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UPDATE 1-In U.S.-China Phase 1 trade deal, enforcement may end in 'We quit'

David Lawder

(Adds enforcement details, quotes from Lighthizer, analysts)

WASHINGTON, Jan 15 (Reuters) - The Trump administration is touting the U.S.-China Phase 1 trade deal's dispute settlement and enforcement mechanism as the major difference between the 86-page agreement unveiled on Tuesday and past pledges by Beijing to change its trade practices.

But the final result of any dispute that prompts new U.S. tariffs to be slapped back on Chinese goods could tear the whole trade deal apart, according to the text of the agreement released on Thursday.

U.S. Trade Representative Robert Lighthizer insisted on a strong enforcement mechanism "with real teeth" to hold China to its Phase 1 pledges to protect American intellectual property, curb the forced transfer of U.S. technology to Chinese firms and boost purchases of U.S. goods and services by some $200 billion over two years.

The teeth in the mechanism are a familiar Trump administration tool: the imposition of tariffs in proportion to damage caused by any non-compliance.

But according to the text, if the offending party disagrees with such a result, its only recourse is to quit the agreement. There are no provisions for appeal or levying retaliatory tariffs.

"If the Party Complained Against considers that the action of the Complaining Party was taken in bad faith, the remedy is to withdraw from this Agreement by providing written notice of withdrawal to the Complaining Party, the text states.

A Trump administration official said that "bad faith" and "good faith" were undefined in the agreement, but actions would be based on facts and economic impact.

Under that scenario, an enforcement action could cause the agreement to collapse, China trade experts say. Some other U.S. trade deals, such as the new U.S.-Mexico-Canada Agreement, employ third-party arbitration panels to settle disputes.

"The Phase 1 enforcement mechanism is very simplistic. It's basically a one or a zero - an on or an off," said Scott Kennedy, an expert on Chinese economics at the Center for Strategic and International Studies in Washington.

"One side will risk scuppering the entire thing over an implementation dispute," he added.

90-DAY CONSULTATIONS

Trump administration officials insist that they have set up a robust process for resolving disputes, with each country opening an enforcement office to field and review complaints about compliance.

Those grievances will be aired through a series of consultations with escalating levels of officials over a roughly 90-day period before penalties can be levied.

The two countries have also agreed to revive regular trade consultations, with monthly working-level meetings, quarterly deputy meetings and semi-annual ministerial level conferences, similar to past U.S.-China economic dialogs.

"Ultimately it's the president who is going to make the call" on whether a problem is big enough to levy tariffs, said Derek Scissors, a China scholar at the American Enterprise Institute. "If they're making the purchases, he's likely to be happy."

Lighthizer acknowledged on Tuesday that the dispute settlement plan was untested, telling reporters that the agreement "will work if China wants it to work."

"Do I think we'll be tested and have cases? Yeah, absolutely," he said. "And we'll find out. If the dispute settlement process works, we're going to be OK, and if it doesn't, we won't."

But he said he would use the process to enforce the agreement "to the letter."

(Reporting by David Lawder; Editing by Jonathan Oatis and Peter Cooney)