BREAKING NEWS: U.S.-China Phase 1 Deal is Officially Signed

On January 15, 2020, U.S. President, Donald Trump, and Chinese Vice Premier, Liu He, signed the U.S.-China Phase 1 Deal in the White House. The partial trade deal is an eight-part agreement consisting of 94 pages.

   

Simultaneously, the Office of the United States Trade Representative (USTR) published a Federal Register Notice announcing tariff changes in accordance with the President’s direction (tweeted December 13, 2019) to modify the action taken pursuant to the Section 301 investigation.

Tariff Changes

The Federal Register Notice, entitled, Notice of Modification of Section 301 Action: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation establishes that importers subject to List 4A will transmit their entry to CBP with the product classification and the second HTS provided in the Federal Register Notice (9903.88.15) indicating their product is subject to List 4A and starting February 14, 2020 the rate of duty will be reduced from 15% to 7.5% for such products. 

Here is an outline of the modification:

• The rate of additional duty on List 4A products of China is reduced from 15 percent to 7.5 percent.
• This modification will be applicable as of 12:01 am Eastern Standard Time on February 14, 2020.
• An annex that amends the Harmonized Tariff Schedule of the United States (HTSUS) to include the duty reduction

Subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States is modified as follows:

1. By amending U.S. Note 20(r), as established by the U.S. Trade Representative in determination contained in 84 FR 43304 (August 20, 2019), and as modified by 84 FR 45821 (August 30, 2019), by deleting “15 percent” each place that it appears, and inserting “7.5 percent” in lieu thereof; and
2. By amending the Rates of Duty 1-General column of heading 9903.88.15, as established by the U.S. Trade Representative in a determination contained in 84 FR 43304 (August 20, 2019), and as modified by 84 FR 45821 (August 30, 2019), by deleting “15%”, and inserting “7.5%” in lieu thereof.

The Phase One Deal between the United States and China aims to eliminate the acts, policies, and practices covered in the ongoing USTR Section 301 investigation. The notice of modification from the USTR is consistent with the Phase One Deal goals.

Phase One Deal in a Nutshell

The Chinese have pledged to purchase more of American farm, energy, and manufactured goods in exchange for the U.S. to cut tariffs on Chinese goods. The deal addresses complaints made by the U.S. regarding discriminatory and unreasonable intellectual property practices. 

The following highlights key points included in the text of the Phase 1 Deal - USTR Phase 1 Factsheet

• Intellectual Property: The Intellectual Property (IP) chapter addresses longstanding concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods. USTR Intellectual Property Factsheet
• Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. USTR Technology Transfer Factsheet
• Agriculture: The Agriculture chapter addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. USTR Agriculture and Seafood Provisions Factsheet
• Financial Services: The Financial Services chapter addresses a number of longstanding trade and investment barriers to U.S. providers of a wide range of financial services, including banking, insurance, securities, and credit rating services, among others. USTR Financial Services Factsheet
• Currency: Addresses unfair currency practices by requiring high-standard commitments to refrain from competitive devaluations and targeting of exchange rates, while promoting transparency and providing mechanisms for accountability and enforcement
• Expanding Trade: The Expanding Trade chapter includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. USTR Expanding Trade Factsheet
• Dispute Resolution: The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner.

Key Outcomes from the Deal

Intellectual Property - USTR Intellectual Property Factsheet

• The deal requires China to expand the scope of civil liability for trade secret misappropriation beyond entities directly involved in the manufacture or sale of goods and services
• Trade secret owners can bring suit against any natural or legal persons, including individual former employees or cyberhackers
• When undisclosed information, trade secrets, or confidential business information is submitted to the central or sub-central levels of government, prohibit the unauthorized disclosure of such information by government personnel or third-party experts or advisors

Technology Transfer - USTR Technology Transfer Factsheet

• The parties have agreed to the following:
  • Prohibit the forcing or pressuring of foreign companies to transfer their technology as a condition for market access, administrative approvals, or receipt of any advantages
  • Require that any transfer or licensing of technology be based on market terms that are voluntary and reflect mutual agreement

Agricultural and Seafood Related Provisions - USTR Agriculture and Seafood Provisions Factsheet

• Purchases: China will purchase and import on average at least $40 billion annually of U.S. food, agricultural, and seafood products, for a total of at least $80 billion over the next two years.
• Domestic Support: China has agreed to abide by its current World Trade Organization (WTO) obligations on the transparency of its domestic support measures.
• Agricultural Biotechnology: China has agreed to implement a transparent, predictable, efficient, science and risk-based regulatory process for the evaluation and authorization of products of agricultural biotechnology.

Financial Services - USTR Financial Services Factsheet

• Securities Services: By April 1, 2020, China will eliminate the foreign equity cap for securities companies, expanding opportunities for wholly U.S.-owned suppliers of securities services.
• Banking Services: China will expand opportunities for U.S. financial institutions, including bank branches, to supply securities investment fund custody services by taking into account their global assets when they seek licenses.
• Fund (Asset) Management Services: By April 1, 2020, China will eliminate the foreign equity cap for fund management companies, expanding opportunities for wholly U.S.-owned suppliers of fund management services.

Macroeconomic Policies and Exchange Rate - USTR Macroeconomic Policies And Exchange Rate Factsheet

• The chapter addresses unfair currency practices by requiring high-standard commitments to refrain from competitive devaluations and targeting of exchange rates, while significantly increasing transparency and providing mechanisms for accountability and enforcement.

Expanding Trade - USTR Expanding Trade Factsheet

• China’s imports of U.S. manufactured goods, such as industrial machinery, electrical equipment, pharmaceutical products, aircraft, vehicles, optical and medical instruments, iron and steel, solar-grade polysilicon, hardwood lumber, and chemical products, among other goods, will total at least $120.0 billion in 2020 and at least $131.9 billion in 2021.

 

As per our previous blog, President Trump tweeted that tariffs of 7.5% of List 4A would be included in the Phase One Deal. However, it is not discussed in the eight-part Agreement. We still anxiously await updates on the status of the tariff reduction and confirmation that the 4B tariffs are indefinitely stayed. Further negotiations will take place during for the Phase Two Deal which will begin this upcoming Wednesday. 

For background information on China Tariffs and numerous ways to mitigate the effect of the China tariffs, check out our previous blogs. Diaz Trade Law has assisted clients in assessing their best options to prepare or mitigate the China tariffs and submitted comments and exclusions. Our Customs and International Law attorneys are available at 305-456-3830 or info@diaztradelaw.com.