This is the novelty of the Phase One agreement: it allows any party – in practice, most likely the United States – to respond unilaterally to an alleged breach of the agreement by suspending an obligation or issuing a remedy in a “proportionate” manner. This response is intended to “prevent the escalation of the situation and to maintain normal bilateral trade relations”, and the party against whom the complaint is directed cannot in turn retaliate as long as the measure “has been taken in good faith”. Under the agreement, China has committed to buying as much as $63.9 billion of covered goods from the United States by the end of 2020 compared to those underlyings in 2017. The definition of the baseline for 2017 using Chinese import statistics implies a purchase target of $173.1 billion for 2020 (red in panel a). Setting the baseline for 2017 using U.S. export statistics implies a target of $159.0 billion for 2020 (in blue in panel a). Although the agreement also sets targets for China`s purchases of certain services traded in the United States, this data is not reported monthly and is not covered here. The agreement also includes targets for 2021, which are not presented here. It is not clear to what extent the agreement applies to the relationship. It appears that the application only applies to the specific commitments of this agreement, but it can be expected that the US side will push for other issues outside the agreement to be addressed as part of this process.
Conversely, another challenge will be what will happen if one of the two parties takes market-restrictive measures which, in its view, are not related to this agreement, but which the other party considers discriminatory and generally relevant to the commercial relationship. How to cite this article: Hunter L. Clark, “An Update on the U.S. – China Phase One Trade Deal,” Federal Reserve Bank of New York Liberty Street Economics, October 6, 2021, libertystreeteconomics.newyorkfed.org/2021/10/an-update-on-the-us-china-phase-one-trade-deal.html. The first phase of the agreement requires China to strengthen its intellectual property regime in a number of areas, including those related to counterfeit and pirated products and medicines. It also requires China to improve its protection of trade secrets and confidential business information. China has also agreed to tougher sanctions for intellectual property theft to prevent theft. The language used creates space for a broad interpretation of expressions such as “proportionate manner” and “good faith”. On the contrary, achieving the supposed goals of the Phase One agreement – the peaceful management of trade – the language of dispute settlement could lead to an escalation of trade tensions between the US and China. This situation is exacerbated by the fact that after the first phase of the agreement, it is the complaining party that ultimately determines that there has been a breach of the agreement. No independent body or tribunal is in a position to make this decision. The agreement in the first phase is not clear on the remedies that may be taken by the complaining Party, whether the suspension of tariff or quota concessions or the imposition of additional duties, and the period during which such measures may be taken.
In summary, the United States (or, in theory, China) can unilaterally determine that there has been a breach, decide on countermeasures, and determine the duration of the suspension of concessions made under the Phase One Agreement. 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 referred to as Phase One Agreement, entered into force on February 14, 2020. Under the agreement, China would implement structural reforms, open up its financial services, and strengthen intellectual property protection, among other things. China has also pledged to buy at least $200 billion more in U.S. goods and services in 2020 and 2021. Under Phase One Agreement, the United States and China agreed on an innovative approach to enforcing their agreement, as outlined in Chapter Seven. The first phase of the agreement established a trade framework group to discuss the implementation of the agreement, led by the U.S. Trade Representative and a designated vice premier of the People`s Republic of China, as well as a bilateral assessment and dispute settlement office for each party. As in a typical trade agreement, a complaining party may appeal to the other party`s bilateral assessment and dispute settlement office if there is a problem with the agreement. .