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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Can Japan Dodge Trump’s Trade War?

Japan is trying to avoid getting caught in the crosshairs of President Trump’s tariff maneuverings with countries that have large trade deficits with the U.S.

Tokyo said that it wants to promote the export of U.S.-sourced liquefied natural gas (LNG) to Asian countries to help cut the trade deficit with Washington. Masaki Ishikawa, chief of the Trade and Economy Cooperation Bureau in the Ministry of Economy, Trade and Industry, said at a bilateral economic dialogue in Washington on Monday that he hoped it would “broaden the scope of Japan-U.S. cooperation.”

The remarks come a week after the much-heralded meeting between President Trump and Japanese Prime Minister Shinzo Abe at Trump’s winter resort in Palm Beach, Florida. However, the two leaders said they had failed to reach a deal that would exempt Japan from new U.S. steel and aluminum tariffs, as Abe had wanted.

Trump, for his part, told Abe, “we have a very big deficit, and we’re going to weed that down and hopefully get a balance at some point in the not-too-distant future.” According to the U.S. State Department, the trade deficit between the U.S. and Japan last year was $56.1 billion, the third largest.

Tokyo needs to appease Washington

Given Japan’s long-time rivalry with China and Japan’s immediate threat from North Korea, Abe has little choice than to offer a carrot to appease Trump’s trade war pivot.

Japan also needs U.S. help as Beijing increasingly enforces its claim to over 90 percent of the South China Sea. These claims pose a potential threat to not only rival South China Sea claimants, Vietnam, the Philippines, Malaysia, Brunei and Taiwan, but potentially to vital shipping lanes that bring crude oil and LNG supplies to Japan. Both Japan and China also have a terse decades-old dispute over the Senkaku Islands (Japanese), Diaoyu Islands (China) in the East China Sea. Related: Iran Pushes Back Against The OPEC Deal

These uninhabited islands are located roughly due east of Mainland China, northeast of Taiwan, west of Okinawa Island, and north of the southwestern end of the Ryukyu Islands and have been the location of numerous standoffs and confrontations between Japanese Defense Force planes and ships and their Chinese counterparts.

Recently, the U.S., Japan, India and Australia agreed to join efforts in enforcing freedom of navigation in the area’s waters, much to the dismay and even anger of policy makers in Beijing.

However, though Japan’s decision to procure more LNG from U.S. producers seems like a concession, in essence it’s not only a smart geopolitical move but a start economic one as well.

As more LNG hits global markets from the U.S., who is poised to become the world’s third largest LNG exporter after Qatar and Australia by the end of the decade, Japan is also positing itself as the prominent LNG trader (or more accurately labeled re-seller) in the Asia-Pacific region.

Even Japan’s largest gas utility is taking advantage of the current LNG supply glut. Tokyo Gas recently said that it would build LNG infrastructure in the Philippines, Vietnam and Indonesia. A report in the Tokyo-based Nikei Asian Review said Tokyo Gas has a $10 billion plan to install small LNG storage and power-generating plants on remote islands around the region, supplying them “once a week or so,” using small LNG carriers.

Southeast Asia nations will present opportunities for both LNG producers and traders as these countries build LNG import terminals to diversify their energy mix away from overreliance on coal and fuel oil needed for electrical power generation. Related: Higher Oil Prices Could Unleash Market Turmoil

Moreover, Japanese gas utilities are also expanding in Southeast Asia since LNG growth demand in Japan, which is still the largest global LNG importer, slows. In doing so, Japan can even appear challenge to rival China and its massive and far-reaching One Belt One Road (OBOR) Initiative. As part of OBOR, China is investing in energy, shipping, ports, infrastructure, energy projects and various corridors connecting China with Europe, via Central Asia and the Middle East.

On the downside, at least for Japanese-U.S. relations, choosing to increase the purchase of one commodity, in this case LNG, will not be enough to offset the massive and growing trade deficit between the two sides. For that to happen, either Trump or Abe, both nationalistic leaders, will have to make concessions, but at this point when that will happen is anybody’s guess.

By Tim Daiss for Oilprice.com

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