The “Phase One” Deal concluded between the United States and China on January 15, will enter into force on February 15. Canada will benefit from the improves to be made to the Chinese intellectual property regime. The chapters relating specifically to the US-China relation is however likely to cause a trade diversion which may harm Canadian industries, especially the agricultural one.
The provisions ruling the trade between the parties—on American agricultural standards and purchase commitments—appear to be contrary to some GATT and GATS provisions, notably the Most Favoured Nation Clause. In addition, the agreement does not seem to fit under either GATT article XXIV or under GATS article V on regional agreements as it raises barriers to the trade for other parties.
The agreement is made of seven principal chapters which are summed up:
AGRICULTURE AND TRADE EXPANSION
The kernel of the agreement is the agricultural sector. A whole chapter is dedicated to the facilitation of agricultural goods between the two blocks. Moreover, these commodities constitute an integral part of the goods listed in the “Expansion of Trade” chapter according to which China must increase its imports of American products of at least USD 200 billion compared to 2017 import levels. In 2020–2021 the increase is to be devised as follows: $77.7 billion for manufactured goods, $52.2 billion for energy products, $37.9 billion for services and $32 billion for agricultural products. On request, the US is also entitled to require additional Chinese purchases of agricultural goods for $5 billion a year. The agreement contains no less than 25 pages encompassing the HS tariff codes of goods and services pertaining to the expansion of trade aims.
INTELLECTUAL PROPERTY AND TECHNOLOGY TRANSFERS
China must come up with an implementation plan relating to the changes it has to bring to its intellectual property regime by March 15, 2020. One of the most significant changes relates to the protection of trade secrets. From now on, if there is reasonable evidence that a trade secret has been misappropriated, the burden of proof shifts to the defendant in civil law procedures. On the criminal law side, in case of misappropriation, the plaintiff will not need to evidence any prejudice so as to engage judicial procedures. Electronic intrusions and breaches to a confidentiality duty will also have to be subject to the Chinese legislation and Chinese authorities will have to issue preliminary injunctions whenever necessary. A consequential gain concerns the automatic destruction of counterfeited goods which will not be allowed anymore into the market following the mere removal of the fraudulent trademark affixed on it. The agreement also includes provision specific to the pharmaceutical industry which will benefit from extended patents in case of abusive treatment delays.
The provisions relating to the Geographically Protected Indications (GPI) will likely provoke sharp reactions from the Europeans, as China committed to avoid that the GPIs hinder the purchase of American products using terms deemed generic.
The Chinese undertakings on technology transfer should also profit our companies. By virtue of this agreement, technology transfers will need to be based on market terms and be strictly made following the parties’ free will. The Chinese government thence committed to refrain from pressuring foreign companies in order to push them to licence or sell their technology.
EXCHANGE RATE MATTERS AND FINANCIAL SERVICES
By virtue of the agreement, China doubly committed to abstain from devaluating the renminbi. On one hand, the agreement reiterates the obligations stemming from the International Monetary Fund Statutes, notably the obligation to eschew competitive devaluations. On the other hand, the agreement institutes per se this same obligation so that it be subject to its enforcement mechanism; it as well includes provision inciting China to adopt a floating exchange rate system.
The section on financial services only impacts American companies; it is nonetheless interesting to note that the stake ceiling for American actors in the banking and insurance industries will be lifted. American companies will have a greater access to the banking market, including health and life insurance.
Notwithstanding the chapter’s heading, the agreement between the US and China does not, strictly speaking, include a dispute resolution mechanism. Indeed, the chapter does not provide for a third-party arbitrator to decide between the parties’ claims; it is rather a disguised consultation mechanism aiming to spare the Chinese sensitiveness. The consultation process is two-fold, it first operates on a designated agent level; if discussions at such level prove themselves unsuccessful, the United States Trade Representative and the Chine Vice-Prime Minister will step in. Following those consultations, if a party deems that the measures taken by the other are in good faith, it will refrain from taking countermeasures. Yet, if this party deems that such measures have not been taken in good faith, the only possible outcome is to engage the withdrawal procedure from the agreement. A provision also enables the parties to contravene to the obligations provided for in the agreement in case of natural disaster or occurrence of events out of their controls. Such occurrences must still need to lead to consultations between the parties.
It will be important to closely monitor the agreement’s implementation throughout 2020. The chapter on trade expansion is likely to be detrimental to the business opportunities of our companies, nay to prejudice them should a replacement of our exports by American substitutes happen. Companies should consequently make a constant follow-up with their Chinese buyers in the event that the products they sell in China appear on the list of goods China committed to buy to the US under the Trade Expansion chapter.
The implementation plan of the chapter on intellectual property protection and its advancement should likewise be kept a close watch on, considering the opportunities and better guarantees for foreign companies operating in China. The durability of the deal is likely to be compromised given the insatiable urge of the US for additional reforms and the probable consternation of thereof by the European Union.
For more information on these developments and the potential impact they may have on your business, please contact Bernard Colas or one of our other CMKZ lawyers specializing in international trade law.