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Economy

A Rational Assessment of Phase One

May 17, 2022
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

On March 31, the Office of the United States Trade Representative released the 2022 National Trade Estimate Report on Foreign Trade Barriers (NTE), which stated that China “fell far short of implementing its commitments” under the Phase One trade agreement. It recklessly dismissed China’s efforts and threatened further sanctions. Such irrational perceptions and assessments will only cast a greater shadow over future China-U.S. trade relations.

On Jan. 15, 2020, China and the United States reached the Phase One trade agreement after 13 rounds of negotiations over 23 months. The agreement has provisions across eight chapters, covering China’s commitments related to market access in agriculture and financial services, intellectual property, technology transfers and additional purchases of U.S. goods and services.

After more than two years, the uncertainties in the world situation and international environment have posed direct challenges to the full implementation of the agreement. China has attached great importance to its fulfillment and has made significant progress in implementation, overcoming the pressure of force majeure such as the global pandemic, a world economic recession and disruptions in supply and industrial chains.

According to China’s statistics, from January 2020, when the agreement was reached, to the end of April 2021, China imported $147 billion of U.S. goods and services, nearly 62 percent of the target specified in the agreement’s chapter on trade expansion, calculated in terms of the monthly normal import target.

With regard to other sections of the agreement, China has actively implemented provisions in intellectual property, food and agricultural products, financial services and other areas.

In the intellectual property realm, China has accelerated the introduction of a series of laws and regulations to strengthen the protection of intellectual property over the past two years. For example, it has fully implemented the management system of pre-establishment national treatment, plus a negative list. It has revised its copyright laws, completed the fourth revision of its patent laws, accelerated the accession process of the Hague Agreement and the Marrakesh Treaty, come into line with the new generation of international economic and trade rules such as the Regional Comprehensive Economic Partnership agreement and continued to improve its intellectual property protection system.

Facts speak louder than words. In 2021, foreign applicants obtained 110,000 invention patents in China, up 23 percent year-on-year; and they registered 194,000 trademarks, up 5.2 percent year-on-year. The number of invention patents granted and trademarks registered by U.S. applicants in China increased by 32.1 percent and 17.3 percent respectively.

China’s financial services sector is more open to the world. In accordance with the financial services chapter of the Phase One agreement, China has lifted foreign equity ratio restrictions on futures companies, fund management companies and securities companies. American International Assurance Company’s Shanghai Branch became the first wholly foreign-owned life insurance company in China. JP Morgan Futures was approved to become the first foreign-owned futures company in China. American Express, MasterCard, Fitch and other institutions entered the Chinese market in a big way, reflecting China’s determination to promote a higher level of opening-up.

The U.S. side, by contrast, has not yet approved the applications of Chinese institutions such as CITIC Group, China Reinsurance (Group) Corp. and China International Capital Corp. to enter the U.S. market as it had promised. In addition, when it comes to nondiscriminatory treatment for Chinese electronic payment service providers, the U.S. has not only adopted a negative attitude and resists the idea but also disguises suppression of Chinese financial companies through the contradictions between China and the U.S. regarding the regulatory coordination of Chinese stocks.

The Trump administration wielded the tariff stick in 2018. In total, it imposed tariffs on $370 billion of Chinese imports, ranging in severity from 7.5 percent to 25 percent, resulting in the weighted average tariff rate for U.S. exports to China soaring to 19.3 percent from 3.1 percent before the tariff war, and wreaking havoc on China-U.S. economic and trade relations.

In the process of implementing the agreement, China has encountered objective force majeure factors, such as the global pandemic and a series of moves by anti-China hawks in Washington to force decoupling from China and subjectively create a confrontational atmosphere.

All these things have interfered with China’s implementation of the agreement.

Topping the list is the serious impact of the pandemic of the century. Since 2020, because of uncertainties over the spread of COVID-19 around the world — especially the intensifying outbreak in the U.S. — a serious impact was felt on U.S. export supply. The U.S. supply chain crisis has continued to ferment, logistics have been blocked and trade costs have soared. All this has directly affected the achievement of the goals of the Phase One agreement on the growth of trade in manufactured goods and energy products.

In addition, price fluctuations and other factors have created constraints. In 2017 China imported $6.9 billion of energy products from the U.S. Under the agreement, no less than $18.5 billion above the corresponding 2017 baseline amount would be purchased and imported into China from the United States in calendar year 2020, and no less than $33.9 billion above the corresponding 2017 baseline amount would be purchased and imported into China from the United States in calendar year 2021. This represents a two-year increase of nearly eight times that of 2017.

In 2020 China imported $9.8 billion of U.S. energy products, making it the fastest-growing sector of U.S. exports to China. However, because of a sharp drop in international energy prices, U.S. energy exports, especially fossil fuel exports, experienced a significant contraction. Although the number of U.S. energy purchases by China increased significantly, the price drop limited the growth in trade volume and the total amount failed to meet the agreed target.

Even greater resistance comes from the U.S. strategic containment of China. High-technology products are an area of strength the U.S. can use to reduce its trade deficit with China. However, the U.S. side regards the high-technology sector as the “optimal barrier” and has undertaken various initiatives to restrict the export of such goods to China for many years. It is of particular note that the Trump and Biden administrations have comprehensively intensified their technology crackdown on China, which continues to extend to the upstream of technology and gradually to the entire technology ecosystem.

Examples include joint and coordinated deployment of export control measures, foreign investment security reviews, telecommunications license reviews, tightening of access to financing for Chinese companies to go public in the U.S. and other targeted list sanctions tools.

As a result, the existing trade cooperation between China and the U.S., which is sustained by a division of labor based on their respective comparative advantages — especially trade relations in some key and core areas — has been severely impacted, directly impeding the effective implementation of the Phase One agreement.

In fact, if the China-U.S. game heats up again, it will be difficult to fully realize the objectives laid out in the agreement. The agreement should not be about the U.S. side unilaterally making demands but rather needs to be implemented jointly by China and the U.S. More important, the U.S. side needs to create conditions and a atmosphere that eliminates confrontation and unnecessary interference. 

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