Ultimate Phase One Trade Deal ‘Remedy’ Is to 'Withdraw' Under ‘Bad Faith’ Negotiations, Text Says

The phase one “economic and trade agreement” the U.S. and China signed Jan. 15 will take effect in 30 days and can be terminated by either country with 60 days' written notice, the deal's text said. Phase one is “a big step toward normalizing our trading relationship with China,” the Consumer Technology Association said, but “market uncertainty remains until we see permanent tariff removal.” The National Retail Federation also welcomed phase one but said phase two “can’t come soon enough.”

The agreement has eight chapters, including several dedicated to intellectual property protection, preventing forced technology transfer and safeguarding against currency manipulation. The text is silent on the issue of Section 301 tariffs on Chinese goods and retaliatory Chinese duties on American exports, though the Trump administration is scheduled to roll back the 15 percent List 4A tariffs by half when phase one takes effect Feb. 14. List 4A includes a wide swath of consumer tech goods, including TVs, smart speakers, Bluetooth headphones, smartwatches and fitness trackers.

China agrees within 30 working days to enact an “action plan” on IP protection “aimed at promoting its high-quality growth,” the text said. The plan will include “measures that China will take to implement its obligations” under the IP chapter “and the date by which each measure will go into effect,” it said. The U.S. “affirms that its existing measures are consistent with its obligations” under phase one, it said. Similar phrasing appears 27 times throughout the 96-page document, signaling it’s China, not the U.S., that needs to alter its behavior.

Once the U.S. produces evidence from a rights holder that a trade secret was breached or risks being so, China agrees to shift the “burden” to the “accused party” to prove it “did not misappropriate” the secret, the phase one text says. “China shall identify the use or attempted use of claimed trade secret information as an ‘urgent situation’ that provides its judicial authorities the authority to order the grant of a preliminary injunction based on the specific facts and circumstances of a case.” The March 2018 Section 301 report the administration used as grounds for imposing four rounds of tariffs concluded China had few such “safeguards” in place to prevent the unauthorized disclosure and dissemination of trade secrets.

China must install “enforcement procedures that permit effective and expeditious action by right holders against infringement that occurs in the online environment, including an effective notice and takedown system to address infringement,” the text said. China also must “require expeditious takedowns” of infringing e-commerce sites, the text said, without quantifying how expeditiously. The agreement also obligates China to “eliminate liability for erroneous takedown notices submitted in good faith,” it said.

The agreement sets up an elaborate “bilateral evaluation and dispute resolution arrangement” between the governments to enforce the terms and douse any future fires. It begins with the creation of a “trade framework group” led by U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He, the text said. Both governments will set up full-time dispute resolution “offices” headed by the deputy USTR and his Chinese counterpart, it said.

Those offices will field complaints alleging violations of the phase one deal, the text said. The U.S. and China “will attempt to resolve” any complaints “in the most efficient manner,” beginning with the lowest level of interaction between the governments, it said.

If a dispute can’t be resolved even after being bounced up the chain to the level of Lighthizer and Liu, the aggrieved country can adopt “a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation,” the text said. The ultimate “remedy is to withdraw” from the phase one agreement if either country deems the other negotiated a dispute resolution “in bad faith,” it said.