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

Following President Trump’s October 11, 2019 announcement of a “phase one” trade agreement between the United States and China (please refer to the W&C US Trade Alert dated October 11, 2019), additional details have emerged and suggest that the two sides are further from finalizing such an agreement than President Trump initially indicated.  In particular, published reports and public statements by US and Chinese officials indicate that further substantive negotiations (not merely finalization or legal scrubbing of agreed text) will be necessary to conclude a phase one agreement, and that only the United States’ postponement of the October 15, 2019 tariff increase on Section 301 product lists 1-3 is at this stage certain.  

The key developments since President Trump’s announcement may be summarized as follows:

• China’s reaction.  Official statements from China on the outcome of last week’s negotiating round have avoided any mention of an “agreement” (or even an “agreement in principle”) between the United States and China.  Rather, China’s Ministry of Commerce and Chinese state media have acknowledged only that the two sides “made substantial progress” in the fields of agriculture, intellectual property protection, and exchange rates (among others) and “agreed to work together in the direction of final agreement.”  Moreover, reports state that (1) China is seeking to hold additional, in-person negotiations at the ministerial level over the coming weeks regarding the substance of the “phase one” agreement; and (2) China will seek a commitment from the United States to cancel the US tariff increase scheduled for December 15, 2019 (i.e., Section 301 tariff list 4B) as a prerequisite to signing any such deal.  US officials on October 11 publicly declined to make such a commitment, offering only that President Trump would continue to evaluate whether to proceed with the December 15 tariff increase.  
• US statements.  Following President Trump’s initial comments on October 11, US officials have appeared to acknowledge that further substantive negotiations will be needed before a phase one agreement can be signed.  For example, Treasury Secretary Steven Mnuchin stated that “I think we have a fundamental understanding on the key issues,” but acknowledged that “there is more work to do.”  Secretary Mnuchin later explained in an October 14 interview that “we have every expectation that phase one will close”, but he acknowledged that “there are still some issues that need to be worked out in wording,” and that the United States expects to hold further meetings with China at the deputy and ministerial levels in an effort to “finish the deal” before the November 16-17 APEC meeting in Chile.  News reports have indicated that these meetings could even include a visit by USTR Lighthizer and Secretary Mnuchin to China before the APEC meeting. 

These developments indicate that the results of last week’s negotiating round may be more modest or unsettled than previously reported.  Indeed, it appears now that the only confirmed results of the round are (1) a commitment by both sides to continue negotiations towards a phase one deal; and (2) a commitment by the United States to cancel the October 15 tariff increase on Lists 1-3 while the negotiations continue.  Moreover, substantial difficulties may arise as negotiators seek to translate verbal commitments into legal text – especially given that the two sides previously have offered drastically different interpretations of commitments purportedly made by the other side during prior negotiating rounds, and these disagreements have substantially complicated the negotiations.  It also appears that a phase one agreement may depend on the United States’ willingness to call off its December 15 tariff increase without obtaining commitments from China on several structural issues, which remains uncertain.  Thus, while the Trump administration’s upbeat assessment of last week’s meeting signals increased openness to a partial agreement that averts further tariff increases in exchange for modest concessions from China, even this outcome remains far from guaranteed.  
 

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