Phase One Deal Expected to Increase US Exports, Reduce China's Non-Tariff Barriers

China agreed to purchase a range of U.S. goods as part of the phase one deal signed Jan. 15, totaling about $200 billion worth of U.S. goods and services over the next two years. The deal covers a long list of agricultural products -- including pork, beef, processed meats, dairy and seafood -- along with increased Chinese imports of U.S. rice, energy products and $120 billion in purchases of U.S. manufactured goods this year.

In a letter from China's President Xi Jinping read by Chinese Vice Premier Liu He at the signing ceremony in Washington, Xi said China wants to quickly implement the agreement and stressed fairness in future trade practices. “I hope the U.S. side will treat fairly Chinese companies and their regular trade and investment activities,” the letter said. The deal did not specifically address Huawei or any of the Chinese companies included on the Commerce Department’s Entity List (see 1912130052).

President Donald Trump said the two sides will soon begin negotiating phase two of the deal, adding that there likely won’t be a third phase. “We’re going to be starting phase two as soon as this kicks in,” Trump said. “We'll probably be able to conclude with phase two. We don't expect to have a phase three.”

While China agreed to buy a combined $80 billion in U.S. agricultural goods over the next two years, Liu said that “if the demand is strong, [Chinese] companies may buy more.” The deal also includes language that aims to strengthen intellectual property rights and prevent forced technology transfers, including provisions that say neither China nor the U.S. may impose licensing procedures that “pressure” the other country’s companies to share their technology. While Liu confirmed that China will strengthen its IP rights, he also said the two countries don’t see “eye to eye” on some issues. “We must seek common ground while putting aside differences,” he said.

Chinese officials did not address whether they will revoke retaliatory tariffs on U.S. goods. A senior administration official said China may provide relief from its retaliatory tariffs through its tariff exemption process (see 1912190024, 1909130013 and 1909110051), but will have to meet purchase levels no matter what happens to tariffs. “China will have to determine how to make that happen,” the official said on a phone call with reporters. “They do have an exclusion process. My understanding is they’re going to continue to refine that.”

Aside from increasing its agricultural purchases, China also agreed to increase imports in the energy sector, including liquefied natural gas, crude oil and metallurgical coal. China will purchase at least $30 billion in energy-related products in 2020 and at least $45.5 billion by 2021. “We’re going to be opening up China to all of your companies,” Trump said. “So I hope you folks can handle it.”

China will also increase imports of industrial machinery, electrical equipment, pharmaceutical products, aircrafts, vehicles, optical and medical instruments, iron, steel, solar-grade polysilicon, hardwood lumber and chemical products, the Office of the U.S. Trade Representative said. Those purchases are expected to reach at least $120 billion in 2020 and at least $131.9 billion in 2021.

China also agreed to reduce a range of non-tariff barriers by expanding the list of pork products that are eligible for importation, including processed foods such as ham and certain types of offal, the USTR said in a series of fact sheets. China will also expand the scope of beef products it can import, eliminate age restrictions on imports of slaughtered cattle within one month of the deal’s implementation and recognize U.S. beef’s “traceability system.” Although China bans imports of U.S. live cattle, it will “immediately engage in technical discussions” on a “final market access agreement” to lift the ban, the USTR said. This could lead to $25 million to $50 million worth of U.S. exports, the USTR said.

When the deal is implemented, China will recognize oversight of U.S. meat, poultry meat, processed meat and meat facilities by the U.S. Department of Agriculture, which will eliminate any “unique” registration requirements. It will also allow U.S. pork products inspected by the USDA’s Food Safety and Inspection Service to be exported to China within 10 working days after the deal takes effect. The USTR expects these provisions to lead to an additional $10 million to $25 million worth of processed meat and poultry exports to China.

By February, China will also implement the FSIS’s Public Health Information System, an electronic system that allows foreign countries to access FSIS meat and poultry export certificates. China will share that certificate information in a “timely manner” with port and customs officials to prevent delays in clearing U.S. shipments at ports of entry, the USTR said.

China’s General Administration of Customs (GACC) will update its list of U.S. facilities that are eligible to export to China within 20 business days of receiving the list from the USDA. That action is part of a commitment by China to “streamline the timelines and procedures” for registered U.S. facilities and provide “regulatory certainty” for dairy products, including fluid milk and dairy permeate powder. China also agreed to buy more U.S. goat and milk sheep products, which could lead to an additional $250 million to $300 million worth of annual dairy and infant formula exports.

China will authorize rice imports from any rice facility approved by the USDA’s Animal and Plant Health Inspection Service within 20 days of China’s receipt of notification from the U.S. that the facility has been approved by APHIS and is compliant with phytosanitary protocols agreed to by the U.S. and China. China will also import U.S. medium grain rice under China’s tariff rate quota for “rice, short and medium grain,” the USTR said, which will allow U.S. rice “to compete with comparable rice grades in the Chinese market.” Combined with China’s commitment to abide by World Trade Organization requirements for wheat, corn and rice TRQs, the USDA expects rice exports to reach $300 million annually.

China also agreed to allow imports of 26 “previously unapproved aquatic species.” Within 20 days after the deal takes effect, China will allow U.S. imports from “aquatic products facilities” that are in “good regulatory standing” by the Food and Drug Administration and also registered by China’s GACC. China will also routinely update its list of approved aquatic products facilities on its website, the deal says, but has the right to audit the U.S. aquatic products food safety regulatory system. It may also conduct inspections of imports of a “risk-based selection” of U.S. aquatic products at its ports of entry. The U.S. said these provisions could lead to an additional $400 million worth of aquatic exports to China.

The National Milk Producers Federation called China’s increased agricultural purchases “encouraging,” but said the benefits for the dairy industry still “remain unclear” due to China's retaliatory tariffs. The “work with China is not complete until the retaliatory tariffs against all U.S. dairy exports are fully lifted,” the federation said. Similarly, U.S. pork exports continue to be suppressed” because of China’s punitive tariffs, the National Pork Producers Council said. “If China is unwilling to drop its tariffs on U.S. pork,” NPPC President David Herring said, “it’s difficult to envision the country meeting the $40 billion per year agriculture purchase commitment.” The National Retail Federation also said it hopes the deal will lead to further tariff elimination. “Resolution of phase two can’t come soon enough,” the NRF said.

The Information Technology & Innovation Foundation said the deal represents progress, “but some of the thorniest issues confronting innovation-driven industries are still on the table, including the lavish industrial subsidies China showers on its companies, including its state-owned enterprises.” The Semiconductor Industry Association said the deal will ease uncertainty within the semiconductor industry. “We hope it provides a stepping stone to a more comprehensive deal,” the SIA said.