Chad Bown

On January 15, 2020, then-U.S. President Donald Trump welcomed China’s Vice Premier Liu He to the White House for the signing of the China-U.S. Economic and Trade Agreement, more commonly known as the “Phase One” trade deal. At the time, Trump hailed the agreement as “delivering a future of economic justice and security for American workers, farmers and families,” and his administration already had its sights set on a “phase two” of talks to address other issues, including tariffs, which remained largely untouched in the Phase One agreement.

At the same time, however, a new virus in Wuhan was capturing worldwide attention, despite China’s assurances on January 14, 2020 that there was “no clear evidence” of human-to-human transmission. Just six days after the Phase One deal was signed, COVID-19 – as it would come to be known – was first detected in the United States. On March 11, 2020 the WHO declared a global pandemic.

The COVID-19 pandemic not only upended global trade, thanks to border closures and factory-shuttering lockdowns, but took a wrecking ball to the fragile detente in China-U.S. relations. However, the Phase One deal remained in effect throughout and continues to shape China-U.S. trade relations today, with the Biden administration taking enforcement of the agreement as a starting point in its own negotiations with China.

Chad P. Bown, the Reginald Jones senior fellow at the Peterson Institute for International Economics, has been tracking fulfillment of the deal since it was announced in January 2020. The Diplomat interviewed Bown about how the agreement has been implemented, how it figures in China-U.S. trade relations, and what the Biden administration’s plan are for next steps.

The circumstances have changed dramatically since the Phase One deal was signed in January 2020. First came the COVID-19 pandemic, which altered the economic and trade environment; then there was a change in administrations in the U.S. With all that in mind, what role is the deal playing in China-U.S. trade relations today?

Even if not for the reasons initially expected, history is likely to judge the Phase One agreement as having played a fairly important role in U.S.-China trade relations over 2020-21.

The deal’s biggest payoff was likely that it halted escalating trade tensions between the U.S. and China. In the 18 months leading up to the agreement, each side had imposed new tariffs on more than half of its imports from the other; bilateral tariffs increased to an average of roughly 20 percent. While the deal did not end those tariffs, it stopped things from getting worse. No new tariffs were imposed in 2020-21.

The Phase One agreement also likely impacted the 2020 U.S. presidential campaign, but also not for the reasons initially anticipated. By very early in 2020, the trade data revealed that China was not making enough purchases to keep pace with the commitment to buy an additional $200 billion of U.S. exports. Phase One was therefore not something Trump would be able to highlight extensively while campaigning ahead of the November election.

For the incoming Biden administration, the agreement also meant there was no need to make immediate trade policy decisions on China upon assuming office in January 2021. They could get their trade team in place, assess the deal, resolve inherited bilateral grievances with the European Union and other allies, and then settle on their trade policy approach to China. That would take time – more so perhaps because of the pandemic – and the continuity of the Phase One agreement provided it.

You’ve been regularly tracking the implementation of the deal. How would you rate the overall success in that regard – not only on China’s purchase commitments, which have attracted the most attention, but in the other aspects of the agreement?

The headline was China agreeing to purchase an additional $200 billion of U.S. exports over 2020-21. It was too aspirational. While “$200 billion” may have been selected as a big, memorable number to campaign on – had the devastation of COVID-19 not emerged as the main election issue – reaching it was unrealistic from the start. In the end, China bought only about 60 percent of the U.S. exports it was supposed to purchase over 2020-21.

Manufacturing was the biggest part of the deal and U.S. exports did not do well. U.S. airplane sales to China were grounded even before the Phase One agreement was signed because of Boeing’s troubles with the 737 MAX. Autos were another major U.S. export sector to China before the trade war, but the tariffs curtailed that trade. U.S. exports in both sectors did not recover over 2020-21.

U.S. farm exports did not reach the Phase One commitments but have rebounded strongly over 2020-21. Not all of that can be attributed to the deal, though – China was buying more pork, corn, and wheat from many countries in addition to the United States. Increased pork demand arose from an outbreak of African Swine Fever that had decimated China’s local pig herds. More corn and wheat imports from the world resulted from China’s compliance with WTO disputes it had lost. U.S. soybean exports – the largest farm product – have also done well in 2020-21 as China replenished stocks and the pig herd recovered to demand more feed.

Carbon-intensive energy products were also a big part of the Phase One agreement. U.S. exports did not reach the targets, but U.S. coal sales to China have grown considerably. This arrived partially at the expense of Australia’s coal exports to China, which Beijing punished for seeking an inquiry into the origins of COVID-19.

U.S. services exports also did poorly. Some of that was pandemic related; Chinese tourists and business travelers stopped visiting America because of COVID-19 restrictions. A long-term worry is the decline of U.S. educational services exports to China, as a stricter U.S. visa policy and more hostile environment have made the United States a less attractive place for Chinese students to learn.

Beyond the $200 billion of purchase commitments, there are also parts of the Phase One agreement covering intellectual property enforcement, forced technology transfer, non-tariff barriers to trade in agriculture, liberalization of financial services, and exchange rate transparency. Unlike the strict numeric purchase commitments, these chapters of the agreement continue even after 2021 ends. While a positive part of the deal, whether China lives up to the commitments will take more time to determine, though relatively few complaints about these elements have emerged publicly so far.

China’s purchase agreements received the most attention of any of the commitments made in the Phase One deal. Critics have argued that promises to meet artificial targets for U.S. imports might violate WTO rules, while analysts in allied nations complain that U.S. exports to China are being bolstered at their expense. How do you evaluate the general concept of tying China to import numbers as a way to address the trade imbalance?  

There are reasonable economic and policy arguments that, at various points over the last 20 years, China ran an overall trade surplus with the world that was too large. I.e., China was importing too little from all of its trading partners relative to its total exports, and that had adverse consequences for the global economy. The implication was that China should rebalance by importing more and exporting less.

However, a unilateral U.S. approach of getting China to rebalance with the United States alone is unlikely to tackle the problem. Trump’s USTR, Robert Lighthizer, structured the Phase One agreement in the attempt to reduce China’s bilateral trade surplus with the United States. China was to increase imports from the U.S. (through the Phase One purchase commitments) and export less to the U.S. (by the U.S. keeping its trade war tariffs in place).

Indeed, the concern from allies was that such a U.S. approach would simply create additional problems for them. Take energy – China agreed to purchase more American coal exports, but it did so by buying less from Australia. Trading partners certainly perceived this cost-shifting approach was the U.S. goal with Phase One, making it more difficult for the United States to convince allies to work collectively on areas of joint concern, such as China’s system of subsidies or its forcibly transferring foreign technology to local Chinese firms.

USTR Katherine Tai has stated that she dislikes the “Phase One” name because of the implication that there will be future “phases.” What are the prospects for follow-on agreements, given the tensions in China-U.S. relations across the spectrum of issues?

To date, the Biden administration has not suggested publicly that follow-on bilateral agreements with China would be in the offing. In fact, the administration has stressed its approach was different from the Trump administration through its desire to “work with allies.” This suggests future agreements with China may be “plurilateral” types of deals between China and a number of different trading partners, including the United States, EU, Japan, and more.

Notably, the Phase One deal did not fully phase out the tariffs implemented by the Trump administration on China. How has the Biden administration approached these tariffs since taking office? Do you see any signs that they might be removed entirely – perhaps after securing more trade commitments from China?

The Biden administration has not clarified its position on the tariffs that Trump imposed on China that remain in place despite the Phase One agreement. (Those U.S. tariffs continue to cover roughly two-thirds of U.S. imports from China – over $300 billion in trade annually – and most of them are applied at rates of 25 percent.)

On January 19, when asked whether his administration was planning to lift even some of the tariffs off imports from China, Biden tied the tariffs decision to China’s failure to meet the $200 billion of purchase commitments by stating, “I’d like to be able to be in a position where I can say [China is] meeting the commitments, or more of their commitments, and be able to lift some of it.  But we’re not there yet.”

Prior to that, in October, USTR Katherine Tai stated the administration would be opening a new exclusions process whereby American companies could petition to have their particular imported product exempted from those tariffs. The administration would make such decisions on a case-by-case basis, similar to what had been done under Trump (but whose granted tariff exclusions had mostly all expired).

Some members of the administration do recognize the costs the tariffs are having on the U.S. economy. In December, for example, Treasury Secretary Janet Yellen stated she thought the tariffs on imports from China “do contribute to higher prices in the United States.”

The Biden administration has emphasized the importance of coordinating with allies on China policy, including trade issues. What steps have we seen so far in terms of a united approach to China trade issues between the U.S. and its allies?

There is some evidence of a more collective approach to China policy.

In March 2021, the U.S. and EU (along with the United Kingdom and Canada) put sanctions on Chinese officials involved in the Xinjiang crackdown on the Uyghur minority. In the period since, both have taken additional steps to ban imports from the Chinese region made through use of forced labor.

In September, the U.S. and EU formally kicked off the Trade and Technology Council at a minister-level meeting in Pittsburgh. There has been additional coordination on policies like export controls for sensitive technologies. In addition to supply chain resilience, they have discussed communication and coordination and trying to avoid a subsidy war (with each other) in the semiconductor industry.

In October, the U.S. and EU settled their dispute over Trump’s tariffs on EU steel and aluminum, in part by committing to spend the next two years negotiating a Global Arrangement on Sustainable Steel and Aluminum. Those negotiations would not only work to decarbonize the industry, but also address “the issue of overcapacity in these industries caused by non-market practices in some economies” – by which they largely mean China.

In November the U.S., EU, and Japan announced a resumption of the “Trilateral,” where the three attempt to coalesce around a mutually agreeable set of new rules for trade affected by subsidies and non-market economies. Ultimately, the Trilateral might use the results of those negotiations to someday approach China on a more comprehensive agreement.

The totality of these efforts suggests that work is being done, and on a number of different fronts. It is often at the technical level and behind the scenes, even if there is not yet any major policy changes or agreements to announce.

This may be the new normal. Trade policy is no longer being conducted over Twitter, and it is not making headlines. Biden has succeeded at making trade policy boring again. The hope is that such an approach may also turn out to be more productive.