Challenges posed by China-US phase one economic and trade agreement

By Ni Jianlin, Dentons

China and the US officially executed the phase one economic and trade agreement on 15 January 2020, finally calling a truce in China-US trade frictions that had been continually escalating for close to two years, causing uncertainty in the global economy.

Opportunities, challenges

From the specific provisions of the agreement it can be seen that it will have the following effects and pose the following challenges:

Ni Jianlin
Senior Partner

(1) China will increase its imports of American industrial manufactured products, agricultural products, energy products and services. Due to the increase of imports from the US, under considerations of maintaining an overall import and export balance, imports from other trading partners may decrease accordingly. It remains to be seen if other trading partners will take corresponding countermeasures in consequence of the trade balance. Additionally, how the import increase committed to will ultimately be implemented through enterprises is somewhat uncertain;

(2) The domestic legislative, judicial and law enforcement systems relating to intellectual property will face adjustments and revisions. The agreement requires shifting of the burden of proof for trade secret misappropriation, lowering of the threshold for initiating criminal enforcement in trade secrets misappropriation cases, and enforcement combating the pirating and counterfeiting of products, all of which are very specific and will necessarily result in adjustments in the relevant domestic legislative, judicial and law enforcement systems.

(3) China’s financial services industry will face competitive pressures from the entry of more foreign financial services providers into the domestic market. Based on the most favoured nation principle in the WTO’s General Agreement on Trade in Services, the provision by China of favourable treatment to US financial services providers could trigger similar demands from other WTO members. In fact, the timetable for opening up the financial services industry announced by the central government is aimed at all foreign financial services providers. How to ensure the financial security of the state where financial services are opened up ahead of schedule is a question that China needs to urgently address.

(4) When the negotiations on the next-phase agreement are to commence is unclear, and the uncertainty as to when the additional tariffs that have been imposed will be lifted is still weighing quite heavily on export enterprises. The phase-one agreement that has been reached has not completely eliminated the tariffs that China and the US imposed on each other, with US$250 billion worth of goods shipped to the US from China still affected by duties of 25%, and US$120 billion worth of US goods still affected by duties of 7.5%. It remains to be seen whether the phase-one agreement will put a brake on the slide in Chinese exports to the US.

Response, recommendations

Although the phase-one agreement is limited to a small range of issues such as intellectual property, technology transfer, trade in agricultural products, financial services and exchange rates, it nonetheless has a relatively large impact on relevant domestic legislation, adjudication, law enforcement and industrial adjustment. The author would argue that it is necessary to respond proactively, transform challenges into opportunities, and win a better development environment for the high-quality development of China’s economy.

(1) Accelerate the revision of relevant domestic legislative, judicial and law
enforcement procedures, and implement the provisions of the phase-one agreement. Adjustment of the relevant legislative and law enforcement systems would be conducive to the establishment of sounder intellectual property protection legislative and law enforcement systems, creation of a more legally grounded business environment for enterprises, and attraction of more foreign investors to invest in China.

(2) Domestic manufacturing and export enterprises whose exports have decreased due to the impact of global supply chain adjustments should strengthen their tracking analysis and study. Promote a pilot trade adjustment assistance project and consider adopting internationally accepted trade adjustment assistance for key enterprises that are relatively influential, so as to further stabilise the foreign trade export and employment situation. Additionally, such relevant industries as agriculture and manufacturing, which may have been relatively seriously impacted, should be closely tracked, and relevant domestic industrial policy adjusted as appropriate so as to enhance the competitiveness of the relevant domestic industries.

(3) Strengthen training on how to respond to China-US trade friction and guide relevant enterprises in co-operating with their importers in actively filing product exclusion requests. Labour-intensive enterprises with products that are easily substituted, and that tend to be relatively seriously impacted by supply chain adjustments, can consider rationally moving part of their production capacity to countries or regions where overall costs are lower and, while complying with rule of origin, avoiding the impact of certain higher tariff measures.

(4) Pay close attention to the joint statements issued by the US, EU and Japan, and the progress of major regional trade agreements such as the CPTPP (Comprehensive Progressive Trans-Pacific Partnership), USMCA (US-Mexico-Canada Agreement), etc., and bilateral free trade agreements. The contents of the seventh joint statement issued by the US, EU and Japan on 14 January 2020 touch upon such issues as revision of the current WTO industrial subsidy rules, enforced technology transfers, market-oriented conditions, international e-commerce rules, and the commitments by developing countries to advanced WTO members in WTO negotiations.

Such issues as subsidies, state-owned enterprises and industrial policy could be major topics of structural reform touched upon in the negotiations for the next-phase China-US agreement, for which China must adequately prepare.

(5) Accelerate the free trade zone pilot reforms and adopt free trade zone trade and investment facilitation, and financial regulation policies that align with the high standards of international economic and trade rules, so as to be able to rapidly adapt to international economic and trade rules of even higher standards. As of now, China has established 18 free trade zones that fully cover new border-free trade zones and the littoral provinces, lead the development of central and western China, and are aimed at regional opening up. China is now a contracting party to 17 bilateral free trade agreements (FTAs) and should push for negotiations on more such bilateral agreements, as well as push for the execution of the RCEP (Regional Comprehensive Economic Partnership) as soon as possible, so as to respond to the complex and ever-changing international economic and trade environment.

Ni Jianlin is a senior partner at Dentons.

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