Energy and the U.S.-China Phase One Trade Deal—Don’t Believe the Hype... At Least Not All of It
January 17, 2020
This week, the United States and China signed a so-called “phase one” trade deal to stop the escalation of tariffs that has precipitated since the start of the trade war in 2017. Among other things, the deal includes a pledge by the Chinese to purchase an additional $200 billion of goods over the next two years (additional relative to a 2017 baseline), including $50 billion in energy.Until the trade war, trade in energy between the China and the United States had been expanding. This makes sense given China’s fast-growing energy demand and the United States’ growing exports. However, before the trade war, U.S. energy exports to China were still quite limited in value, volumes, and as a percentage of energy exports from the United States and imports into China. According to analysis by Clearview Energy Partners, on a value basis, energy exports to China would have to grow ten times from where there are today to meet the stated goal of the agreement. No small feat. ESAI analysis (see below) suggests a hypothetical Chinese push to increase imports could reach $13.1 billion in the first year rather than the $18 billion stipulated in the deal.
Despite what appears to be an unqualified win for the U.S. energy industry, there is reason to be skeptical that the energy purchasing provisions of the trade deal will come to fruition. First, the Chinese have not indicated they would remove tariffs on energy imports. China may use tariff exclusions or some other relief mechanism to offset the cost to the importer (because, yes, in China too, importers bear the cost of tariffs) but so far have not said they would do so. Second, the Chinese have thus far been reluctant to strike long-term purchase arrangements for U.S. liquified natural gas, and it appears the very existence of this trade war may have justified some of their caution about exposure to the U.S. market.
Third, and perhaps the most important caveat underneath the headline of large energy purchases, is that follow-through on phase one of the deal may be slow based on the tenor of negotiations for phase two (which looks to be tough sledding). In the near-term, the Chinese may be incented to make progress toward their purchasing targets in a show of good faith but getting to the full $50 billion target is a long way off on the bumpy trajectory of trade talks.
