Stanford’s Alan Sykes on the New U.S.-China Trade Agreement

On January 15, President Trump signed a much-anticipated “Phase One” trade agreement with China—the culmination of more than two years of escalating trade tensions and negotiations. In the discussion that follows, Stanford Law Professor Alan O. Sykes, an expert in international trade law, explains key aspects of the new agreement that covers IP, agriculture, energy, and more.

The trade talks between the U.S. and China were at times quite tense. Do you think the deal is a “win-win,” with benefits for both countries?

The answer may depend on your baseline. It is certainly an improvement over a steadily escalating trade war. Is it an improvement over the status quo ante prior to the trade war? I will leave any quantitative assessment to the empirical economists, but the fact that stiff tariffs remain in place on both sides surely detracts from any benefits of the agreement. According to the Peterson Institute for International Economics, average tariffs on U.S. imports from China were 3.1% in January 2018 and will be approximately 19.3% after the Phase One Agreement goes into effect in February. China’s average tariffs on U.S. imports have risen from 8.0% in January 2018 to 20.9% today and will remain at this level under the Phase One Agreement.

As to the long-term picture, one can only speculate—will we reach a comprehensive agreement that addresses U.S. concerns about China to the satisfaction of both sides and rolls tariffs back to their prior levels, or are we looking at many more years of higher tariffs and business uncertainty? My crystal ball is in the shop.

Alan Sykes
Stanford Law Professor Alan Sykes

So trade tariffs imposed by both China and the U.S. over the last two years of the escalating trade war will not be rolled back?

The United States will reduce some of its tariff increases in return for Chinese concessions in “phase one” but retains the bulk of the tariffs as “negotiating leverage” for the future. And China retains its retaliatory tariffs. Both sides are deferring any further rollbacks until the “phase two” negotiations.

What do you think about the structure of the deal?

An additional concern relates to the basic structure of the Agreement, which represents a return in significant part to what economists call “managed trade.” Conventional trade agreements dismantle trade barriers and then allow countries and their firms to compete for business opportunities in a market setting. This Agreement requires China to make purchases in specific dollar amounts over the next two years, without regard to what a free market outcome would produce. China critics may argue that this is the only way credibly to ensure improved access to the Chinese market for our exporters given the enormous sway that the Chinese government exercises over the behavior of Chinese businesses, including those that are in principle privately owned. But the potential for inefficiencies due to a distortion of trade patterns is obvious.

Finally, if China exercises favoritism toward the United States as a result of this agreement, other countries will not be happy. Depending on the precise tools that China employs to fulfill its commitments, other countries may well have legal claims that China is violating its WTO obligations, such as the most favored nation obligation that applies to trade in both goods and services. Time will tell whether the agreement triggers serious blowback from other trading nations.

Getting into the highlights of the deal, chapter 6 calls for an additional $200 billion in purchases by China of U.S. goods and services. Is it a significant increase in trade?

The $200 billion commitment covers U.S. exports to China for the years 2020 and 2021 and includes four broad categories: manufactured goods, agricultural goods, energy products and services. The commitment is measured against the 2017 baseline amount of trade in each category. Total U.S. goods and services exports to China were $188 billion in 2017 according to the Commerce Department and have since declined because of the trade war. A cumulative increase of $200 billion over two years relative to 2017, if the target is achieved, thus represents a very substantial increase in U.S. exports.

An important question concerns what happens in 2022 when the commitments expire. Chapter 6 contains language stating that the parties “project that the trajectory of increases…will continue in calendar years 2022 through 2025,“ but it does not embody definite commitments in that regard. If negotiations regarding an extension of purchasing commitments into 2022 and beyond are unsuccessful, exporters must worry about the effects of a potentially sizeable drop in Chinese demand.

Professor Sykes interview with former Ambassador to China Max Baucus

Can you talk about how the agreement may get rid of Chinese regulations that blocked American agricultural and biotech imports to China? 

Chapter 3 of the agreement is largely about food safety regulations, known as “sanitary and phytosanitary measures” in trade parlance. General obligations on such measures already exist under WTO law, but Chapter 3 addresses a number of specific issues that have arisen in U.S. trade with China (in both directions). The goal is to ensure that food safety regulation is not abused for protectionist purposes, or otherwise applied in an arbitrary manner that creates unnecessary trade barriers that do not contribute to legitimate regulatory objectives. Specific product categories on which commitments are made include dairy and infant formula, beef, poultry, pork, and seafood.  Chapter 3 also contains a timeline and procedures to be followed by China for the approval of new biotechnology products for sale in China.

Does the text of the trade agreement offer enough clarity on enforcement, particularly for IP? IP protection has been in Chinese law for a while, hasn’t it? Can enforcement be guaranteed?

Chapter 1 contains a lengthy set of commitments on intellectual property protection, aimed at strengthening protection in China. Some of the substantive commitments parallel China’s obligations under the WTO TRIPs Agreement or in Chinese national law, but other aspects are new. Many of the provisions regarding trade secret protection, in particular, go beyond the obligations in TRIPs and address some concerns of U.S. companies doing business in China. A common complaint about China in the past also relates to weaknesses in enforcement, even when nominal IP protection is on the books. Much of Chapter 1 is devoted to procedures for enforcement, aimed at making it easier, more expeditious and more effective for U.S. right holders to invoke their IP rights under Chinese law, including greater use of criminal penalties.

A related but distinct issue concerns the enforcement mechanism for the Phase One Agreement itself. What if China fails to live up to the commitments described above or others? In contrast to the WTO system and that of many free trade agreements, there are no provisions for appeal to neutral arbitrators. Instead, either country can complain to the other and request consultations, which can be escalated to the high ministerial level. In the event of impasse, a complaining party can take unilateral action to suspend an obligation under the Agreement or take some other “remedial measure in a proportionate way.” Such action by the United States would presumably be taken pursuant to Section 301 of the Trade Act of 1974, which is the authority that the President has invoked to impose the existing punitive tariffs against China.

What else stands out to you about the agreement?

It is an important step toward ending the trade war, and at least halts its escalation for now. It provides a significant potential boost for some U.S. exporters in the near term, provides greater access to the Chinese market for certain financial services providers, and may lead to improved IP protection for American right holders.

What issues do you expect to be addressed in Phase Two and what is the timeline for that?

The most challenging issues have been deferred. These include, among other things, the U.S. claim that Chinese industrial policy, carried out through “subsidies” and state-owned enterprises, affords Chinese entities an unfair competitive advantage, especially in higher technology sectors.  The use of anti-subsidy measures (“countervailing duties”) against state-owned enterprises remains an area of major controversy, as does China’s treatment as a non-market economy for purposes of antidumping law. The agreement reiterates and to a degree elaborates China’s WTO commitment not to mandate technology transfer as a condition for doing business in China, but it does not address Chinese rules that require inbound investors to partner with indigenous entities in many industries, a policy that has the effect of generating technology transfer even though it is not “mandatory.” Related, and unlike the situation with many other important U.S. trading partners, we have no general investment agreement with China akin to our many bilateral investment treaties or the investment provisions in the USMCA. And as in the past, there is the lingering question as to whether China will fulfill its commitments or find ways to skirt them.

There is no definitive timeline for the Phase Two negotiations, although low level talks will likely begin reasonably soon. Any major progress, let alone a definitive agreement, will be after the U.S. election, and of course the trajectory thereafter can depend greatly on who wins. The agreement is clearly designed to afford the Trump administration a year of negotiating time after the election to address the many outstanding issues, including China’s import commitments beyond 2021.

Professor Alan O. Sykes is a leading expert on the application of economics to legal problems whose most recent scholarship is focused on international economic relations.