17 January 2020

China and the United States announce “Phase One” trade deal - key issues and takeaways for business

This article was written by Wang Feng, Dai Menghao, and Yu Fengzhen.

After more than two years of stop-start negotiations, China and the United States formally signed an agreement on a Phase One deal (the “Agreement”) in Washington, D.C. on January 15, 2020. Shortly after signing the Agreement, the United State Trade Representatives and the Ministry of Commerce of China have published the full text of the Agreement in English and Chinese. The Agreement’s main context consists of eight chapters covering intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange, expanding trade, dispute resolution, and final provisions, basically addressing all the essential issues identified in the Section 301 Investigation. Based on the main terms of the Agreement, we preliminarily summarize the key takeaways of the Agreement and profound impacts on companies in their future trade activities. 

What’s in the Phase One Agreement?

According to the text of the Phase One Agreement, it covers the following substantive areas:

Protection of Intellectual Property

The Agreement provides detailed and comprehensive protection in the area of intellectual property, including the protection of trade secrets, pharmaceutical-related intellectual property, trademarks and geographical indications, effective patent term extension, enforcement against counterfeit medicines, combating piracy and counterfeiting on E-commerce platforms, stopping and blocking manufacture and export of pirated and counterfeit goods. Meanwhile, China and the U.S. confirm their positions in judicial enforcement and procedure in intellectual property cases. 

Prohibition of Forced Technology Transfer

In the Agreement, the parties affirm that the transfer of technology and license shall follow the market-based principles. Technology transfer shall not be a condition for market assess or administrative approvals. No state-directed outbound investment is allowed for the purpose of acquiring foreign technology in sectors and industries. Further, the two countries will ensure the enforcement and administrative proceedings are fair, impartial, transparent, and non-discriminatory. 

Elimination of Non-Tariff Barriers to Agriculture Trade

The Agreement provides that China will lower the non-tariff barriers to trade of agriculture and food, such as dairy and infant formula, meat, soybeans, aquatic, fruit, pet food, etc., and enlarge their imports. Meanwhile, China will respect its current World Trade Organization (WTO) obligations and improves its administration of wheat, corn, and rice tariff-rate quotas (TRQs).

Opening-up of Financial Market

In the Agreement, each party agrees to ensure fair, effective, and non-discriminatory participation in the market for financial services, such as in banking, securities, insurance, electronic payment, credit rating, futures, etc. For a few financial services (such as fund management services, securities, insurance, etc.), China will eliminate the foreign equity caps for U.S service suppliers by April 1, 2020.

Management of Foreign Exchange

The Chapter “Macroeconomic Policies and Exchange Rate Matters and Transparency” addresses that “each Party shall respect the other Party’s autonomy in monetary policy, in accordance with its domestic law”, and “honour currency-related commitment each has undertaken in G20 communiqués, including to refrain from competitive devaluations and the targeting of exchange rates for competitive purposes”. Furthermore, the two countries will communicate regularly on the policies and transparency of the exchange rate.  

Expansion on Imports

In the Chapter “Expanding Trade” under the Agreement, China is committing to expand the imports of U.S. goods and services in the next two years by purchasing no less than US$200 billion of U.S. goods and services “on the top” of the import amounts in 2017 in wide industries, such as industrial machinery, electronic equipment, pharmaceutical products, aircrafts, vehicles, medical devices, etc.

Bilateral Evaluation and Dispute Resolution

To ensure effective implementation of the Agreement, the two parties agree to form “Bilateral Evaluation and Dispute Resolution Arrangement”, so as to regularly discuss the status of the implementation, to resolve issues during the implementation, and set up the future work scheme of the parties.

Likely impacts on trade and investment

As a milestone document in the China-U.S. trade dispute from 2017, the Agreement has a profound influence on the trade development of both China and the U.S. With respect to the stipulations in the Agreement, our preliminary opinions are as follows:

Part of the commitments from China in the Agreement are consistent with the progress of legislative reform in China.

At first sight, China made multiple commitments to the reform of domestic policies in the Agreement. Whereas in fact, the reform has been scheduled, and even reflected in the drafts of law, from the perspective of the legislative process in China.

For example, the Foreign Investment Law of the People’s Republic of China enacted this year specifies that administrative authorities and officers are not allowed to force technology transfer by administrative means. In the field of intellectual property that is concerned by the U.S., the E-Commerce Law enacted last year provisions that e-commerce operators shall establish rules of intellectual property protection. And in the draft of the new Patent Law, not only does it increase the compensation on patent infringement, it has specific provisions on medicine patent, i.e., for the patent for invention of innovative medicines applied for simultaneous marketing in China and overseas, their term for patent right may be extended. Thus, the commitments will not significantly impact the progress of legislative reform in China.

The “Expanding Trade” Chapter of the Agreement may directly influence specific supervision requirements and entry policies.

The “Expanding Trade” Chapter of the Agreement may directly influence inspection and quarantine, as well as customs supervision, particularly on agricultural products.

According to the Agreement, China may adjust the import criteria of specific agricultural products. For instance, China only allows import of live cattle from areas free of foot-and-mouth disease in Australia, New Zealand and Uruguay for now, while it is scheduled to import live cattle from the U.S. per the Agreement. And the current supervision criteria are very likely to be adjusted accordingly in dairy, beef and aquatic products. In addition, 23 categories of trade in goods and services are listed in the Agreement where China needs expansion in import, which makes it worthy of attention whether China Customs and other supervision authorities may adjust specific supervision methods to promote the development of trade in goods and services.

Chinese companies should be aware of the compliance risks in the Agreement.

According to the Agreement, China will strengthen the law enforcement in intellectual property and protection of trade secret, which means Chinese companies should pay closer attention to the compliance risks in these areas. And the Agreement specifies the combat against counterfeit medicines. In particular, the usual practice of the U.S. towards generic medicines may affect the compliance practice of their import into China, which should also be noted by stakeholders in the industry.

In general, as a temporary truce to the trade dispute in the past 22 months, the Agreement eases the tension between China and the U.S. to an extent, and directs mutual development and dispute resolution by negotiation. We will pay close attention to the follow-up policy updates and their influences in the two countries, and share our comments in time.

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