January 20, 2020

U.S.-China Sign Phase One Trade Deal And U.S. Eliminates China’s Currency Designation

In a ceremony in the East Room of the White House last Wednesday, President Donald Trump and Chinese Vice Premier Liu He formally signed an interim, phase one trade deal that has eight chapters. The chapters are: intellectual property, technology transfer, food and agriculture trade, financial services, macroeconomic and currency policy, expanding trade, dispute resolution, and final provisions. (Read text of the agreement here.)

As part of the pact, which will go into effect on February 14, 2020, China committed to buying an additional $77.7 billion in U.S.-manufactured goods (and $200 billion in total goods), including iron and steel products.

For its part, the United States agreed to reduce tariffs on about $120 billion worth of Chinese consumer goods from 15 percent to 7.5 percent. (Click here to read the Office of the U.S. Trade Representative’s notice that explains which products will be affected by that portion of the agreement.) Still, the agreement leaves in place U.S. tariffs on nearly $250 billion in Chinese goods, and it does not impact the United States’ Section 232 tariffs, nor does it include measures to address steel and aluminum overcapacity in China. (According to Platts, China’s crude steel capacity will increase 14 million metric tons in 2020.) Politico reported that U.S. Trade Representative Robert Lighthizer said existing tariffs “would only be peeled back if China agrees to make additional concessions in a phase two agreement.”

Regarding currency issues, the pact commits the two countries to following International Monetary Fund provisions avoiding currency manipulation and to achieving and maintaining “a market-determined exchange rate regime.” That language mirrors Chapter 33 of the U.S.-Mexico-Canada Agreement. China also agreed to publicly disclose its foreign exchange reserves and quarterly imports of goods and services.

In addition to agreeing to this provision, the U.S. government last week dropped its formal designation of China as a currency manipulator. The decision marks a reversal from August 2019 when the Trump administration labeled China a currency manipulator for the first time in nearly 30 years. In a statement, U.S. Treasury Secretary Steve Mnuchin explained the decision, saying “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability.” How did other nations react to the agreement? According to Politico, the European Union (EU) said the phase one agreement might violate World Trade Organization rules. Politico said, “The comments signal that any easing of U.S. tensions with China could have knock on effects for the rest of the world.”

In related news: the United States joined with the EU and the Japanese government in releasing a joint statement that asks the World Trade Organization to alter its rules to better address Chinese trade practices. Specifically, the statement asks that the WTO impose penalties on China for practices that drive aluminum and steel overcapacity. Click here to read the statement.