The next development in trade-war talks hinges on China's intellectual property plan — and whether the US will accept it

The action plan's submission represents "one risk catalyst worth watching," Morgan Stanley analysts said, as the US could decline the proposal and throw a wrench into future trade talks.
The stock market"has priced into everything that China and the US are talking and that, sooner or later, there will be a real deal," Wharton School professor Mauro Guillen said.
The "biggest risk" to investors would be any signal of the negotiations being derailed, the professor added.
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The next major deadline in trade-war negotiations arrives on February 14, when China submits its plan to better enforce intellectual property laws.

Experts are skeptical the Valentine's Day update will do much good for the two countries' trade relationship.

IP protections are a long-standing issue between the US and China. While outlining his economic plan in September 2016, then-candidate Donald Trump promised to "apply countervailing duties until China ceases and desists" from "theft of American trade secrets and intellectual property." Chinese theft of American IP costs the US between $225 billion and $600 billion every year, according to a 2017 report by the United States Trade Representative.

The two economic superpowers inked a phase-one trade deal on January 15, marking the first major deescalation in the global trade conflict. Apart from a partial tariff reduction and mandated orders of US goods by China, the deal lacked specifics and primarily touted agreements from both parties to boost cooperation in the future.

The Trump administration hinted at work on a phase-two deal during the January signing ceremony, yet administration officials have since said the next deal has "no deadlines."

But as economists, investors, and analysts wait for new details on the next step in trade-war deescalation, the smaller February deadline looms. Article 1.35 of the phase-one deal calls on China to submit an "Action Plan to strengthen intellectual property protection" within 30 days of the phase-one deal's signing. The US will then either approve or decline the plan, and some fear the decision could throw a new wrench in the trade negotiations.

The next key risk

While the phase-one trade deal brought few surprises, the action plan represents "one risk catalyst worth watching," Morgan Stanley strategists Michael Zezas and Meredith Pickett said in a January 15 note.

The deal allows both the US and China to "determine the appropriate method of implementing the provisions of this Agreement within its own system and practice," leaving plenty of room for argument come mid-February.

"There could be room for disagreement about what is a sufficient plan for China to address IP issues," the strategists said.

Three years into Trump's first term, relaxed enforcement of IP law remains the status quo for companies based in China. The country's action plan may paint a picture of heightened legal scrutiny around IP theft, but true change will take years, Mauro Guillen, professor of management at the Wharton School of the University of Pennsylvania, said.

"I don't see how, in four weeks, China can put in place a system to ensure that tens of thousands of companies will comply with regulations when they haven't done that in 30 years," Guillen said in a phone interview with Business Insider.

Should the US take issue with the submitted plan or call for stricter language, the delay to business-as-usual for the negotiating nations could pull stocks from their lofty levels. The stock market "has priced into everything that China and the US are talking and that, sooner or later, there will be a real deal," Guillen said. The "biggest risk" to investors would be any signal of the negotiations being derailed, he added.

Plan of inaction

Even if such a plan is accepted, some believe it won't amount to much.

"A plan doesn't mean implementation," Guillen said. "Maybe many of these companies will actually say, 'we don't want to pay for it, so we want to look for some other way.'"

China enacted a number of new IP laws ahead of the deal's signing, establishing legal changes to ban forced technology transfers, strengthen protections for foreign firms operating in the country, and prohibit officials from revealing business secrets. Yet the laws' recent implementation leaves little immediate proof of their effectiveness, and places greater focus on the upcoming IP action plan.

Even if China's proposal falls below standards sought by the Trump administration, the US is more likely than not to accept the deal, Guillen said. Trump has repeatedly touted the phase-one deal as a win for his presidency, most recently at the World Economic Forum in Davos, Switzerland, on January 22. The president "only needs to say 'we can improve this, let's keep going'" if he dislikes the plan, the professor said, and spare himself the tarnishing of his trade-policy record.

"For the US to say 'we don't like this' and hike tariffs, that would set the negotiations back by a few months. I don't think that's going to happen," the professor said.

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The next development in trade-war talks hinges on China's intellectual property plan — and whether the US will accept it

The next key risk

Plan of inaction

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