Anyone interested in the November 2020 U.S. Presidential election—and that’s pretty much everyone around the world—should examine the 96-page Jan. 15, 2020, U.S.-China Phase One Economic And Trade Agreement. That’s because economics will be the decisive factor in the election. Since the 2016 campaign, foreign trade has been a top economic issue, co-extensive with national security concerns. This Agreement defines America’s trade policy, both retrospectively (viewing the election as a referendum on that policy), and prospectively, (picking the next President to continue or change that policy).
U.S. President Donald Trump’s foreign trade policy merits a ‘C-’ grade. His potential Democratic rivals in the White House race deserve an Incomplete. These marks are based on seven criteria applied to the Phase One Trade Agreement.
Graders and their criteria never are entirely objective. The President proves these points: he grades the Agreement as a “big, beautiful monster,” but is grading himself without announced metrics.
Mercy, Justice And Grading Criteria
The fairest grading tempers justice in pursuit of excellence with mercy grounded in empathy. It’s tempting to trash unmercifully the Agreement as a response to a Trade War that Trump started. Why give an ‘A’ to a problem solver who created the problem? Therein lies the answer: Trump didn’t cause the problem; rather, his predecessors since China’s December 2001 accession to the World Trade Organization did. Presidents George W Bush and Barack Obama failed to address the most serious structural imbalance in the world economy, between America and China.
The Donald dared to recognise Sino-American trade relations were unsustainable, and to begin the long, labourious process that resulted in the most significant foreign economic agreement involving China since its WTO Protocol of Accession.
Conversely, it’s tempting to demand strict justice in evaluating the Democrats. On the eve of the Iowa caucuses and New Hampshire primary, they’re squabbling about gender and age discrimination. Sitting Senators, Rhodes Scholars, billionaires, yet no coherent vision for America’s most important bilateral economic relationship – seriously? Alas, the candidates calculate it’s easier to address income inequality, developmental concerns—especially education and health care—and climate change as discrete topics, rather than forge a synthetic vision that foreign trade policy and domestic challenges are inextricably linked.
Yet, for all Presidential contestants, China defines U.S. foreign economic policy. Elections are akin to sports events, so pick your analogy: the Boston Marathon defines runners; the World Series defines pitchers; the Super Bowl defines quarterbacks. Sure, he renegotiated the North American Free Trade Agreement. Yet its core text remains largely as before. It’s nice he revamped the Overseas Private Investment Corporation into the U.S. International Development Finance Corporation. Funded smartly, it might challenge China’s Belt and Road Initiative.
Simply put, it’s the biggest plays in the biggest games that really matter. The Phase One Agreement is the biggest he’s done.
It’s the biggest for Democrats to critique. That’s why the grading is based on it. Besides, come Inauguration Day 2021, its text will be the template, or ante-template, for future deals.
Let’s Grade!
Here are seven metrics to assess the Phase One Agreement and, perhaps any other trade deal.
1. Scope: Does the Agreement address America’s initial negotiating objectives?
Sort of.
In March 2018, the USTR published the findings of the investigation it undertook pursuant to Section 301 of the Trade Act of 1974 of China’s trade practices. The key conclusions concerned intellectual property – not bilateral trade imbalances. In April 2018, the USTR announced its first retaliation list, taking aim at Chinese products connected to the Made in China 2025 industrial policy, thus drawing a link between Chinese IP misappropriation and cybertheft, and China’s goal to dominate world markets in 10 sectors highlighted in the Communist Party’s 298-page ‘Green Book’.
U.S. officials expressed hope the Section 301 action would cut the bilateral trade deficit by at least $100 billion. But doing so was not an initial—and certainly not primary—negotiating objective.
By May 2018, when the two sides announced a truce in their Trade War, U.S. officials raised the profile of the trade imbalance – perhaps sensing they’d flunk at persuading China to tackle the most egregious IP practices or surrender its offensive industrial policies.
Yet, in its November 2018 update to its March report, the USTR again emphasised cybertheft, forced technology transfer, discriminatory licensing practices, and state-directed targeted outbound investment – in sum, structural change in the Chinese economy, not trade imbalances. Likewise, in a stinging June 2018 report, the White House Office of Trade and Manufacturing cited China’s “economic aggression” through IP and industrial policy behaviour, effectively declaring the Trade War was about America’s national security.
Well, Chapters 3-6 of the Agreement dwell on the trade deficit. Missing from the deal are obligations for China to cut subsidies and reform state-owned enterprises. These points suggest a ‘D’.
Chapters 1-2 cover some 20th century IP matters (e.g., patent, trademark, and copyright enforceability), but don’t mention cyber-anything. Some of China’s obligations correspond with it’s supposed to have done across the last quarter-century under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. However, the obligations are ‘TRIPs Plus’ on other topics (like trade secrets and forced technology transfer). Similar story on currency manipulation: glad Chapter 5 covers the topic, but the commitments resemble those in previous G-20 communiqués. These provisions merit a ‘B’.
2. Success: Will the Agreement achieve the objectives it addresses?
Some, maybe.
China’s self-interest should cause it to satisfy its Chapters 1-2 IP commitments. Doing so is the Communist Party’s last chance to prove to the world it is serious about IP enforcement and welcomes FDI without forcing investors to hand over trade secrets. The Party has the Year of the Rat (2020) and Ox (2021) to convince the world its IP behaviour is not ratty, and it doesn’t bully foreign companies. That bodes for an ‘A’.
But, the Chapters 3-6 managed trade commitments call for an ‘F’. The table below shows why.
China’s purchase obligations for agricultural and industrial goods, financial services, and energy products over just two years are irrationally exuberant.
What the table doesn’t show is the Agreement fails to address many of China’s non-tariff barriers U.S. manufactured products face, and some NTBs that impede American financial service providers. The table also doesn’t reveal that Chinese refineries are configured for the type of crude oil in which America doesn’t specialise.
3. Transparency: Is the Agreement publicly available?
Yes, except for 2017 baseline figures and product-specific import targets.
Reliable baselines are needed to judge whether China meets its target import commitments in Article 6:2 of the Agreement. Industrial import baselines remain especially unclear.
Product-specific targets ain’t in Annex 6.1 and its attachment. They’re hush-hush so as not to create market distortions. Their publication would give more certainty and predictability to markets, and in any case, all of the targets potentially distort markets.
These points suggest an ‘F’. But, the rest of the Agreement is published, which suggests an ‘A’.
4. Enforceability: Is the Agreement enforceable?
Yes, thanks to ‘hard’ law language in many Agreement provisions, plus an enforcement mechanism in Chapter 7. Sounds like an ‘A’.
Alas, there’s reason for a ‘C’. Chapter 7 leaves undefined the key term to avoid counter-retaliation, “good faith.” So, if the U.S. imposes retaliatory tariffs on China for failure to fulfil its obligations, but China deems the U.S. action in “bad faith,” China can counter-retaliate.
That’ll mean a Trade War all over again.
If the U.S. invokes Chapter 7 and retaliates in “good faith,” then China’s only options are to suffer the penalty – or withdraw from the deal, with a renewed Trade War to follow.
5. Externalities: How does the Agreement affect other countries?
“Who cares?” is the joint Sino-American attitude. That’s why the European Union is contemplating a WTO lawsuit, alleging the Agreement violates multilateral trade rules against managed trade. Along with the EU, India and dozens of other WTO Members are—or better be— concerned about two-directional trade diversion. More American exports to China will mean less of their exports to China (ceteris paribus). And, as the Agreement does not lift the 25 percent Waves One, Two, or Three tariffs imposed by the U.S., Chinese exports will continue to search for third-country markets outlets.
6. Social Justice: Does the Agreement promote social justice?
Nope.
On labour rights, the Agreement is implicitly biased, if not racist. In the United States-Mexico-Canada Agreement re-negotiations, the U.S. successfully advocated for labour rights through auto sector rules of origin and a rigorous labour dispute settlement mechanism. The Republican Trump Administration and Democrat-aligned AFL-CIO joined forces to fight the loss of U.S. jobs to cheap Mexican labour. Raising livelihoods of Mexican workers was more than morally good; it would stem the migration push out of Mexico and pull into America.
Much U.S.-side rhetoric in the Sino-American Trade War and Presidential election is about restoring U.S. manufacturing jobs stolen by cheap Chinese labour. But, the Agreement does nothing to advance Chinese workers’ rights. That’s ironic. The proletariat are the base for any Communist Party, and many blue-collar workers are in Trump’s base. It’s also discriminatory: do Mexican workers matter more than Chinese ones, and American ones most of all?
On climate change, the Agreement is not green, but black.
Annex 6.1 promotes exports of fossil fuels (e.g., coal and crude oil) in China’s import obligations.
7. Tactics: Was the strategy used to negotiate the Agreement effective?
Yes and no. President Trump got China’s attention in a way his previous two predecessors didn’t, and he extracted the most comprehensive deal since China’s December 2001 Protocol of Accession to the WTO. Maybe an ‘A’?
But, his narcissistically populist ‘America First’ ideology impelled his old-school, hard-headed, one-on-one real estate development tactics: squeeze the other side until it suffers so much pain it makes key concessions.
The retaliatory tariff squeeze was no more effective in inducing structural economic reform in China than sanctions were in getting Iran’s theocracy to curb its ballistic missile program and support for its proxies.
Better results might have been had by imagining the Section 301 action (and Iran Nuclear Deal amendments), as a multilateral exercise in partnership with the EU, Japan, and other allies – for sure including India.
His unilateralist tactics bespoke the limits of American power. Made in China 2025, state-owned enterprises, and subsidies are the levers of power for President Xi Jinping to promote Chinese economic growth, which if it keeps slowing, will cause unrest—adding to his crises in Hong Kong and Xinjiang, and with viruses—that will threaten his position. Likewise, Iran’s horrific downing of Ukraine Air Flight 752 hasn’t made Soleimani less of a martyr around whom Iranians can rally against the assassin, America. On China, there is hope for a team strategy with the Jan. 14 EU-Japan-U.S. trilateral statement on subsidy reform. Whither Iran? So, a ‘C’?
Overall Report Card
It’s easy to calculate the Democrats’ Grade Point Average. They’ve not filled out their exam answer sheet. So, they get an ‘Incomplete’.
They’ve had since their first debate in June 2019 to articulate trade, FDI, and IP strategies and tactics. They’ve whined about tariff retaliation and condemned trade deals as corporatist. But they’ve to test better than the President’s ‘C-’. They don’t have much time. Under KU Law School’s Grading System, ‘Incompletes’ change automatically to an ‘F’ at the end of the following semester. The end of next semester is after the November election.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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