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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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Trade War Could Persist Unless China Caves

Markets have been anticipating more trade talks this year between Washington and Beijing. However, it appears that the U.S. could be preparing to ask for even more from China before a formal deal can be reached, according to a New York Times report on Monday.

U.S. Trade Representative Robert Lighthizer has warned President Trump that additional tariffs on Chinese imports may be needed to get meaningful concessions in trade negotiations, the report said. Early last month the U.S. and China agreed to set a 90-day freeze on more tariffs as the two sides try to mend trade differences. They also set a self-imposed March 2 deadline. If a deal can’t be reached, the U.S. will likely increase existing tariffs on $200 bn worth of Chinese goods from 10 percent to 25 percent as well as impose duties on another $267 bn worth of Chinese goods. China would likely respond in a tit-for-tat manner again and also impose more duties on U.S. goods.

Lighthizer’s comments were immediately felt in global equity markets. European markets were down while U.S. stock futures also fell sharply. The New York Times report added that Lighthizer must negotiate with China it in a way that tilts the balance of power toward the U.S. Going forward, his hawkish approach will have significant ramifications for American companies, workers and consumers whose fortunes are increasingly tied to China.

LNG connection

A number of these companies, seemingly waiting on the edge of their seats, are U.S.-based firms trying to jump-start new liquefied natural gas (LNG) projects as part of the so-called second wave of U.S. LNG development. Many of these new U.S. LNG project proposals that are now being planned and/or receiving federal approval will have a difficult time reaching the all-important final investment decision (FID) needed to go forward without Chinese assistance. These projects not only need to sign long-term off-take agreements with Chinese entities but many of them, particularly newcomers not backed by more experienced oil and gas majors, will need Chinese financing to go ahead. Without Chinese aid, it’s likely that a significant number will fall through the cracks, and even jeopardize the U.S.’ ability to challenge Qatar and Australia as the global LNG leader next decade. Related: Oil Tanker Firms Scrap Most Ships In Three Decades

China, for its part, has placed a 10 percent tariff on U.S. LNG with the threat of increasing that figure in the future, resulting in China having to find alternate sources of the super-cooled fuel on the spot market. The downside for China is that it also needs U.S. sourced LNG as its insatiable gas demand expands amid Beijing's mandate that gas makes up at least 10 percent of its power generation energy mix by 2020, with further earmarks set for 2030.

These new U.S. projects will mostly vie for LNG markets in the Asia-Pacific region, which currently accounts for 72 percent of all LNG demand with that amount projected to increase to 75 percent, amid demand from both China and South Asia, namely Pakistan, Bangladesh and India.

Hitting China hard

American tariffs have already made a negative impact on the Chinese economy. A Caxin report indicated on Monday that China’s manufacturing had an even worse December than expected. The Caixin/Markit Manufacturing Purchasing Managers’ index (PMI), a private survey, fell to 49.7 in December from 50.2 in November. A reading above 50 indicates expansion, while a reading below that level signals contraction. In December, two separate measures for new orders and new export orders showed contraction, the Caixin report showed.

Lighthizer’s top deputy will meet with Chinese officials this week ahead of more planned high-level talks in February. He will push for even more substantive changes, including forcing China to end its practice of requiring American companies to hand over technology as a condition of doing business in the country.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on January 03 2019 said:
    First you better correct the title of your article to read “Trade war could persist unless China caves in”.

    Contrary to the hype and self-delusion that you display in your article, China will never cave in. If President Trump listens to the advice of US Trade Representative Robert Lighthizer that additional tariffs on Chinese imports may be needed to get meaningful concessions in trade negotiations, then he can forget about reaching a deal to end the trade war between the US and China.

    Still, I believe the trade war could be coming to an end since it has now dawned on President Trump that he can’t win a trade war with China. And contrary to the New York report that Lighthizer must negotiate with China in a way that tilts the balance of power toward the US, he must realize that China will never put its name to any agreement that gives the United States an advantage to claim victory.

    President Trump did not really anticipate China’s response when he imposed tariffs on its exports to the United States. He thought that China will bend the knee to him. This not only didn’t happen but China retaliated blow by blow to his imposition of tariffs. Moreover, it completely stopped buying US crude oil and curtailed very significantly purchases of US LNG.

    Many of the new US LNG project proposals that are now being planned and/or receiving federal approval will have a difficult time reaching the all-important final investment decision (FID) needed to go forward without Chinese assistance. These projects not only need to sign long-term off-take agreements with Chinese entities but many of them will need Chinese financing to go ahead. Without Chinese aid, it’s likely that a significant number will fall through the cracks.

    Despite President Trump’s tough talk, his position vis-à-vis China has been weakened in recent time. The trade war is already starting to take a toll on the US economy. American farmers have been hit hard by retaliatory tariffs from China, which have tanked prices for corn and soybeans. More recently, the stock market has seen a spike in volatility, and all of the gains US stocks have seen in 2018 have been wiped out in the last few weeks. Perhaps more painful was the recent announcement from General Motors that the company was closing down five factories and laying off 14,000 people. Automakers warned that steel and aluminium tariffs would cost the industry billions of dollars. Moreover, the Centre for Automotive Research earlier this year warned that US auto sales could plunge by up to two million vehicles a year over the huge tariff increase launched by Trump. That could mean a loss of about 715,000 American jobs and a $62 billion hit on US GDP.

    The first crack in the US armour appeared when the US Treasury Secretary Steven Mnuchin admitted that China has not been manipulating its currency to benefit from trade with the United States. This is one of two accusations President Trump used when he imposed tariffs on Chinese exports. The other is the huge trade surplus China enjoys with the US.

    Were China to be prevented from exporting $800 bn worth of Chinese goods to the American market, it could easily sell them somewhere else since its economy is much bigger and more integrated with the global trade system than the United States’.

    The United States will pay a very heavy price in trying to replace the Chinese exports with more expensive imports from other countries. This will add more costs to American consumers, exacerbate US budget deficit and inflation and add 2.35% to America’s $21 trillion outstanding debts. In other words, the US will be the loser in a continuation of a trade war with China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Robert on January 04 2019 said:
    China cannot replace the $800 Billion US market for manufactured goods. Africans, Asians, and Russians cannot afford nor do they need most items. The EU is in recession.

    Oil and agriculture products are fungible. The demand will be met from available supply no matter how China chooses to boycott or select individual sources. Alternatively China can starve and stop using oil to manufacture. China is not self sufficient in food and energy.

    The USA is winning the trade war. Capital, manufacturing, and labor demand is steadily repatriating with only the threat of tariffs. The 25% tariff is likely no matter how China wishes to stall. Repatriation will rapidly increase under the 25% tariff because manufacturing in China becomes unprofitable. Profits are the milk of industry.

    25% tariffs are only the opening gambit. Tariffs can be 250%. Manufacturing in USA is destined to be more profitable than manufacturing in China.

    China has a severe unemployment problem. One hundred million migrant Chinese laborers routinely build empty cities like the ancient Egyptian surplus labor built pyramids. These people all have cell phones and they make for an impressive flash mob. Tariffs can quickly swell Chinese unemployment to 200 million and more. The challenge for President Xi is to balance Chinese imports with exports before March 2019.

    The trade war has been underway for fifty years. China took unfair advantage. Turn about is fair play.

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