On January 15, 2020, the United States and China signed the Phase One trade agreement, signaling a thaw, at least temporarily, in the bilateral trade relationship. As part of the agreement, China committed to purchase a significant amount of US goods and services over 2020 and 2021, as well as make a number of reforms in intellectual property, agriculture, and financial services that would benefit American companies. Two years later, most of the commitment deadlines have passed, but bilateral tariffs remain at nearly an all-time high. At this juncture, the China Business Review asked US-China trade scholars and experts to reflect on the Phase One agreement and recommend next steps for the United States’ trade policy toward China.
The perspectives shared are those of the contributors and do not necessarily reflect the views of the entities they represent, the US-China Business Council, or the China Business Review.
Senior Fellow for Trade, Investment, and Innovation, Asia Society Policy Institute
By the time Chinese and US negotiators announced their Phase One deal in late December 2019, businesses, workers, and consumers on both sides were beleaguered by the trade war, but neither government seemed prepared to compromise very much. The result was a not-very-ambitious agreement. Phase One did deliver progress on a number of longstanding market access issues, but many of the issues that had been the subject of so much attention during the 301 investigation—state subsidies, preferential treatment for state-owned enterprises and private sector players, and more—were instead left for a subsequent “phase two” negotiation that would never come.
Though some tariff rates were reduced and other pending tariffs were forestalled in order to facilitate the major purchases of US goods that China committed to make by the end of 2021, a major disappointment of Phase One was that it brought no tariff rollbacks. China did liberally grant tariff exclusions, a move that allowed bilateral trade to return to a semblance of its normal volume, but even so, China fell short of its purchase commitments and the prospects for sustaining the bounce felt by US exporters are uncertain now that the deal has expired.
Meanwhile, American importers, not Chinese exporters, have continued to bear the brunt of the costs resulting from US tariffs on Chinese goods, paying more than $110 billion in Section 301 China tariffs over the course of the agreement. An optimist might call this a wash, but not a win.
Despite scant evidence that this tool will ever deliver the sorts of Chinese policy changes that both the current and previous administrations have hoped to achieve, the current administration has left the tariffs in place, allowed most exclusions to expire, and moved to renew very few of them. Moreover, the Biden team’s vow to enforce China’s Phase One commitments suggests we may soon see a hike in tariff rates or new tariffs imposed in response to China’s purchase shortfalls. These days, everyone seems to agree that the United States must get tough with China, play hard ball, and position the United States to succeed in a relationship defined somewhere along the sliding scale between competition and cold war. But if the object is to sharpen our competitive edge, why do we keep kneecapping ourselves?
Senior Fellow, Foreign Policy, Global Economy, and Development, John L. Thornton China Center at the Brookings Institution
The Phase One trade agreement with China was a mistake. The heart of the agreement was a purchase commitment from the Chinese government to increase specific imports from the United States totaling $200 billion of extra purchases, compared to 2017 levels, during 2020 and 2021. The agreement was widely criticized by economists at the time of signing as a kind of managed trade, rather than an opening of the Chinese economy. Furthermore, the target was unrealistic as it would have required increases of US exports to China of more than 40 percent per year. Also, the high 25 percent tariff that the United States had imposed on about half of imports from China was left in place, a burden that is largely paid for by American firms and households.
What has been the result of the Phase One deal? First, US imports from China continued at a very high level, showcasing American demand for Chinese goods even with a 25 percent tax in place. Second, US exports to China have grown at a healthy rate, reaching a historic high in 2021, and constituting one of the few bright spots in the US economy. Still, China fell far short of the purchase commitments, reaching about 60 percent of the commitment. There were a few areas such as soybeans where the actual trade was close to the commitment; but in general, managed trade fails because governments cannot anticipate what is going to happen with demand for many products. For example, the United States was supposed to sell significant quantities of energy to China, but with the pandemic-induced economic slowdown in 2021, none of this materialized.
The Biden administration now faces a difficult situation with China trade. US exports and strong and different sectors of the US economy are prospering by selling to China. To re-ignite the trade war in this environment would be bad for the US economy. On the other hand, China did not meet the targets in the Phase One deal and Biden is likely to be criticized as soft on China if he gives them a pass. The continuing 25 percent import tariffs on the US side are hurting the economy. The best option would be to negotiate a new agreement with China that drops the US tariffs in return for specific opening moves on the Chinese side. The lack of trust between the two sides, however, makes it difficult to negotiate in this way. The administration is likely to leave the trade situation in limbo during 2022, creating uncertainties for producers on both sides of the Pacific.
Senior Fellow, The American Enterprise Institute
Tariffs the United States applied to China-made goods through Section 301 and the Phase One bilateral agreement are both wildly exaggerated in importance. The Trump administration was wrongly obsessed with trade balances and the Biden administration has failed to reset policy. The United States should pull vital supply chains out of China and perhaps address American funds flowing into Chinese securities.
In 2016, when candidate Trump railed against the bilateral deficit, it stood at $310 billion (goods and services). With tariffs still in place, the 2021 deficit is on pace for about $330 billion. Exports, ostensibly boosted by Phase One, are below the peak of late 2017 and early 2018. The intellectual property component of Phase One had no meaningful effect—Chinese law never matters.
The Biden administration sometimes shows awareness of these non-events. The administration is presently quiet about Phase One ending, much less “phase two” starting. That the United States can talk Xi Jinping into pro-competition and pro-property rights reform is absurd. We could negotiate more export quotas, but that would not be in American interest even if China hit the targets.
More usefully, the United States Trade Representative floated a Section 301 investigation into subsidies, and national security advisor Sullivan indicated the US was pondering outbound investment restrictions. Last year was understandably devoted to domestic initiatives. This year, the administration and Congress should identify and implement top policy priorities in bilateral economic relations. Even just one.
The stock of American investment in Chinese securities rose $780 billion from 2016 to 2020. But if only one major step is realistic, it should be relocation out of China of a handful of supply chains. This has proven easier said than done. There is overwhelming political support in the wake of Covid, yet neither the Trump nor Biden administrations have acted and Congress has moved very slowly.
Congress should identify a small set of genuinely critical sectors, such as medical supplies and semiconductors. Executive branch action should then start the clock on mandatory and complete eviction of China-linked supply from associated chains. This should be an exit from China and Chinese companies, not relocation entirely to the United States.
The Biden administration stuck to tariffs and Phase One in part because it feared political fallout from abandoning them. The fallout would be minor if the administration overcame business lobbying and offered substantial policies that treat China, correctly, as an economic rival. Relocating key supply chains is the single best option.
Partner, Akin Gump Strauss Hauer & Feld LLP and Former Deputy Assistant to the President for International Economics
Overall, the Phase One deal has been a moderate success, with some limitations and shortcomings. On the positive side, it has helped achieve key structural reforms to China’s intellectual property laws, reduce barriers to US agricultural exports, and provide greater market access to US financial services firms. It has also led to record sales of US agricultural products and serves as a rare example of US-China dialogue and cooperation among overall deteriorating relations.
On the negative side, China appears to be falling short of structural commitments related to counterfeit goods, patent linkage, and biotechnology approvals, among others. China will also fall short of its purchasing commitments once the final numbers are tabulated. More fundamentally, Phase One is incomplete and does not address many of China’s most unfair trade practices.
Moving forward, the Biden administration should maintain and improve the Phase One deal as part of a broader three-part plan to compete with China.
First, the United States must embrace strategic competition with China and “run faster” with policies that encourage growth in critical technologies, such as semiconductors, artificial intelligence, 5G, and synthetic biology, among others. This includes passing the US-China Innovation and Competition Act; maintaining competitive tax, tariff, and regulatory policies; and avoiding policies that unnecessarily target US technology leaders.
Second, the United States must improve its “defense” to protect sensitive technology from China and shield US industries from unfair competition. This includes enhancing trade remedy, investment screening, and export control measures, but ensuring they are narrowly targeted and coordinated with allies. This is critical to ensure US companies can continue to do non-sensitive business with China that funds innovation in the United States and to avoid putting US companies at a competitive disadvantage.
Third, the United States must play better “offense” by expanding its bilateral engagement with China, including through the Phase One Deal. This includes ensuring better compliance in areas where China is falling short and seeking to negotiate new commitments in other areas. At the same time, the United States should revisit the related Section 301 tariffs to make them more targeted and ensure they are pressuring China without hurting the US economy. The United States should also seek trade agreements with countries in China’s sphere of influence, including through the CPTPP or a digital trade agreement. Finally, the United States should seek WTO reforms covering China’s unfair practices and work with allies to secure them.