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    US, China Clinch "Phase One" Trade Deal

Summary

China has pledged to expand US energy imports by at least $52.4bn in 2020-2021.

by: Joseph Murphy

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US, China Clinch "Phase One" Trade Deal

The US and China have signed a trade deal that lowers US tariffs on Chinese goods in return for a promise from Beijing to buy more US goods, including energy.

The so-called “Phase One” trade agreement, which should help lower the temperature of an 18-month trade dispute between the two countries, was signed in Washington by US president Donald Trump and China’s vice premier Liu He, the White House said on January 15.

“President Trump is making good on his promise to fix the failed policies of the past and deliver fairer trade for the United States,” the White House statement read.

Under the deal, China has committed to expanding imports of a range of US products and services by at least $200bn over the next two years, from a $130bn baseline in 2017. The growth in trade should continue even after 2021, the White House said.

Regarding US energy, China has agreed to increase purchase of products such as LNG, oil and coal by at least $52.4bn over the two years, versus a 2017 baseline of $9.1bn. Chinese imports of US energy products such as LNG, oil and coal, will therefore reach at least $30.1bn in 2020 and $45.5bn in 2021.

Meanwhile, the US is to halve the tariff rate introduced on September 1 on a $120bn list of Chinese goods to 7.5%. A previous 25% tax on $250bn of goods imposed earlier will remain in place, however.

These remaining levies could be lifted if the two sides agree a “Phase 2” trade agreement, Trump said on January 15. The White House had planned to slap tariffs on an additional $160bn of Chinese goods last month, but put the plan on hold as talks made progress. These tariffs have now been suspended indefinitely, as have retaliatory tariffs announced by China.

Chinese tariffs on LNG to remain

In a research note, Edinburgh-based Wood Mackenzie noted that Chinese tariffs on US energy imports still remained in force, undermining plans to increase supplies.

""Let's be clear: $52.4bn over two years is a lot of energy. But neither the 5% tariff on US crude oil nor the 25% tariff on US LNG is to be reduced or removed by China under the Phase 1 deal," WoodMac's Asia Pacific Vice Chair Gavin Thompson commented. "For China to massively increase imports of oil and LNG from the US while tariffs remain in place is going to be challenging."

China imported 1.5mn mt of US LNG in 2017, which WoodMac valued at $0.6bn.

"If China is to increase the value of US LNG imports considerably as a part of this agreement, let's say to around 10mn mt in 2021, then the 25% tariff would need to be either absorbed by the importing company, or passed through to the consumer," Thompson explained.  "We expect that Chinese national oil companies will be reluctant to commit to large-scale purchases given this."

Furthermore, there may not be the demand in China to justify such a significant growth in US supplies, with WoodMac pointing to slower growth in consumption, rising domestic production and the launch of Russia's Power of Siberia gas pipeline to China in December.

"The Chinese uncontracted LNG demand is estimated to be 17mn mt in 2020 and 23mn mt in 2021; US off-takers will now be looking to target this market," Thompson said.  "Contract and portfolio suppliers with contracted supply into China and US offtake – notably Shell, BP and Cheniere – could also target increasing volumes of US LNG within existing contracts into China if agreement can be reached with key buyers, including Cnooc and PetroChina."