Ceasefire Announced in U.S.-China Trade War

By Chris Mitchell, vice president, global government relations

On Friday, December 13, the United States and China announced they had struck a “phase one” deal that effectively pauses the trade war that has flared between the countries over the last two years.

The Trump administration says 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.” It also obligates China to make substantial purchases of U.S. goods and services and establishes a stronger dispute resolution process. In response, the U.S. has postponed new tariffs that were scheduled to go into effect on December 15 and cut the tariff rates on the most recent previous round. To learn more, check out the fact sheet produced by the U.S. Trade Representative.

IPC welcomed news of the “phase one” deal. As documented in a recent IPC study, many IPC members are feeling the pain of higher costs, supply chain disruptions, administrative hassles, and reduced access to valuable markets as a result of the U.S.-China trade war. IPC urged both countries to de-escalate the tensions, suspend the tariffs, and address longstanding disputes through both bilateral negotiations and multilateral dispute-settlement mechanisms.

With this context in mind, here are our top takeaways from last Friday’s announcement:

1. Much remains unclear about the substance of the deal. The text of the agreement won’t be released or signed until January at the earliest. Some critics have suggested that this announcement, like some before, may have been premature given the divergent manner in which U.S. and Chinese officials have characterized the deal.

2. China’s “structural reforms” largely reflect previously announced or enacted commitments. For example, China approved a new foreign investment regime outlawing forced technology transfer earlier this year. It was also months ago when it announced an opening of its financial services sector to spur new foreign investment; and it already pledged new currency commitments at the most recent G-20 summit. Even its intellectual property obligations are strikingly like IP regulations that have been in effect for a year.

3. We know too little about the agreement’s dispute-settlement provisions, which are key to ensuring that each party lives up to its commitments. The USTR says the agreement allows “the parties to resolve disputes in a fair and expeditious manner” and to take “proportionate responsive actions” they deem appropriate. This language sounds promising, but the devil is in the details.

4. China commits to step up its purchase of U.S. goods and services. Under the deal, China has agreed to import $200 billion more in U.S. goods and services over the next two years than it did in 2017. The agriculture sector is the largest single beneficiary; it expects China to purchase $32 billion more in goods and produce through 2021, though China has pushed back on including specific amounts for these purchases. The impact of these purchases on the electronics industry remains unclear. China’s commitment on this issue reflects President Trump’s emphasis on the bilateral trade balance.

5. The U.S. retained 25% tariffs on $250 billion in Chinese imports while canceling tariff hikes scheduled for December. The remaining tariffs disproportionately impact the electronics supply chain, so U.S. electronics manufacturers who import parts, components and materials from China won’t see much immediate relief. However, the tariffs instituted as part of list 4a have been cut from 15% to 7.5%. On the other hand, U.S. original equipment manufacturers dodged a bullet because the new tariffs that were scheduled to go into effect this week would have hit cell phones, laptops, and toys ahead during the holiday season. These products are largely engineered and designed in the U.S. but manufactured in China. For its part, China has agreed to forego new retaliatory duties including those slated for U.S. autos and auto parts.

6. It is not clear if or when negotiations on a “phase two” deal will commence. Initially, the Trump administration suggested that no date had been set but that they wouldn’t begin until after the President’s reelection. However, over the weekend, President Trump tweeted that negotiations would begin right away. The first order of business is finalizing and implementing the phase one deal, including the enforcement mechanisms. Many observers believe that as long as the phase one agreement is finalized in January and the Chinese appear to stand behind their new commitments, additional tariffs are not likely to be imposed in 2020.

7. Both the U.S. and China claim initial victory in a trade war that continues to inflict harm on both countries. The trade war has sapped growth from both economies, and the next round would have hurt both sides even more, so each had reason to strike a deal. In this phase one deal, China gave up very little, but President Trump has kept most tariffs in place and has accelerated the diversification of U.S. supply chains away from China. Meanwhile, he gives the economy more positive news going into an election year.

We at IPC will continue to monitor and report on developments associated with this trade deal, but please don’t hesitate to contact us if we can provide you more information about the impact of this deal on the electronics industry.

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