US-China trade tensions ratchet up

The article below by Peter Stewart was published on April 11, 2018 in The Analyst column of Interfax Natural Gas Daily, an analytical newsletter focussed on latest developments in the global gas and LNG market.

A trade dispute between the United States and China kicked off in March when US President Donald Trump announced a 25% tariff on steel and aluminium imports from all countries except Canada and Mexico. Since then, the US has proposed additional tariffs on more than 1,300 Chinese goods from the aerospace, machinery, computer and medical industries – sparking threats of retaliatory tariffs from China.

The quarrel has erupted against the backdrop of China’s increasingly assertive profile on the world stage, which has triggered geopolitical tensions between Beijing and Washington. Chinese President Xi Jinping outlined his vision for China’s emergence as a first-rank global power in two keynote speeches in recent months. Beijing has meanwhile accelerated plans to develop disputed islands in the South China Sea, putting it at odds with US allies in the region, including Japan.

But despite the mounting tensions over trade, Washington has talked up the prospect of higher US exports of fossil fuels to China. Peter Navarro, the director of the White House National Trade Council, said last week the US “would love” to export more LNG to China, although he added this would not make a dent in the trade deficit between the countries. “We’re going to do everything we can to sell China more LNG,” he said.

US exports of LNG to China have risen substantially in recent months. The US sent 1.95 billion cubic metres of LNG to China in Q4 2017 – double the total volume exported during the first three quarters of the year – according to Energy Information Administration data. Exports in January 2018 were three times higher year on year.

China has threatened to place tariffs on 106 US products, but so far liquefied propane is the only energy product on the list, and no date has been given for when these measures would start. A variety of specialist petrochemicals and lubricants are also included. Although tariffs on these goods could indirectly affect US petrochemical manufacturers – who typically use ethane from shale production as their main feedstock – fuel exports from the US look unlikely to be affected unless the dispute escalates seriously.

China has prioritised gas in its fuel mix to meet air quality standards and Paris agreement targets. It imported 19.7 bcm of gas in the first two months of 2018, up by more than 40% from the same period in 2017, while gas consumption hit 45.8 bcm, up by 17.6%, according to recent data from the National Development and Reform Commission.

Twin tensions

Global equity markets slumped last week as the risk of a trade war was heightened by Trump’s Twitter remarks, but they rebounded this week after conciliatory comments by Xi. Commodity markets, meanwhile, have become increasingly volatile as the twin threat of heightened tension in the Middle East and the risk of a trade war pulls prices in opposite directions. Brent crude futures recovered to around $71 per barrel after Xi’s comments, having dropped to lows of around $67/bbl last week.

The stakes are high. China bought $130 billion worth of US goods in 2017, making it the third-largest market for US exports behind Canada and Mexico. The US imported more than $500 billion worth of Chinese goods in 2017, resulting in a US trade deficit with China of $375 billion.

Xi has promised to cut automotive tariffs this year as well as to improve intellectual property protection, open up financial services and raise foreign ownership limits within the auto sector.

The US has demanded action rather than promises. Trump had earlier threatened an additional $50 billion in tariffs after an August 2017 probe into Chinese intellectual property theft. China has vigorously denied the US accusations of unfair trade practices and vowed to retaliate if the US puts tariffs on Chinese goods.