Phase I Trade Deal
The United States recently reached a Phase I trade agreement with China, easing the tension of the ongoing trade war between the two nations. Had the two nations not come to an agreement on a Phase I deal prior to December 15, $156 billion in Chinese good would have been subject to additional tariffs. If you would like to view the full trade deal click HERE.
The Phase I trade deal was officially signed on Wednesday, January 15. The following is information highlighting some of the main sections and agreements of the Phase I deal between the two countries.
Good News for American Farmers & Businesses
American Farmers and Businesses
The trade war has hurt farmers and businesses that both import and export across America, specifically in Wisconsin for months. The National Bureau of Economic Research found that the Trump tariffs have hiked costs for U.S. consumers, disrupted supply chains for U.S. producers and exporters, and reduced total U.S. trade and gross domestic product from where they would be without the tariffs. From pecan growers in Georgia, to ginseng farmers in Wisconsin, to U.S. businesses, to U.S. consumers, everyone has felt the impact of this conflict. Escalating tariffs between the two nations have significantly hurt Wisconsin exports like pork, dairy products, cranberries, and ginseng, among many others. With most of these tariffs remaining in place for at least the rest of 2020, farmers and businesses will continue to suffer at the hands of this trade war. Farmers like those in Wisconsin have arguably been impacted the most by tariffs. For example, United States’ ginseng is grown primarily in central Wisconsin, accounting for more than $30 million in revenues per year, and China has been a large market for this. Similarly, Wisconsin is the largest U.S. producer of cranberries and China is a large market for those producers as well. Both of these products have felt the impact of tariffs, as prices have decreased, and exports have declined. These are just a couple of examples of the industries hampered by this trade war that is not ending anytime soon.
Lingering Tariffs, New Commitments
- The U.S. suspended planned 15% tariffs on $156 billion of Chinese goods that would have gone into effect on Dec. 15
- China cancelled its retaliatory tariffs due to take effect on Dec. 15 (including 25% tariff on U.S.-made autos)
- This deal will cut by half the tariff rate U.S. imposed on Sept. 1 on $120 billion of Chinese goods to 7.5%
- U.S. tariffs of 25% on $250 billion of Chinese goods will remain unchanged (it appears that the Trump administration is trying to use this as negotiating leverage for the Phase II deal)
This following can be seen in the documents of the agreement. NOTE: The U.S. has a $419 billion trade deficit with China, so these trade commitments are an effort to reduce that deficit. China agrees to:
- increase purchases of American products and services by at least $200 billion over the next two years
- increase purchases of manufactured goods by $77 billion over two years
- increase purchases of U.S. agriculture products by $32 billion over two years
- buy $52.4 billion of additional U.S. energy products, which will include liquefied natural gas, crude oil, refined products, and coal, and
- import more U.S. wheat, rice, corn, pharmaceuticals, and financial services
Agreements & Enforcements
Intellectual Property Agreements
China has said that changes will happen, but it will be at their own pace. China agreed to:
- includes stronger legal protections for patents, trademarks, and copyrights
- follow through on pledges to eliminate pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals, and government benefits for those types of transfers
- refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans
Prior to the deal’s signing, the Trump administration revoked its decision to label China a currency manipulator.
- China has pledged to refrain from competitive currency devaluations and to not target its exchange rate for competitive purposes
- Violations of currency commitments will be subject to an enforcement mechanism that could lead to tariffs
Financial Services Access
- The deal includes improved access to China’s financial services market for U.S. companies in banking, insurance, securities, and credit rating services
- This section of the deal addresses U.S. complaints about investment barriers like foreign equity limitations and discriminatory regulatory requirements
Dispute Resolution and Enforcement
- Disputes will be resolved through bilateral consultations
- Bilateral consultations will begin with designated officials and move to higher offices if they are unable to reach an agreement
- If that doesn’t work, tariffs or other penalties could be imposed
Phase II and what to expect moving forward
There is much more work that is needed to be done to complete the entire trade agreement. A significant amount of the United States’ issues with China were not resolved in the Phase I deal, such as the tariff problem, so the Phase II deal will need to address more than this one did. The most significant downfall of Phase I is that most of the tariffs that are hurting farmers and businesses are still in place, as the deal primarily ensured that no new tariffs would be enacted between the two countries. Trump has indicated that he will agree to take the tariffs off if they are able to reach the Phase II deal, but it is likely that these tariffs will remain through 2020.
Some have argued as well that a hallmark of the Phase I deal, China adding $200 billion to its purchases of U.S. goods and services over the next two years, is unlikely to affect our overall trade deficit. They say this would be due to U.S. producers not being able to scale up production to accommodate the new demand, leading to a redirection of U.S. exports from other countries to China.
Vice President Pence and President Trump have indicated that discussions on a Phase II deal have already begun.
Something to keep in mind: The Situation in Hong Kong
There is one aspect of United States-China relations that has increased tension in the past few months between the two nations aside from their trade argument. That aspect is the situation in Hong Kong and the United States’ support of their democratic protesters. After Congress passed a resolution supporting the democratic protesters in Hong Kong, Chinese officials were unhappy and indicated that it could affect the trade negotiations. Despite their disagreement on democracy in Hong Kong, the two nations were able to reach this Phase I agreement, so it appears that their disagreement will not play a role in future trade negotiations.