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NorthAmOil COMMENTARY NorthAmOil
Concerns voiced on viability of US- China deal’s energy trade targets
The US and China have signed a preliminary trade deal, amid concern that the energy purchase commitments set out in the agreement could be too ambitious
US-CHINA
WHAT:
Energy trade targets set out in the preliminary deal between the US and China could be unrealistic.
WHY:
The deal calls for China to increase its US energy purchases by $52bn over two years, up from $8bn in 2017.
WHAT NEXT:
Some expect China to lower or remove its tariffs on US LNG in order to meet its trading commitments.
AN initial deal was signed by the US and China this week, bringing about a pause in a trade war between the two countries that has been under- way for almost two years. However, concerns were quickly raised about how realistic some of the targets set out in the deal are, including those pertaining to energy trade. At first glance it seems that both the US and China are still manoeuvring for advantage, and the potential for a re-escalation of tensions between the two remains.
Trade targets
US President Donald Trump and Chinese Vice Premier Liu He signed the “Phase One” trade deal on January 15, providing Trump with a boost in an election year. Under the deal, China has committed to stepping up its purchases of US goods and services by $200bn over the next two years. This includes a commitment to spend $95bn more on commodities within that timeframe – with energy purchases comprising $52bn of that figure.
The details of the Phase One deal have been met with scepticism over China’s ability to fulfil its purchasing commitments. In order to achieve the total promised increase in purchases, US exports of goods and services would have to expand by almost 56% year on year in 2020.
In the area of energy, US energy exports to China totalled $8bn in 2017 according to the New York Times, before dropping sharply from
2018 as a cycle of retaliatory tariffs began. Under the new deal, China has committed to surpass- ing its 2017 energy purchases from the US by $18.5bn this year and $33.9bn in 2021. Bloomb- erg, meanwhile, noted that prior to the trade war, monthly US oil and gas exports to China peaked at around $1.5bn – about 25% below the average volumes required over two years to meet the new target.
According to Bloomberg’s calculations, if China were to buy all of the LNG the US is expected to export in 2020 and 2021 at last year’s average North Asia spot price, it would equal roughly $12bn in 2020 and $17bn in 2021. This falls considerably short of the Phase One deal’s targets, and purchases of crude oil and petro- chemical raw materials would be anticipated to make up the balance.
Such a dramatic ramp-up in oil and gas trade would be challenging to achieve at the best of times, but the picture is complicated by the fact that Beijing has made no explicit commitment to eliminate tariffs on imports of US energy. These tariffs currently stand at 5% for crude and 25% for LNG. The tariff on LNG in particular is thought to be prohibitively high, with no new US LNG cargoes having been delivered to China since March 2019.
“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 orremovedbyChinaunderthePhaseOnedeal,”
US President Donald Trump and Chinese Vice Premier Liu He signed the “Phase One” trade deal on January 15.
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Week 03 22•January•2020