China’s tariffs make US energy sales to Beijing completely unviable

Beijing has imposed levies of 15 per cent on American coal and LNG and 10 per cent on crude oil

The inland port in Nanjing in China's eastern Jiangsu province. Beijing's tariffs cover between $14 billion to $20 billion of US goods. AFP

US President Donald Trump’s tariffs on Canada and Mexico were over before they even started, courtesy of some cosmetic concessions. Those on China look more serious: the opening shots of a bigger trade war.

Even if a promised meeting between Chinese leader Xi Jinping and Mr Trump yields fruit, further confrontation is only postponed.

The US imposed a 10 per cent tariff on Chinese goods, on top of existing levies. In his election campaign, Mr Trump had promised a 60 per cent charge on all Chinese imports. The pretext is China’s provision of precursor chemicals used to make the drug fentanyl; the obvious reason is superpower rivalry.

Beijing responded by imposing tariffs of its own: 15 per cent on US coal and liquefied natural gas, 10 per cent on crude oil, among targeted goods. They cover between $14 billion to $20 billion of US goods − or less than 10 per cent of China’s imports from its trans-Pacific rival in 2023.

There are also export curbs on critical minerals, such as tungsten, antimony and indium and some graphite products, and technologies related to lithium, gallium and rare earths. These have various applications in batteries, electric motors, semiconductors and other key technologies.

If there is to be a trade war, neither country is entering in a very favourable position

Overall, China’s response is quite measured and moderate. But its tariffs would make US energy sales to China completely unviable, given the abundance of competitive alternatives. China has gorged on Russian oil since Europe banned it following the invasion of Ukraine in 2022. Though China was still a significant importer of US crude last year, buying 220,000 barrels per day on average, that was down from 411,000 bpd a year earlier, and China is only the US’s sixth biggest customer. Beijing bought just 2 per cent of its oil imports from the US.

Former US president Joe Biden imposed new sanctions on Russian oil on his way out of the door, and the US has also returned to threats of “maximum pressure” against Iran, whose only real customer for oil is China. It will be hard to push Beijing on petroleum trade on three fronts.

The US is also far behind Australia, Qatar and Russia as a provider of liquefied natural gas to China; even less important when considering the imports of gas by pipeline from Russia and Turkmenistan. China was important as a fast-growing LNG consumer, creditworthy and able to sign long-term contracts to underpin construction of new US liquefaction plants, but that prospect had already faded in Mr Trump’s first term.

The Gulf countries and Iraq will easily be able to fill in any gaps in China’s LNG and oil procurement as US buyers are pushed out of the market. Adnoc’s new LNG plant at Ruwais has already signed up most of its output, including one deal with China’s ENN, but it could see further opportunities. Even more, Qatar will gain: it has still to sell a large part of the intended production from its huge ongoing expansion, and it has brought in big Chinese companies as equity partners.

Finally, US sales of coal to China are pretty minor, bringing in $1.8 billion last year. But China is the US’s second-biggest customer, and tariffs will not help Mr Trump’s already hollow promises of reviving US mining.

Peter Navarro, Mr Trump’s trade adviser and a known tariff advocate and China hawk, said his boss would speak to Mr Xi, raising hopes of an early resolution.

In January 2020, the two nations signed an initial trade deal promising China would buy an extra $200 billion of US goods over two years. None of this ever happened, and probably wouldn’t have even if the Covid pandemic had not intervened. Any cosmetic arrangement reached now will suffer the same fate.

If there is to be a trade war, neither country is entering it in a very favourable position. The Chinese economy has slowed, cutting the rate of growth of its energy imports and making the bilateral deficit with the US even less resolvable. It needs its cleantech manufacturing sector to keep growing exports. However, it can devalue to stay competitive even in the face of some tariffs.

Canada and Mexico hit back after Trump imposes heavy tariffs

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The US, meanwhile, has kicked off by alienating allies. The Mexican and Canadian economies together are about 15 per cent the size of the US. Their tight integration into the North American economic bloc − especially of energy, minerals and vehicle manufacturing − is crucial to building the scale and efficient supply chains needed to compete with the Chinese juggernaut.

Now they are inevitably going to hedge their bets and seek trade partners elsewhere. That would lower their bilateral deficits with the US, a meaningless measure but one psychologically important for the transactional Mr Trump. And they need alternatives, to reduce their vulnerability to the next round of pressure, and absorb the impact.

Europe is next on the White House’s hit list, and a more formidable trade opponent than Canada or Mexico. On January 20, Mr Trump demanded the bloc buy more American oil and gas. It may do in the short term, as remaining Russian purchases dwindle and tariffs divert US LNG from China. But Brussels wants to phase out fossil fuels, and now it has even more reason not to be dependent on either its big eastern or western neighbours. If US LNG suddenly looks unreliable, that raises the risk that Germany or others blunder into the calamitous error of dealing with Moscow to revive Russia’s gas exports.

The latest tariffs, both those from the US and China, don’t threaten any dramatic energy supply disruptions or price spikes. But from a world that was extremely free in energy trade up to the global financial crisis, they add to fragmentation and friction. Prices will be higher, innovation less, decarbonisation slower, and a Xi-Trump handshake won’t change that reality.

Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis