US-China Negotiations on "Phase One" Agreement Continue with Little Clarity on Tariffs or Substance

More than one month after President Trump’s announcement that the United States and China had reached a narrow, “Phase One” trade agreement “in principle,” negotiations to finalize the agreement remain incomplete, and substantive disagreements – including over the extent of any tariff reductions – continue to pose obstacles.  In recent weeks, US and Chinese officials have reported progress in their negotiations towards the potential Phase One agreement and have continued to express optimism that such an agreement can be concluded quickly.  However, many core issues remain unresolved.  This note summarizes outstanding issues in the US-China trade conflict and possible next steps.

Venue

President Trump and President Xi were originally rumored to be planning a signing ceremony for the “Phase One” agreement at the November 16-17 APEC meeting in Chile.  However, the APEC meeting has now been canceled due to civil unrest in Chile, and the two sides have yet to announce an alternate venue.  Some observers have speculated that a signing ceremony may be held in Iowa to show support for American farmers – an idea President Trump did not rule out – but neither this venue nor any other has been confirmed at this time.

Timing and Terms

The cancellation of the APEC meeting may prove to be a fortunate turn of events for the Trump administration – which reportedly is eager to conclude the Phase One deal –because both sides appear to be struggling to finalize the deal by the original, mid-November deadline.  Indeed, as of today the parties remain unable to close the initial agreement.  The broad outlines of the deal – focusing on Chinese agricultural purchases, currency, intellectual property and tariffs – are still in place, and the parties apparently have agreed on modest currency and intellectual property commitments.  However, doubts remain about China’s commitments to purchase US agricultural products and, most importantly, the tariffs that both sides now have in place or are planning to put in place (see next section).  

Tariff Removal

Disagreement over the extent to which the United States will scale back planned and existing Section 301 tariffs on Chinese goods appears to be the primary obstacle to concluding a Phase One agreement at this time.  China reportedly continues to seek, as part of any Phase One deal, the cancellation of the 15% US tariff increase on $160 billion worth of goods (“List 4B”) that is scheduled to take effect on December 15, 2019, as well as the removal of the 15% tariff on “List 4A” goods ($112 billion) that took effect on September 1, 2019 (see table below).  In addition, some sources indicate that China is seeking at least a partial reduction of the 25% additional tariffs imposed by the United States on Lists 1-3 ($250 billion) since mid-2018.  (China also has indicated that it would remove the retaliatory tariffs it has imposed on US goods simultaneously and “in the same proportion” as any US tariff reductions.)  The United States, however, reportedly is reluctant to eliminate any of the Section 301 tariffs that it has already implemented as part of a Phase One deal, and may instead be willing to cancel only the tariffs scheduled for December 15. 

The two sides recently have offered differing accounts of the status of the negotiations on tariff removal.  Last Thursday, for example, a spokesman for China’s Ministry of Commerce announced that, following constructive negotiations over the past two weeks, US and Chinese negotiators had “agreed to remove the additional tariffs in phases as progress is made on the agreement,” but provided no further details.  Markets reacted positively to this news, but White House officials subsequently gave conflicting signals on whether the parties had actually come to any such agreement and, if they did, how significant this tariff “rollback” would be.  President Trump subsequently stated that he had not yet agreed to roll back any of the tariffs, and that, even if a Phase One deal is reached, he would not eliminate all of the additional tariffs the United States has imposed on China-origin goods.  He subsequently added that the United States would further increase tariffs on Chinese goods if a Phase One deal is not completed, suggesting that tariffs may be imposed on List 4B on December 15 if an agreement is not reached before then. 

Outlook

Both sides continue to appear motivated to conclude a Phase One agreement, but the past several weeks have brought little additional clarity regarding the scope, timing, or implications of such an agreement, including its effects on the Section 301 tariffs and Chinese retaliation.  At this stage, the most likely outcome continues to be a modest tariff ceasefire upon the completion of the Phase One agreement, with the United States delaying or canceling the December 15 (List 4B) tariff increase and both sides potentially eliminating recent tariff increases, such as the List 4A tariffs imposed on September 1.  At this time, however, it appears unlikely that there will be near-term changes to the US tariffs for Lists 1-3.  Companies therefore should continue to plan for scenarios in which these tariffs remain in place for the foreseeable future.  It also remains possible that negotiations to conclude the Phase One agreement will take significantly longer than the Trump administration initially projected, prolonging the uncertainty regarding the List 4B tariffs and corresponding retaliation.

See also: Update: "Phase One" US-China Agreement to Require Further Substantive Negotiations

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