Editorial: US-China trade – a win for whom? [LNG Condensed]
China and the US in January signed their Phase 1 trade deal, but it is far from a major victory for anyone. First, a high level of tariffs, covering about $360bn worth of Chinese imports to the US and more than $100bn of goods flowing in the other direction, remain in place, not least a 25% tariff on Chinese purchases of US LNG.
Second, this is not a deal which promotes free trade, but one which, by requiring Chinese purchases of US goods, perversely may mean even more state intervention in the Chinese economy, as well as risking damage to both China and the US’s trading relations with other partners.
Third, many issues remain unresolved and have been left for Phase 2. No one knows at this point how these negotiations will progress, and how the US will choose to exert leverage in the process. This represents a continuation of the new level of risk in US-Chinese trade relations.
Sticking to the deal
A key element of the agreement is that China boosts its purchases of US agricultural goods by $32bn over the next two years, compared with 2017 levels. For energy products, China must spend $52.4bn, spread over LNG, crude oil, refined products and coal. It is not clear this will happen.
The agreement says, “purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.” Chinese statements regarding the agreement have said Chinese imports would be based on market demand in line with the country’s economic growth.
Moreover, how are Chinese LNG buyers supposed to increase their purchases of US LNG in the face of a 25% import tariff? It will be easier to increase crude purchases which attract a 5% tariff. Tariffs on refined oil products, which China needs less, are even higher than for LNG.
The current Chinese import tariff structure appears incompatible with the hike in US energy product purchases required under the Phase 1 agreement, while the disparity in positions suggests the terms of the Phase 1 agreement may not be adhered to, raising the possibility that the US cries foul and reverts to a more aggressive strategy.
Building long-term relations
As such, the Phase 1 agreement does not bring much stability to US-China trade relations. In this context, how likely is it that Chinese LNG buyers will be willing to sign off-take agreements for US LNG, and, even if they do, will financiers attach a higher level of risk to such an agreement in comparison to one with a Japanese or South Korean buyer?
The array of new US LNG projects which remain at the pre-final investment decision stage need long-term partners rather than relying on an uncertain spot market. Without off-take agreements they cannot go to the banks for the capital required for these multi-billion-dollar investments.
China is an obvious source of off-take agreements. According to the International Energy Agency’s (IEA) World Energy Outlook 2019, China’s demand for natural gas will double over the next two decades, rising 370bn m3, more than the rest of developing Asia combined.
Net imports of natural gas from all sources to China are forecast to increase from 122bn m3 in 2018 to 353bn m3 by 2040. LNG will dominate the growth in global gas trade, with Chinese LNG exports rising close to 200bn m3/yr by 2040, compared with 73.5bn m3 in 2018, the IEA estimates.
LNG trade impacts
The 25% tariff on US LNG exports to China, if maintained, will shape the LNG industry in very particular ways -- both positive and negative.
On the one hand, it makes adherence to the Phase 1 deal difficult. And if US LNG lacks access to the Chinese market, it will make Europe a key battleground between Russian pipeline imports and the US, suggesting further attempts by Washington to affect the progress of major Russian pipeline projects such as Nord Stream 2.
On the other, it may hand a bonus to portfolio players, which can act as middle men between US LNG producers and Chinese buyers, optimizing multiple supply sources around the tariff barrier.
But the bottom line is that Phase 1 of the US-China trade deal entrenches distortions in the world economy and the LNG industry, owing to the US’ withdrawal from multilateral rule-based trade agreements in favour of a bilateral, preferential approach. If such agreements remain in place, they will shape the world economy and LNG industry for decades to come.