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Beyond the U.S.-China Phase One Deal: It’s Time to Enact Meaningful Change

January 15, 2022 marks the two-year anniversary of the conclusion of the U.S.-China Phase One Trade Deal brokered by the Trump Administration. Throughout his campaign and first year in office, President Biden has underscored the importance of a comprehensive, strategic, and international, coalition-based approach to the U.S.-China trade relationship. Two years and billions of dollars in tariffs later, it is critical that the administration implements a U.S.-China policy that benefits the U.S. economy, U.S. workers, and the supply chain. Here’s how the United States can lead in this consequential relationship and enact meaningful change:

Remove tariffs. The numbers are clear: tariffs are taxes paid for by American companies and consumers. Thus far, they have cost U.S. companies $113 billion during an already economically trying time. There is bipartisan Congressional support for the administration to phase out this overused policy tool. Maintaining leverage is important and achievable through the administration’s continued engagement and cooperation with international allies. To move forward, the president should direct and empower the Office of the U.S. Trade Representative and U.S. Department of Treasury to work out an agreement with the Chinese government that removes the majority of tariffs and tackles issues not fully within the scope of the Phase One Deal.

Supply chain diversification is beneficial, but decoupling is neither feasible nor helpful. Diversification of supply chains is indeed necessary, and the pandemic, as well as government policy, have forced companies to take a hard look at their supply chains and assess over-reliance on one market and single points of failure. But tariffs have pushed it too far – setting up unnecessary hurdles and expenses for U.S. companies. Meanwhile, other economies have been working steadily to remove tariffs, including through trade agreements. For example, the EU and China have lowered tariffs and reduced other trade barriers on an estimated $553 billion and $420 billion in total trade, respectively, in the last decade, compared with $171 billion for the United States.

China is and will remain a manufacturing powerhouse and essential market for the foreseeable future. With a quarter of the world’s consumers, companies cannot afford to ignore China – nor should the U.S. government want them to. Market access abroad yields real and measurable benefits at home, including important funding for research and development, future technologies, manufacturing facilities, and jobs in the United States. Minus a clear and evidence-based national security concern, efforts to uproot and transfer decades of institutional knowledge, expertise, infrastructure, and investment will only damage U.S. and multinational companies’ ability to compete, invest in new technologies, and innovate.

Reject Unsound Metrics of Success and Tackle Unaddressed Technology Trade Issues. Most economists agree: the metric of the trade deficit is a poor indicator of economic strength. The Trump Administration based its Phase One metrics of success largely on purchase commitments and their ability to reduce the trade deficit, which led to an imperfect assessment of progress. The Biden Administration should ensure that they measure economic benefits in the realm of both goods and services trade that go far beyond one-time purchases of goods.

This step is essential to empowering the administration to fully address important technology trade issues not included in Phase One. Those issues include China’s continued reliance on state subsidies to undercut market prices; unfair market access requirements for foreign technology companies, especially in the realm of cloud services and data; and forced partnerships with Chinese companies that offer competitors an inside look into best-in-class U.S. and multinational company operations. These issues are central to U.S. competitiveness and innovation and should be addressed separately from discussions of purchase commitments and in coordination with industry and allies to identify and press for policy changes.

The Phase One agreement laid an important groundwork and precedent during a difficult time and yielded some respectable outcomes. But no agreement is perfect, and the Biden Administration now has an opportunity to address what worked and what did not.

After two years of observing the pros and cons of Phase One, the path forward is clear: the Biden Administration should revisit policies that have disproportionately hurt U.S. companies, workers, and competitiveness and address complex challenges that remain in the U.S.-China bilateral trade relationship. The administration must act now to rescind tariffs and work with allies to press China towards appropriate and achievable goals that will benefit the United States and the global economy.