Trade wars are contests in masochism.
The US Trump administration struck the opening blows but China has already identified energy as a key pain point. Oil, gas, coal and solar power are all set to take some bruises.
In January, the US put a levy of 30 per cent on all imported solar cells, and at the end of May, it imposed tariffs on steel and aluminium from the EU, Mexico and Canada. A compromise was announced in May over US demands that China reduce its $375 billion annual trade surplus with the US by $200bon. China’s growing economy was in any case set to take more energy and agricultural produce from America.
Yet after talks predictably broke down, on June 15 the White House unveiled tariffs on $50bn of Chinese imports, including 25 per cent on solar panels. Beijing has announced it will respond with tariffs on many American goods, including 25 per cent on oil, propane, petrochemicals and coal, on July 6. Natural gas in its liquefied form, LNG, is not yet on the list.
The Middle Kingdom has very swiftly become the largest importer of US petroleum, a forecast 450 000 barrels per day in July, worth some $12bn over the course of a year, as producers seek outlets from a continent flooded with crude. As it converts polluting coal-burning heaters and industry, it is buying more liquefied natural gas (LNG) from the US, with a potential $20bn to $30bn of yearly sales. Sales of ethanol, made from corn and used as a petrol substitute or additive, could add another $5bn to $7bn. And its coal purchases from the US doubled last year to almost 6 million tonnes, worth some $500 million.
The ceiling on further imports is not set by Chinese trade policy or even its economy, but simply the limitations on US production and export capacity, with pipelines from the inland Permian Basin of West Texas already full to capacity, and new LNG export plants yet to be completed.
The shale revolution has had a positive impact on the American economy, but not changed its overall trade position. The US’ petroleum trade deficit is now barely a tenth of its peak level of 2008, but the deficit on all trade is unchanged. Dollars that were used to buy foreign oil are now used for other products, just as economic theory would predict. And focusing on a bilateral deficit, even with a country as important as China, is yet more nonsensical.
The modern Republican party appears to welcome Soviet-style policies of managed trade, and is more concerned about selling coal and soya beans than building a high-tech economy. Such a mercantilist agenda of “energy dominance” is an intolerable threat to powerful independent nations.
The US, which had quotas on imports of oil from 1959 until 1973 for spurious national security reasons, blocked China National Offshore Oil Company’s attempt to buy independent oil firm Unocal in 2005, and banned exports of its own oil for 40 years until 2016, has a poor record on free trade in energy. A serial imposer of energy-related sanctions on countries such as the Soviet Union, Iran, Iraq, Libya and Sudan, it has recently targeted three leading oil and gas exporters, Russia, Venezuela and (again) Iran.
As their exports are hampered, the US might have expected to take markets for its LNG in Europe and oil in Asia. China, Japan and South Korea have always been concerned about over-reliance on the Middle East; Europe, over Russian gas.
Chinese tariffs will make US energy imports uncompetitive. To some extent, American oil and LNG exports will simply be redistributed, with consumers paying the cost. Iran, offering discounts to beat sanctions, will be a key alternative for China. But trade barriers in such a dominant consumer will depress prices for US crude overall, inhibiting its breakneck growth.
The world LNG market is becoming more flexible, but newly-conceived American LNG terminals, many of them betting on China, will not get financing without backing from customers. If China does extend tariffs to LNG, that will retard its take-up in China in general; it will use less gas, and what it does consume will come more from domestic production and pipelines from Russia and Central Asia.
Retaliation to anti-trade measures, a sad economic necessity, is also intelligent politics. Most of the leading US oil-producing states – Texas, North Dakota, Alaska, Oklahoma, Wyoming – trend Republican, as do the leading coal-mining states, Wyoming (again), West Virginia and Kentucky. Last week, state-owned China Energy put on hold plans to invest $84bn in West Virginia, one of the poorest states. An Alaskan delegation looking to Chinese firms to invest in LNG came back from Shanghai empty-handed last month.
The impact of a trade war goes far beyond the sectors initially targeted. A 10 per cent drop in China’s exports would reduce its GDP by 0.3 per cent, but Asia’s by 1.1 per cent. Beyond short-term disruptions and loss of access to markets, the bigger danger to the energy sector comes from economic damage.
Energy-exporting countries can enjoy a short-term gain as US oil and gas companies’ charge is stalled, but are threatened by a slump in demand. The rest of the world needs to deepen its own economic and energy integration, and not allow proportionate defences to swell into generalised trade wars. And with free market advocates unheeded, it seems increasingly likely that only real economic pain can open the eyes of the new American protectionists.
Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis