Advantage US, in trade deal with China

James J Nedumpara / Manya Gupta | Updated on January 17, 2020

File Photo   -  Reuters

The US has sought to overcome long-standing bilateral trade, IPR and financial barriers, completely disregarding WTO rules

President Donald Trump famously tweeted in March 2018 that “trade wars are good and easy to win.” The trade war which started in May 2018 with the imposition of Section 232 tariffs on steel and aluminium later spilled over to tit-for-tat tariffs on a range of sectors and products. The retaliatory duties had affected bilateral trade between the US and China, amounting close to $700 billion and covering nearly 65 per cent of the trade.

Moreover, many other countries that were passive onlookers of the trade conflict between the two superpowers were also unwittingly dragged into the battle. For example, the steel and aluminium duties also applied to India; this was subsequently challenged by India in a WTO proceeding.

President Trump’s obsession with China has had several collateral victims. The major casualty is the WTO itself. Retaliatory tariffs are imposed over and above the WTO bound tariff commitments. By the same corollary, the ‘Economic and Trade Agreement’, which Trump and the Chinese Vice-Premier Liu He signed on January 15, is also in complete disregard of the WTO rules. The preferential terms which the disputing countries are providing to each other are also apparently not in line with the MFN (most favoured nation) principle.

What are the major takeaways of the trade deal? Apart from the reduction of tariffs, the Agreement includes various long disputed issues between the US and China. It is divided into eight chapters — intellectual property, technology transfer, trade in food and agricultural products, financial services, exchange rate matters, trade expansion and dispute resolution.

China has long been accused of intellectual property theft. Therefore, there is no surprise that intellectual property is the lengthiest chapter in the trade deal. Moreover, issues such as forced technology, counterfeiting of goods and their sale on e-commerce platforms, compromise of trade secrets, and non-recognition of patent rights in the case of expired technology transfer agreement have been key areas of conflict. The US has filed a few cases at the WTO to address these problems, but the WTO dispute resolution process is often cumbersome and could go on for years.

No tech transfer

Under this trade deal, there is a general prohibition on insisting on technology transfer as a condition for acquisitions, joint ventures and investments between the two countries. In addition, a general cooperation has been agreed between the two countries concerning agricultural science and technology, use of pesticides for agricultural purposes, encouraging sustainable agricultural development, and the development of sanitary and phytosanitary measures and digital technologies that can benefit agriculture.

In essence, President Trump has been leveraging the retaliatory tariffs to gain market access in several areas of goods and services where China continues to be a closed market. With this objective, the US has convinced China to allow imports of its dairy products and to recognise the US sanitary and phytosanitary standards. In the same vein, the US has prevailed over China to expedite the biotechnology approval system. China’s biotechnology approval system is known for being very slow and is stated to take a minimum of 10 years for providing an approval.

Financial services is a sector where China has remained as a closed market and the US has considerable trade interests in this field. American credit card companies such as Visa and Master Card did not face a level-playing field in China as China’s regulatory systems conferred various advantages on China UnionPay (CUP). The new trade deal seeks to provide corresponding market access for Chinese and American companies in banking, credit rating, electronic payment, financial asset management, insurance, securities, fund management and future services.

Importantly, the US had declared China as a currency manipulator and has been considering options to impose countervailing duty on imported goods under the guise of currency misalignment. The trade deal provides for achieving and maintaining a market-determined exchange rate regime.

The Chinese wall of non-tariff barriers and regulatory approvals often proved insurmountable for most trading nations. As Harvard Professor Mark Wu argues in his paper ‘The China Inc’, the Chinese State plays a key role in the allocation of resources and providing State-aid. In the trade deal, China ensured purchases and imports from US of goods falling under approximately 550 tariff lines and 25 types of services cumulatively exceeding the 2017 baseline by $200 bilion. Separate targets are set for 2020 and 2021. Given the state intervention in China, the purchases are to be made at market prices based on commercial considerations. The US has also ensured the market for its nascent rare earth metal production, a product in which China itself is a world leader.

However, China has not made any alterations to the tariffs it imposed during the trade war. In return for the access to Chinese market, the US has modified the increase in tariff from 15 per cent to 7.5 per cent on trade worth $120 billion with immediate effect.

Dispute resolution

Importantly, the trade deal includes a chapter on dispute resolution. It seeks to establish a bilateral mechanism for monitoring, evaluation and immediate redress of trade conflicts. This mechanism provides an opportunity for both parties to evaluate measures which have a continuing effect on trade. It is anybody’s guess that this mechanism is meant to serve the US interests to monitor the commitments that China has offered. Notably, the dispute resolution mechanism in the Agreement does not prevent retaliation.

Given the tense economic relationship between the two economies, a re-escalation of the trade war cannot be ruled out. For the time being, the Chinese have been able to mollify Trump. The next phase of trade talks are likely focus on contentious issues such as the role of state-trading enterprises, greater market access in other areas of services, and cyber security. It is unrealistic to expect the second phase of negotiations to be smooth and uneventful.

The impact of this trade deal on other countries is uncertain at this moment. For countries that export to China, especially technology and capital goods, this could be welcome news. On the flip side, if the US ultimately wins the trade war, as President Trump claims, it could set a bad precedent. It could encourage the US to use the same strategy or similar methods against every other country, which in the US’s opinion is not providing meaningful market access for American goods and services. Hopefully, the trade deal can bring the much needed peace in international trade, at least for the moment.

Nedumpara is Professor and Head, Centre for Trade and Investment Law, Indian Institute of Foreign Trade, New Delhi; Gupta is Research Fellow at CTIL

Published on January 17, 2020

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