Trade Agreements and COVID-19: A Changing Relationship

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Since the start of this year, trade relations with China, previously marked by an escalating trade war, have reached a major inflection point. Recently, on March 12, the U.S. reacted to the growing COVID-19 pandemic by announcing new exclusions from its 25% tariff on $200 billion worth of products imported from China. In addition, on January 15, 2020, the U.S. and China entered into phase 1 of an economic and trade agreement. This agreement follows extensive actions taken by the U.S. trade representative against China under section 301 of the Trade Act, actions which were designed to curb China’s unfair trade practices, including misappropriation of intellectual property and unfair market barriers. In this agreement, China makes numerous one-way concessions in order to demonstrate its willingness to deal further with the U.S.

March 12 Exclusions

As of March 12, 2020, the USTR has announced that five HTSUS (Harmonized Tariff Schedule of the United States) subheadings are excluded from Section 301 tariffs on certain products from China. The products contained within these five subheadings are all part of the “$200 billion action” taken on September 24, 2018, where a 10% tariff was announced on 5,757 HTSUS subheadings. In May 2019, this 10% tariff was increased to a 25% tariff. These exclusions appear designed to lessen the burden on importers attempting to obtain products such as plastic bags/garbage bags, sanitary gloves, and other hygienic products in order to fight the novel coronavirus. The following HTSUS subheadings are affected and have had their tariff reduced by 25%:

  • 3923.21.0030
  • 3923.21.0095
  • 3926.20.9050
  • 4015.19.1010
  • 5603.12.0090

Phase 1 Trade Agreement

Intellectual Property

At first glance, the deal seems to be significant for intellectual property (IP). The first two chapters focus on IP, with many more impositions on China than on the U.S. In Chapter 1, China essentially agrees to reform their IP protections to be more like ours. They promise to strengthen protections of patents, trademarks, and trade secrets. They promise to process pharmaceutical patents more efficiently. They promise to police physical and e-commerce markets. These promises are a big step forward.

But they are only promises, and this is only Phase 1. The deal can be terminated at any time by either party. Before moving to take advantage of strengthened IP in China, protect yourself. There is no guarantee that China will follow through. (As just one interesting development, Chinese researchers have applied for a Chinese patent on Gilead’s drug that might fight the coronavirus. On the one hand, this could restrict Gilead’s rights in the drug. On the other hand, this is less heavy-handed than the available “compulsory license” procedure.) China might be signaling their sensitivity to the balances inherent in IP rights. And we don’t yet know exactly what their new rules will look like, nor how they will be enforced. Continue to aggressively protect your IP when doing business outside the U.S.

Pharmaceuticals

Currently, the disclosure requirements in China when applying for pharmaceutical patents are stringent. The deal requires China’s patent office to consider post-filing supplemental data. This should ease the burden of satisfying those requirements.

China also strengthens the value of such patents. They promise “expeditious” resolution of pharmaceutical patent disputes and “effective and expeditious” enforcement against counterfeit medicines.

Biotechnology

The long Annex 16 to Chapter 3 widens the path for agricultural biotechnology in China. The parties aim to build “public confidence in, and acceptance of, the use of safe biotechnology in the agriculture and food system.” China will be required to use only “science- and risk-based” reasons for authorizing biotech products.

Trade Obligations

The agreement contains some concrete provisions regarding food and agriculture trade between the U.S. and China. As was the case with the agreement’s IP section, the majority of these provisions place obligations on China. The trade section of this agreement touches on products such as dairy, infant formula, livestock, and rice.

The agreement requires China to recognize equivalence in safety standards between U.S. and Chinese regulatory agencies. For example, the agreement requires China to accept the U.S. dairy-safety system as providing at least the same level of protection China’s dairy-safety system. The agreement also has similar provisions for beef, meat, poultry, processed meat, and infant formula.

The agreement provides China some ability to inspect and audit certain U.S. agriculture processing facilities. This is notable as the only significant section in the entire agreement that provides any unilateral right on the part of China.

Finally, the agreement is a large step forward for certain exporters to China, as it obligates China to purchase certain annual amounts of products from the U.S. The full list of HTSUS codes applicable to each quota are outlined in Annex 6.1, but the general categories are manufactured goods, agricultural products, and energy exports (including natural gas, coal, crude oil, and other refined products), as well as certain exported services (which include business travel/tourism and cloud services). The agreement obligates China to, in total, purchase an additional $76.6 billion in products from the U.S. in the first year of the agreement, and an additional $123.3 billion in the second year of the agreement. Both of these amounts are on top of the established 2017 baseline trade.

Moving Forward

This agreement is a strong first step, and while many of its terms and sections are aspirational, it does have concrete provisions that benefit U.S. producers looking to export into China. Furthermore, this agreement has already lessened trade tensions between the U.S. and China. On February 20, the U.S. cancelled an increase in across-the-board tariffs on China, reducing the amount from a 15% tariff to a 7.5% tariff. In doing so, the U.S. trade representative said that the decision was based, in large part, on the finalization of phase 1 of the trade agreement.

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