China in Transition

Phase One of the US-China Economic and Trade Agreement Realized Through Chinese Concessions
—Expanding Imports into China from the US Alone Will Not End the Trade War

Chi Hung KWAN
Consulting Fellow, RIETI


On December 13, 2019, the US and China announced that they had reached a phase one trade agreement. President Trump and China's Vice Premier Liu He subsequently signed the "US-China Economic and Trade Agreement" ("the Agreement") at the White House on January 15, 2020. In the Agreement, in response to US demands, China promised to greatly increase its imports from the US. However, no agreements have yet been reached with respect to industrial policy reforms and subsidies that the US requested of China, or the removal of additional tariffs on Chinese goods that China requested of the US. Negotiations in the future on these issues are expected to face major difficulties.

The Contents of the Agreement Focusing on Expanding China's Imports of US Goods and Services

The Agreement is made up of eight sections that deal with 1) intellectual property, 2) technology transfer, 3) trade in food and agricultural products, 4) financial services, 5) macroeconomic policy and exchange rate issues and transparency, 6) expanding trade, 7) bilateral evaluations and dispute resolution, and 8) final provisions. The major points can be summarized as follows.

1. Intellectual property
China commits to strengthen the enforcement of intellectual property right laws. In addition, the Agreement addresses numerous longstanding concerns in the areas of trade secrets, patents and pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.

2. Technology transfer
China agrees to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals or permits, or receiving advantages from the government. China also commits to providing transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refraining from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create market distortions.

3. Trade in food and agricultural products
China shall reduce non-tariff barriers to the import of US agricultural products and foodstuffs, such as milk products, beef, soybeans, fishery products, fruit, animal feed, and pet food; expand the imports of these products; and improve the administration of managing tariff-rate quotas for wheat, corn, and rice.

4. Financial services
China shall ensure fair, effective, and non-discriminatory participation in its market for such financial services as banking, insurance, electronic payments, credit ratings, and futures. China shall also eliminate foreign equity limits and allow wholly U.S.-owned services suppliers to participate in the securities, fund management, and futures sectors no later than April 1, 2020.

5. Macroeconomic policy and exchange rate matters and transparency
The US and China shall both respect the autonomy of the monetary policy of the other country. Adhering to the International Monetary Fund (IMF) Articles of Agreement, each country should avoid currency manipulation, achieve and maintain a market-determined exchange rate regime, and refrain from competitive devaluations and the targeting of exchange rates for competitive purposes (Note 1).

6. Expansion of trade
Chinese imports of American goods and services shall increase by a total of 200 billion dollars or more over the next two years compared to 2017 levels.

7. Bilateral evaluations and dispute resolution
A trade framework group led by the United States Trade Representative (USTR) and a designated Vice Premier of China shall be established to ensure the efficient implementation of the Agreement. In addition, a macroeconomic dialogue shall be reopened between the US Secretary of the Treasury and the designated Vice Premier of China.

8. Final provisions
The Agreement shall come into force 30 days after being signed. Either the US or China can terminate the Agreement by notifying the other country.

Of the 8 sections, number 6), which governs expanding trade, forms the core of the Agreement. Through its implementation, the trade imbalance between the US and China is expected to decrease considerably. China promises to increase its imports of American goods and services by 76.7 billion dollars or more in 2020 and 123.3 billion dollars or more in 2021 (for a total of 200 billion dollars or more over the two years) compared to the value in 2017 (186.3 billion dollars), the year before the trade war started (Figure 1). If this is realized, Chinese imports of US goods and services will reach 263.0 billion dollars in 2020 and 309.6 billion dollars in 2021. In particular, imports of agricultural products will be increased compared to the 2017 value (19.6 billion dollars), by 12.5 billion dollars in 2020 and 19.5 billion dollars in 2021 (Note 2). In addition, China will work to expand its imports of agricultural products from the U.S. by the equivalent of 5.0 billion dollars annually over these two years.

Figure 1: Composition by Industry of US Imports that China has Promised to Increase Over the Next Two Years
Figure 1: Composition by Industry of US Imports that China has Promised to Increase Over the Next Two Years
Source: Compiled by the author from USTR, "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, 2020.

The Agreement does not touch on the handling of additional tariffs on the four lists of Chinese imports implemented by the US so far, but the USTR had already announced earlier that the 15% additional tariffs (implemented on September 1, 2019) on 120 billion dollars of Chinese imports that form part of List 4 would be reduced to 7.5%, while the 25% additional tariff on the 250 billion dollars' worth of Chinese goods included in List 1~3 implemented earlier would be maintained (USTR, "United States and China Reach Phase One Trade Agreement," Press Release, December 13, 2019) (Table 2) (Note 3). The US would certainly like to leverage these additional tariffs as a bargaining chip in future negotiations.

Table 1 Additional US Tariff Rates on Chinese Products
—Adjustments following the Phase One US-China Economic and Trade Agreement
Item Amount
(billion dollars)
Additional tariff rate
Before adjustment
(Until Feb. 13th, 2020)
After adjustment
(From Feb. 14th, 2020 and beyond)
List 1
  • Automobiles
  • Industrial robots
  • Medical equipment, etc.
340 25% 25%
List 2
  • Semiconductors
  • Electronic components
  • Plastic and rubber products
  • Railroad vehicles and parts
  • Telecommunications parts
  • Industrial machinery, etc.
160 25% 25%
List 3
  • Machinery, electrical equipment
  • Furniture
  • Foodstuffs, daily necessities, etc.
2,000 25% 25%
List 4
  • Smart watches
  • Television related equipment
  • Sports and leisure items, etc.
1,200 15% 7.5%
  • Smartphones such as iPhones, etc.
  • Laptop computers
  • Game consoles, etc.
1,600 0% 0%
Source: Compiled by the author based on USTR data.

China Welcomes the Agreement

China emphasizes that the Agreement is the result of a fair negotiation on equal footing, and a win-win deal for both sides. The column published in the People's Daily, the mouthpiece for the government on January 16, 2020 titled "Equal, Reciprocal, and Win-Win: An Explanation of the Phase One US-China Economic and Trade Agreement" is representative of this perspective. The following points are largely responsible for China's support for the trade deal.

First, the strengthening of intellectual property right protection is necessary for the development of innovation in the Chinese economy. The commitments on the issue made by both sides are well-balanced.

Second, the further establishment of systems related to technology transfers is entirely in line with the direction of Chinese economic reforms. The rights and obligations undertaken on both sides with respect to technology transfer are equal.

Third, the expansion of US-China agricultural cooperation is a positive development as it will meet Chinese consumer demand, promote structural reforms in agricultural supply, and improve the quality of agricultural development.

Fourth, the opening of financial services is good news for both sides as the related commitments coincide with the opening of the financial industry, which China has been very proactive in promoting in recent years.

Fifth, the two parties have reached an equal and reciprocal mutual understanding with respect to the exchange rate issue, and the Agreement is by no means a simple reworking of the Plaza Accord.

Sixth, as an increase in imports from the US coincides with prescribed Chinese policies and real needs, Chinese companies and consumers will purchase these imports based on market principles and of their own accord. Furthermore, the government will have no need to take measures such as administrative guidance or fiscal subsidies to realize purchases on the scale agreed upon by the government.

Finally, in the mutual evaluation and dispute resolution mechanism, the rights and obligations of China and the US are entirely equal. These mechanisms do not allow for unilateral US control of China in any way.

Major Concessions from China

However, this Agreement would not have been reached if China had not made major concessions. At the press conference in Washington held in May 2019 after finalizing negotiations with the US, Chinese Vice Premier Liu He raised three prerequisite conditions for signing the Agreement, namely 1) the complete removal of additional tariffs by the US, 2) the restriction of additional US imports to a more realistic scale, and 3) a more balanced agreement document in recognition of the dignity of both nations (Note 4), but it is clear that these three conditions were not met in this Agreement.

Regarding the first point, the US maintains the 25% additional tariff on Chinese imports included in Lists 1~3, which had already been implemented at that point. In light of the fact that a new round of additional tariffs at a rate of 15% was implemented on some Chinese products in List 4 in September 2019 (to be reduced to 7.5% on February 14, 2020), the situation in which Chinese products face even more considerable handicaps in the US market in comparison to May 2019, when Vice Premier Liu He made his comments, has remained unchanged.

Next, regarding the second point, according to the Agreement, China's imports of agricultural products from the US will double in 2021 from the 2017 value. To absorb this increase, it will be necessary for China to suppress either domestic production or imports from other countries.

Finally, regarding the third point, the Agreement largely takes the form of China unilaterally accepting American demands. In fact, in comparison to 97 commitments made by the Chinese side using the expression "China shall" in the Agreement, there are only five such commitments made by the US side using the expression "the US shall." Furthermore, even these five commitments only involve procedures that the US should follow to facilitate the Chinese side fulfilling their commitments.

When the U.S.-China trade war first erupted, government opinion in China was led by the "hawks," who insisted that China should fight and win. However, with Chinese exports to the US falling sharply on the back of rising tariffs, and the deceleration of economic activity becoming more and more apparent, the government has adopted a more dovish stance regarding negotiations with the US, and wishes for an early conclusion to the trade war.

Remaining Challenges

Up until now, the US-China trade war has primarily taken the form of mutual tariff hikes. Although both sides have avoided raising their tariffs yet higher and a de facto "ceasefire" has been put in place, many challenges remain, and the path to the ending the trade war remains difficult.

First, to follow the Agreement, China must greatly increase its imports from the US. However, a recovery of exports to the US cannot be expected, as exports will continue to be inhibited by the high additional US tariffs. While this will contribute to a reduction in the US-China trade deficit, the resulting decline in "net exports" (GDP-based exports minus imports) is likely to put downward pressure on the Chinese economy.

Second, some economists hope that the Agreement would exert external pressure toward promoting economic reforms in China similar to when it joined the WTO in 2001, but it must be acknowledged that there are decisive differences between the two situations. The WTO is a multilateral agreement that applies the most-favored nation principle to all its members. In contrast, this Agreement is bilateral and many of its measures do not apply to third countries. In addition, China's accession to the WTO encouraged free trade through reductions in tariffs and other trade barriers, while a number of numerical targets for imports from the US set in the Agreement represent steps toward managed trade. This preferential treatment of the US violates the most-favored nation principle and represents unfair competition for companies and industries in China and other countries.

In addition, the Agreement does not mention China's industrial policies, represented by the "Made in China 2025" industrial plan, or government subsidies to state-owned enterprises, both of which are of significant interest to the US. These policies are expected to be central issues in future negotiations, but as they are considered pillars of China's economic system of "state capitalism," reaching a compromise between the two sides on these matters will not be easy.

Finally, even if we assume for the sake of argument that the Phase Two negotiations proceed smoothly and the trade war between the US and China subsides, disputes involving technology issues between the two countries are likely to drag on. In fact, in the name of national security, the US is attempting to ban high-tech Chinese firms such as Huawei from US markets and to prevent the acquisition of US high-tech firms by Chinese capital. As long as China continues to rise as a global power, the US will treat it as a strategic competitor, and confrontation between the two countries is unlikely to end.

The original text in Japanese was posted on February 19, 2020.

  1. ^ On August 5, 2019 the US Secretary of the Treasury designated China as a "currency manipulator," but this was rescinded on January 14, 2020, the day before the Agreement was signed.
  2. ^ The Chinese imports from the US cited here (total and for each item) are based on US statistics on exports to China.
  3. ^ Implemented on February 14, 2020. On the same day, China reduced its additional tariffs on 75 billion dollars' worth of imports from the US from 10% or 5% to 5% or 2.5%.
  4. ^ "Chinese Vice Premier Urges China-U.S. Cooperation, Vows No Compromise on Major Principles," Xinhua News Agency, May 11, 2019.

April 20, 2020