The United States and China on January 15 signed a ‘Phase One’ trade deal. According to a Fact Sheet released by the United States Trade Representative (USTR), the deal “requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.”
The deal also includes a commitment by China that it will make substantial additional purchases of US goods and services in the coming years; establishment of a strong dispute resolution system intended to achieve prompt and effective implementation and enforcement; and an agreement by the United States to modify its Section 301 tariff actions in a significant way.
The ‘Phase One’ deal represents an important step in US-China economic and trade relations. However, the Lists 1-3 and 4A tariffs on Chinese goods remain in place, albeit at lower rates with respect to List 4A. Significantly, ‘Phase One’ now establishes the ‘new normal’ for relations with China; that is, US businesses subject to tariffs before will continue to face tariff pressures, but the risk of future tariff increases and the problem of uncertainty in general have diminished. The risk instead relates to the extent to which China meets, or is viewed as meeting, its new commitments as memorialized in the ‘Phase One’ document.
While this new level of certainty, especially after a long period of business-worrying uncertainty, is a welcome change, US companies whose supply chains flow through China still must continue to scrutinize their imports, supply chains, and sourcing patterns. Businesses must determine the impact of the various tariffs, particularly now that it seems clear that the tariffs will be in place through 2020 and quite probably beyond. The prospects of a ‘Phase Two’ deal remain unclear and far off at best, potentially not materializing until after the November 2020 US elections. Affected companies therefore should engage in possible mitigation strategies via the use of available analytical tools.