This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with red strikethrough and textual matter added in the later version is indicated with blue.
The Trump Administration announced on December 13, 2019, a draft agreement with the Chinese government on a subset of President Trump on January 15, 2020, signed a phase one trade agreement with the Chinese government that is intended to resolve some of the trade and investment issues the Administration raised in March 2018 under, pursuant to Section 301 of the U.S. Trade Act of 1974. Including appendices, the agreement is 96 pages and covers some aspects of intellectual property (IP) (Chapter 1), technology transfer (Chapter 2), agriculture (Chapter 3), financial services (Chapter 4), macroeconomic policies and exchange rates (Chapter 5), trade purchases (Chapter 6), and dispute resolution (Chapter 7). Approximately one-fourth of the agreement addresses IP commitments. Discussion of technology transfer is confined to two pages.
Some Members assess the deal to be a first step in a longer effort to address Section 301 of the U.S. Trade Act of 1974. The Chinese government has not formally agreed to the agreement and neither side has signed it. China is currently reviewing the text, leaving open the potential for disagreement or renegotiation of terms. If the process goes smoothly, U.S. Trade Representative (USTR) Robert Lighthizer and Chinese Vice Premier Liu He could sign the agreement in January 2020 in Washington, DC, before starting phase two negotiations.
The Administration identified four concerns about China's behavior in its March 2018 Section 301 Report—forced technology transfer, cyber-enabled theft of U.S. intellectual property (IP) and trade secrets, discriminatory and nonmarket licensing practices, and state-funded strategic acquisition of U.S. assets—and subsequently imposed four rounds of tariffs on Chinese goods. China responded with four rounds of counter tariffs. Negotiations also sought to address President Trump's concerns about the trade balance and incorporate Chinese offers in unrelated areas, such as financial services.
The USTR said the two sides have drafted an 86-page text covering some aspects of IP, technology transfer, agriculture, financial services, exchange rates, and dispute resolution that could be made public over the next few weeks. The two sides have been working with a draft text since at least May 2019, when China reportedly returned a heavily marked up draft and held up purchase agreements until the United States agreed to lift some tariffs. The Administration may have released details of the draft agreement to justify its decision to delay tariffs scheduled to take effect on December 15 and to lock in terms with China.
Some Members of Congress and most commentators assess the deal to be a first step in a longer effort to resolve U.S. trade concerns with China. Many observers call it a short-term truce, noting it falls significantly short of the Administration's goal of a comprehensive settlement, leaving tough systemic issues on IP and technology transfer to phase two talks. The USTR agrees that the deal is just a first step, but notes that most U.S. tariffs remain in place and that the deal will have a strong enforcement mechanism. Critics counter that the Administration was too quick to settle and that by lifting and delaying some tariffs, it may have lost leverage. They see the Administration as responding to pressure to keep China relations stable and the U.S. economy on solid footing ahead of the U.S. presidential election in November. U.S. firms, especially smaller companies, facing tariffs that remain in place are still concerned about the effects on their businesses. Others note that China's promise to buy an additional $16 billion in U.S. agriculture in the deal's first year is well below the U.S. target of $25 billion. Beijing also has preserved space for China to implement its industrial policies in strategic sectors of concern to the United States. Critics argue the timing gives China credit for purchases of U.S. products it would have likely made anyway in areas such as pork, to address shortages ahead of the Chinese lunar new-year in late January, and stem inflationary pressures.
Section 301 action emerged from a building of frustration in the U.S. government and business community over Beijing's perceived unwillingness to acknowledge and address key commercial concerns. In its March 2018 Report on the findings of its Section 301 investigation, the Administration identified four concerns: (1) forced technology transfer, (2) cyber-enabled theft of U.S. IP and trade secrets, (3) discriminatory and nonmarket licensing practices, and (4) state-funded strategic acquisition of U.S. assets. As a result, the United States imposed four rounds of tariffs on Chinese goods. China responded with four rounds of counter tariffs. Negotiations also sought to address President Trump's concerns about the trade balance and incorporate Chinese offers in unrelated areas, such as financial services. Overview of Key IssuesTariffs. short of the Administration's goal of a comprehensive settlement. The most significant potential gains for the United States appear to be in agricultural market access—an area that is important to the U.S. economy but falls outside the scope of the 301 investigation—suggesting to some that China may have directed talks away from sensitive IP and technology transfer issues by offering other commitments of interest to the United States. Chinese tariffs on U.S. agricultural products, however, remain largely in place, potentially mitigating the effects. China's potential use of selective exemptions—rather than across the board tariff reductions—may give it leverage in future potential talks.
deal cutsUnited States, as of February 14, 2020, will cut the tariff rate from 15% to 7.5%. The remaining U.S. tariffs enacted since March 2018 will remain in effect. According to a December 15 announcement by China's State Council Tariff Commission, China has agreed not to proceed with its own scheduled December tariff increases (Appendix II) and will extend exemptions for autos, auto parts, and some pork and soybean imports it announced in September; earlier tariffs, including tariffs China implemented on September 1 (Appendix I), remain in effect. Some question whether the deal will be enough to reassure business and supply chains that have been diversifying in the wake of tariffs.
Purchases. China committed to purchase an additional $200 billion of U.S. agriculture, energy, and manufacturing goods over the next two years, with a detailed breakout by commodity; agriculture constitutes approximately $40 billion to $50 billion of the total. Beijing said it will buy $16 billion of U.S. agricultural goods in the first year of the deal and that purchases will be market-based, which may mean Chinese purchases could fall below U.S. stated goals. China's purchases may potentially shift U.S. export flows from other markets but not generate new demand. Neither side has released details about commitments beyond year two.
Currency. The Administration negotiated a currency commitment similar to Chapter 33 of the proposed U.S.-Mexico-Canada Agreement that includes a commitment to market-determined exchange rates, transparency and reporting requirements, and recourse to dispute settlement.
Financial Services. China promised to selectively reduce some foreign equity limits and restrictions, likely in an effort to generate pockets of U.S. business support, but may slow implementation through licensing, as it has done previously.
IP. China's commitments on counterfeiting, patent and trademark, and pharmaceutical protections may reflect recent domestic actions. China's new Foreign Investment Law imposes legal penalties for officials who disclose trade secrets, but Chinese industrial policies still incentivize government officials to obtain foreign knowhow. China's State Council promised new IPR protections by 2022, including financial damages in patent infringement cases, but has been silent on industrial policies and procurement rules that require foreign firms to share or transfer IP and knowhow to China.
Technology Transfer. USTR says that China will not force technology transfer and will not use state financing to make overseas acquisitions that advance China's industrial policies. This may be difficult to enforce. The new Foreign Investment Law forbids forced technology transfer, but Chinese officials frequently state that foreign firms willingly give their technology. Chinese industrial policies, such as Made in China 2025 and the national semiconductor policy, remain in force, and the Chinese government can leverage informal powers. The U.S. business community has voiced concerns that China is doubling down on industrial policies, including recapitalization of government funds and the launch of a new plan and $21-billion government fund to support advanced manufacturing. In 2020, Chinese officials will be adjudicating the country's next Five-Year Plan (2021-25) and supporting industrial plans that lay out plans for specific sectors.
Enforcement. USTR says remaining U.S. tariffs will incentivize implementation of Chinese commitments. An enforcement mechanism will allow 90 days to resolve issues, after which either side can take proportionate action. Snapback tariffs may be difficult to justify without specific benchmarks and timelines.
Phase Two. Core U.S. concerns on IP, technology transfer, and state subsidies appear to be left to phase two of the negotiations. These systemic issues have so far been intractable. They involve a web of reinforcing Chinese government plans and industrial policies that offer preferences and support for Chinese firms, both domestically and overseas, and often require foreign firms to partner and transfer technology, proprietary knowhow, and core IP with Chinese entities. China has used dialogue in the past to delay action on contentious issues. Phase two will test whether the U.S. approach can break new ground.
IP. China's commitments on counterfeiting, patent and trademark, and pharmaceutical protections reflect domestic actions China already took and similar language from earlier commitments, according to former U.S. government negotiators. The agreement focuses more on enforcement—penalties and legal recourse in the event of IP theft—rather than prevention of theft. China's new Foreign Investment Law imposes legal penalties for officials who disclose trade secrets, but the agreement is silent on China's policies and practices that encourage theft and the ways in which the government directs, encourages, and facilitates technology transfer.
Technology Transfer. China committed not to force technology transfer but this provision may be difficult to enforce. The new Foreign Investment Law forbids forced technology transfer, but Chinese officials frequently state that foreign firms willingly give their technology. Chinese industrial policies, such as Made in China 2025 and the national semiconductor policy, remain in force, and the Chinese government can leverage informal powers. The U.S. business community has voiced concerns that China is doubling down on industrial policies, including recapitalization of government funds and the launch of a new plan and $21-billion government fund to support advanced manufacturing. In 2020, Chinese officials will be adjudicating the country's next Five-Year Plan (2021-25) and new industrial policies.
Resolution of core U.S. concerns on IP, technology transfer, industrial policies, and state subsidies remain, for the most part, left to potential future phase two talks. These U.S. concerns center on what is perceived by U.S. stakeholders to be a web of reinforcing Chinese government plans and industrial policies that offer preferences and support for Chinese firms, both domestically and overseas. Often, non-Chinese firms are required to partner with and transfer technology, proprietary knowhow, and core IP to Chinese entities. The Chinese government may seek to further delay action on these contentious issues by prolonging phase two talks. The Preamble of the January agreement does not define "mutually agreed trade and investment concerns," potentially allowing China to debate the scope of phase two. Failure to resolve technology transfer issues could intensify congressional debate on the U.S. approach and harden the U.S. posture vis-à-vis China. (See CRS In Focus IF11284, U.S.-China Trade and Economic Relations: Overview.)
Authoritative Versions. The agreement states that the English and Chinese versions are equally authentic and that both official Chinese and U.S. trade data will be used to determine whether Chapter 6 trade purchases have been implemented. These provisions could open areas of potential disagreement on commitment terms, particularly if terms do not precisely correspond in both languages. The deal is silent on how trade purchases will be valued and whether they could include China's retaliatory tariff rates, many of which remain high.
Purchases. China committed to purchase at least $200 billion above a 2017 baseline amount of U.S. agriculture ($32 billion), energy ($52.4 billion), manufacturing goods ($77.7 billion), and services ($37.9 billion) between January 1, 2020, and December 31, 2021. China caveated that purchases will be market-based, allowing flexibility to fall below targets. China's purchases may not generate new demand and could displace other trading partners, prompting the European Union to consider a World Trade Organization challenge.
Currency. The Administration negotiated a currency commitment, similar to Chapter 33 of the approved U.S.-Mexico-Canada Agreement, for market-determined exchange rates, as well as transparency and reporting requirements.
Financial Services. China committed to selectively reduce some foreign equity limits and restrictions, but arguably could curtail implementation through licensing and operating requirements. China committed to accept and review the license applications of Mastercard, Visa, and American Express but did not commit to approving these companies' applications.
Dialogue. The agreement creates a Trade Framework Group led by the USTR and a Chinese Vice Premier that will meet every six months, resumes regular bilateral macroeconomic meetings led by the U.S. Treasury Secretary and a Chinese Vice Premier, and mentions technical discussions on unresolved IP and agricultural issues.
Implementation. Some commitments in agriculture and financial services have specific phase-ins. IP commitments appear to be more open-ended and are not linked to corresponding changes required in existing Chinese laws, regulations, rules, practices, and industrial policies.
Enforcement. An enforcement mechanism will allow 90 days to resolve issues, after which either side can take proportionate action. Snapback tariffs may be difficult to justify without specific benchmarks and timelines. The agreement is silent on what other retaliatory measures could be adopted.