agreement under which the U.S. suspended some tariff increases and rolled back others in return for Chinese commitments in the areas of intellectual property rights, technology transfer, agriculture, financial services, currency, and enforcement. That agreement took effect Feb. 14 and U.S. officials recently reported that Beijing is making progress in implementing those commitments.

However, lawmakers at the Ways and Means hearing emphasized that this agreement does little to address the fundamental issues identified in the Section 301 investigation that sparked the Trump administration’s trade war with China. Committee Chairman Richard Neal, D-Mass., said the phase one agreement does include “some important commitments,” and Ranking Member Kevin Brady, R-Texas, said it represents “historic progress” in the areas it covers. However, Neal added that the agreement “leaves on the table more significant, structural commitments,” and Brady acknowledged that it does not achieve Republicans’ goal to “have all of China’s unfair trade practices addressed and stopped” so the Section 301 tariffs can be lifted.

Private sector witnesses also highlighted the shortcomings of the phase one agreement. Economic Policy Institute President Thea Lee said this deal “squandered” the leverage created by the tariffs and “does not adequately confront the key challenges and problem areas in the U.S.-China relationship.” Owen Herrnstadt, director of trade and globalization for the International Association of Machinists and Aerospace Workers, said the agreement “was a major disappointment” and illustrated that “we cannot alone simply tariff our way into competitiveness with China.” Tim Dufault, a wheat farmer from Minnesota, said the agreement does include “some good provisions … addressing non-tariff barriers” but said “those are, at best, singles when what we need is a home run.”

Trump administration officials have said that more systemic issues, which hearing witnesses said include subsidies, state-owned enterprises, cross-border data flows, technology licensing, digital trade, labor and environmental policies, and cybersecurity, are generally expected to be the focus of a phase two agreement. However, Tim Stratford, a former U.S. trade negotiator and chairman of the American Chamber of Commerce in China, warned that concluding such an agreement “will be extremely difficult.”

Stratford explained that national security concerns on both sides, and a related increase in wariness of each other’s intentions, have greatly complicated the trade relationship. In these circumstances, Stratford said, “we should expect that China will resist more strongly than ever U.S. pressure to reduce industrial policy support for domestic high-tech industries or to open its markets further to the U.S.” This is particularly true given that Beijing “has almost certainly concluded” from the trade war of the past two years that the U.S. is not as reliable a trading partner as previously assumed, having demonstrated “a willingness to impose substantial tariffs on a vast array of Chinese goods and to significantly tighten restrictions on Chinese businesses’ access to various U.S. technologies and high tech components.”

As a result, Stratford asserted, “the Chinese government will likely want to maintain the current fragile truce and draw out the negotiation process as long as possible in order to extend the time period it has to prepare for the next time the U.S. decides to impose tariffs or other sanctions.” As part of that strategy, he said, China will likely offer concessions “that do not undermine key industrial policy objectives and that play to politically important domestic U.S. constituencies.” Chinese leaders will also likely believe “that in the immediate future the U.S. appetite for further tariff escalation is limited, and that it will be better for China to respond to the U.S. tit-for-tat in any future tariff battles that may arise than to abandon elements of their economic development model that they believe have worked well for them.”

If Stratford’s predictions hold true and the U.S. and China are unable to conclude a phase two agreement, the remaining Section 301 tariffs will likely remain in place for the foreseeable future. However, there are a number of ways businesses can minimize their exposure to these tariffs. Click here for more information, or contact trade attorney Lenny Feldman at (305) 894-1011.

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