A new direction for the phase one deal between China and the US? – the diplomat – Community News
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A new direction for the phase one deal between China and the US? – the diplomat

The “Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China”, commonly known as the Phase One Agreement, entered into force on February 14, 2020. Under the agreement, China would, among other things, implement structural reforms, open up its financial services and strengthen intellectual property protection. China also pledged to buy at least $200 billion more U.S. goods and services in 2020 and 2021.

However, after nearly two years, complaints have surfaced about China failing to meet its obligations under the Phase One deal. According to the Peterson Institute for International Economics, China had achieved only 62 percent of that goal by October 2021. As Phase One deal expires in December 2021, questions remain about enforcement and compliance, as well as the future of the deal.

The Phase One deal came at a time when the trade war between the world’s largest economies was still raging. It all started in 2018 when the United States imposed tariffs on $34 billion worth of imports from China, such as aircraft parts. In return, China has imposed 25 percent tariffs on certain US imports, including agricultural products. In the intervening years, the United States and China exchanged tariff exemptions for certain goods. In recent months, however, the trade war has resumed, for example as the Biden administration extended its predecessor’s ban on US investment in Chinese companies with links to the military.

Exemptions from tariff lists and other trade measures from both the US and China seemed to work in calming the trade relationship between them. This piecemeal approach will continue unless Washington and Beijing reach a new deal, which is unlikely. Alternatively, the Phase One deal could be extended by adjusting the numbers involved, i.e. how much China would import from the United States. In this way, the United States can rely on the hard-fought deal and shift its focus to enforcement. Biden’s trade representative, Katherine Tai, previously indicated she plans to focus on executing the Phase One deal in talks with her Chinese counterpart, Deputy Prime Minister Liu He.

Under the Phase One deal, the US and China agreed on an innovative approach to enforce their agreement, as outlined in Chapter Seven. The Phase One deal created a Trade Framework Group to discuss implementation of the agreement, led by the US Trade Representative and a designated Vice Premier of the People’s Republic of China, as well as a Bilateral Review and Dispute Settlement Bureau for each party. As with a typical trade agreement, a complaining party can appeal to the other party’s Bilateral Review and Dispute Resolution Office when there is a problem related to the agreement. If this issue is not resolved, the matter may be referred to the designated US Deputy Trade Representative and the designated Deputy Secretary.

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In Section 7.4, the Phase One deal provides that if the complaining party’s concerns are not resolved by the US Trade Representative and the Chinese Deputy Prime Minister, then:

… Parties will consult promptly about the response to the damage or loss incurred by the Complainant. If the parties agree on a response, the response is carried out. However, if the Parties fail to reach a consensus, the complaining Party may take action, including by suspending an obligation under this Agreement or by taking any remedial action it deems appropriate.

Here’s the novelty of the Phase One deal: It allows either side—practically speaking, most likely the United States—to unilaterally retaliate for an alleged breach of the agreement by suspending an obligation or taking remedial action. a “proportional way”. This response should be aimed at “preventing the escalation of the situation and maintaining normal bilateral trade relationship”, and the party complained against is not allowed in turn to retaliate as long as the action is “too much”. taken in good faith”.

The language used allows for a broad interpretation of expressions such as ‘proportionate’ and ‘in good faith’. Instead of achieving the stated goals of the Phase One deal — managing trade in a peaceful manner — the dispute settlement language could escalate trade tensions between the United States and China. This is compounded by the fact that under the Phase One deal, it is the complaining party that makes a final determination that a breach of the agreement has occurred. There is no independent panel or tribunal to make that decision. The Phase One deal is not clear about the corrective actions that the complaining party can take, whether it be the suspension of tariff or quota concessions or the imposition of additional tariffs, and for how long these measures can be taken. In short, the United States (or, in theory, China) can unilaterally determine that a violation has occurred, take countermeasures and determine the length of time to suspend concessions made in the Phase One agreement.

This leaves us wondering whether both sides, but especially the United States, are expected to take unilateral action to enforce the Phase One deal. Statements from US officials indicate that this is likely to happen. So far, however, the evidence shows that enforcement under the Phase One deal may not be happening for a variety of reasons.

First, if the US takes action, China could either accept the corrective action along with a pledge not to retaliate, or withdraw from the Phase One deal. The latter option would be more harmful than taking the remediation measure itself. From a purely economic perspective, the goals achieved under the deal are better than the alternative of resorting to trade wars with China.

Moreover, from a geopolitical perspective, there are few, if any, alternative ways to force China to honor its trade obligations. The World Trade Organization (WTO) is in bad shape, especially its Appellate Body, the “crown jewel” of the organization responsible for the final say on trade disputes. Even if the WTO were fully functional, there is doubt as to whether the Phase 1 agreement can be considered legitimate under WTO rules. The WTO Agreement on Safeguards provides that:

… a Member shall not pursue, adopt or maintain voluntary export restrictions, orderly disposal arrangements or other similar measures on the export or import side. These include actions taken by a single member, as well as actions under agreements, arrangements and understandings entered into by two or more members. Such measures in force on the date of entry into force of the WTO Agreement shall be brought into conformity with this Agreement or phased out.

It is clear that measures such as bilateral voluntary export restrictions, orderly marketing agreements and similar measures restricting imports of certain products are prohibited under WTO rules.

Political rhetoric aside, opening the Phase One deal to adjustment and negotiations seems the most plausible option in the near term. The agreement has been a success, despite the numbers and flaws in the text of the agreement. No country should be forced to import from another country, but China was willing to import from the US in larger quantities.

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In the short term, both the US and China will continue to exempt a AD hoc basing certain goods and services on harmful tariffs and other trade practices of both countries. If that continues, Washington should give diplomacy and negotiations another try.