Clint Eastwood Rides Again

CSIS has done two recent papers on the United States-Mexico-Canada Agreement (USMCA) and the China “Phase One" deal. Rather than repeat those here, I am going to look at them from the perspective of the three categories from the classic spaghetti Western, "The Good, the Bad, and the Ugly." The first item in the good category is the USMCA. I believe it represents a modest improvement over the status quo, but perhaps more important, its approval is an excellent example of how to deal with Congress, which had been looking like a lost art. Whether the USMCA was a one-off event in that regard remains to be seen.

Also, in the good category are some elements of the China Phase One agreement. While much of the public discussion has focused on China's agriculture purchase commitments, more important for the long term will be the many market-opening regulatory commitments China made that will oblige them to accept a range of U.S. products from avocados to barley to blueberries going forward. Clearly, we won't be burying China in blueberries next year, but the opportunity to do so is welcome through these small signs of China's willingness to open its markets.

In the possibly good category are China's commitments on intellectual property and technology transfer. They're good on paper, but we've seen them before—in the case of tech transfer, as long ago as 2001 when China joined the World Trade Organization. This time around they're more specific, and the occasional deadline has been added, which apparently is China's way of saying we broke our word in the past, but this time we mean it. We'll see. If they do, these are definitely in the good category.

In the bad category are the many things missing from the agreement, most notably any references to subsidies, state-owned enterprises, or industrial policy. These are the core structural issues where the United States has demanded Chinese reform. They have been saved for phase two, but readers of my past columns know that I think it is very unlikely any of them will be addressed in any meaningful way. There may well be a phase two, although analysts are beginning to doubt that, but these are core political issues for China. Our demands may be good economics, but concessions in these areas will inevitably undermine Party control, which makes them non-starters for Xi Jinping.

In the ugly category are the agreement's enforcement provisions. First, their intent is clearly based on a “sovereignty is everything” and “might makes right” philosophy. Ambassador Lighthizer has been honest in saying he wants structures in which the United States can get its way because it is bigger and stronger than the other parties. So, his intent is clearly to undermine traditional dispute settlement and rule of law approaches because he believes doing so will work to our advantage. For those who believe in the rule of law and in multilateralism, this is a major attack.

It is possible, however, that it may not turn out as bad as all that. First, it may end up being China-specific. Lighthizer has been clear in saying the current rules don’t fit China—something that many people agree with, and a view that is growing in Europe as well (though their focus is more on enhancing the existing rules than throwing them overboard). This new process was not put into the USMCA or the Japan or Korea agreements. Indeed, while the USMCA weakened the investor-state dispute settlement mechanism (ISDS), it did so largely by limiting its applicability rather than fundamentally changing the process. It is still based on arbitral panels. USMCA also strengthened the state to state dispute settlement provisions by essentially removing a country’s right to block panel formation. That was not Lighthizer’s preference, but he accepted it in discussions with Congress. So, it is premature to assume the China agreement language will become a standard U.S. negotiating objective. In fact, Lighthizer has said more than once that the USMCA is the gold-standard template for future agreements.

Another question is whether other countries will follow suit. In negotiating with the United States, they might get muscled into it; but I don’t see it catching on elsewhere, certainly not with the European Union, which appears to be next in line for a negotiation.

Finally, there is the question of whether it will actually work as intended. The United States wanted the provision because it is skeptical the Chinese will comply with the agreement, and it wanted to lay a foundation for subsequent action without the risk of retaliation once Chinese failure occurred. Many of the Chinese commitments in the agreement are quite specific in terms of both timing and what they agreed to do. The Chinese have a decent record of complying with those kinds of commitments; they tend to honor the letter but not the spirit, so if the letter is carefully drafted, they generally follow through. (There are, of course, exceptions.) That means you may find fewer disputes than people expect.

Does the provision undermine the World Trade Organization? Yes, clearly, as do other administration actions, particularly with respect to the Appellate Body. Should we panic? Not yet and not until we find other countries adopting the same kind of process, which at this point is unlikely.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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