Coronavirus outbreak may force US, China to rework trade deal implementation

Several weeks have passed since the U.S.-China Phase One trade agreement entered into force, but already there is good news on implementation. China has taken the actions specified in the agreement according to required timeframes, and in some cases has even been ahead of schedule. Beijing has relaxed import restrictions on agricultural products ranging from potatoes to poultry to pet food, has granted approval for a U.S. electronic payments provider to operate in China after several previous delays and has issued exceptions to tariff increases on certain U.S. imports, including certain pork, beef, soybeans and energy products.

China has accomplished this while confronting a national health emergency, the COVID-19 virus. Even with the attention of senior Chinese officials focused on dealing with the health crisis, and some government workers staying at home, China has demonstrated that it is taking implementation of this bilateral deal seriously.

The next notable milestone is mid-March, when China is to issue an Intellectual Property Protection (IPR) Action Plan, detailing its efforts to strengthen its IPR regime, along with specific dates for implementing the range of IPR commitments in the Phase One deal. Based on progress to date, this is expected to be done on time and in good order.

But the good news might stop there. While the “rules” provisions of the agreement are being faithfully implemented, China undoubtedly will find it difficult to meet its purchasing commitments of $200 billion dollars above its 2017 levels over the next two years of U.S. manufacturing, agriculture, energy and services exports. Even in the best of circumstances, reaching these targets seemed like a stretch. With the economic impact of the coronavirus unfolding, what was considered a stretch is looking more and more like a bridge too far. With China’s factories closed or operating below capacity, cancelled flights, slowdowns at ports, weakened consumption and inability of many workers to travel to their worksites, buying tens of billions of dollars of U.S. goods and services in 2020 is just not in the cards.

This is not to mention the economic impact that COVID-19 may have on the United States once it takes firm hold. It’s unclear whether U.S firms will be able to offer China the products and services in the quantities specified in the deal if American workers remain at home, and factories and farms are not operating at full capacity.

While welcoming Chinese implementation of the agreement to date, U.S. Trade Representative Robert Lighthizer and Agriculture Secretary Sonny Perdue made it clear in a statement issued on February 25 that they “fully expect compliance with all elements of the deal.” After going through such a tough and long negotiation, it’s understandable that the administration is giving great weight to the follow-through. But holding on to unrealistic expectations in the face of a global health crisis helps no one. Mistrust would likely grow between the U.S. and China and it would leave the world wondering whether bilateral trade friction may rekindle later this year, at a time when the global economy is becoming increasingly fragile.

The United States and China should get ahead of this curve and send a message to the world that they will work together to recalibrate their implementation expectations. Specifically, they should hold consultations under Article 7.6.2 of the agreement, which calls for such talks “in the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely compliance with its obligations under this Agreement.” The coronavirus clearly fits the criterion. There appears to be a game of chicken going on now with neither side wanting to demand such consultations. Both sides should put these reservations behind them and jointly announce that they will meet (virtually, if necessary) this month to discuss potential challenges in meeting obligations, with a particular focus on the purchasing commitments.

Following these talks, they could issue a joint statement recognizing that unforeseen developments are likely to prevent the timely implementation of the agreement and that they will stay in close contact as developments unfold. They could even be as bold as to extend the time frame by six months for meeting the procurement targets to June 30, 2022.

One final suggestion regarding tariffs: While some are advocating that the United States and China rollback their respective tariff hikes in order to give a needed jolt to the global economy, Treasury Secretary Steve Mnuchin made it clear earlier this week that the United States was not “considering that at the moment.”

But it would make sense to start with a narrower focus. Each country could prioritize those products where tariff rollback would help get needed products to their citizens grappling with the existing or potential fallout of the virus, such as medical, health or cleaning products, as well as items that that would help workers and companies weather the impacts. Relief should particularly be geared toward small and medium-sized businesses, which already are disproportionately hurt in China and likely to also bear the economic brunt in the United States as the virus spreads.

Wendy Cutler is vice president of the Asia Society Policy Institute and a former acting deputy U.S. trade representative.