President Donald Trump’s newest tariffs on Chinese imports – a hefty 25 percent levy for steel and 10 percent for aluminum –is already fueling speculation about an impending trade war.
However, the Trump administration isn’t likely to stop with steel and aluminum but is also considering limiting Chinese investment in the U.S. and imposing tariffs on a broad range of products in a push back against both the massive trade deficit between the two countries and intellectual property theft.
“The U.S. is acting swiftly on intellectual property theft. We cannot allow this to happen as it has for many years!” Trump said in a Twitter post on Wednesday. In an earlier tweet, the president said China had been asked to develop a plan to reduce their “massive trade deficit with the United States.”
China, for its part, responded on cue yesterday. An op-ed in the Beijing-based Global Times, which often expresses the views of the Chinese Communist Party (CCP), fired back.
Particularly irked over Trump’s tweet that China has been asked to develop a trade deficit plan, the op-ed said that China won’t be “bullied” by Trump’s trade war threat.
“US trade protectionism has become the No.1 hot spot in the world, even stealing the thunder of the North Korean nuclear crisis. The US may be the first country to have clamored for war against the entire world, although the battlefield is the economy,” the op-ed said.
The piece then shifted to what has been on everyone’s mind – will China retaliate?
“China should face trade friction with the US in a calm manner. Meanwhile, it must retaliate against US tariffs that forcibly interfere with Sino-US trade and violate World Trade Organization rules. China must show it won't be bullied,” it added.
Oil and gas market intersection
And, that’s the question isn’t it? Will Beijing retaliate or not, and if so, how much will it match Trump’s actions? Moreover, will that relation include U.S. crude oil and liquefied natural gas (LNG) shipments?
Currently, the U.S. exports just over 2 million barrels of crude oil per day, much of it finding its way to Asia and particularly China, as the U.S. slowly eats away at Saudi market share in the region and the country. Since West Texas Intermediate crude prices trade at a discount to Brent and other crudes, the U.S. usually has a pricing advantage over its competitors in the region. Saudi Arabia for its part uses Oman and Dubai prices as an underlying benchmark for its official selling price (OSP) in Asian markets.
While U.S. oil exports to China is still small, it has grown from nothing before 2016 to a record 400,000 barrels per day in January, worth almost US$1 billion. Meanwhile, that amount will continue to grow amid increased U.S. shale oil production and as U.S. output reaches near 11 million bpd, effectively bypassing Russia at the end of the year or the start of next year to become the top global oil producer.
Yet, trade retaliation from Beijing could potentially include U.S. oil imports, particularly since Beijing has a plethora of oil export suitors all vying for the country’s lucrative oil market.
However, natural gas is more complicated. While China does have plenty of crude oil options and gas options too for that matter (both LNG and piped gas), the country may be more pressed to not include U.S. LNG on any list of trade retaliatory measures.
The most pressing reason for this: As Beijing rushes headlong with its mandate to make gas 10 percent of the it’s power generation mix by 2020 and more by 2030, China needs long term U.S. LNG supply agreements as part of its energy security mix in addition to supply from Qatar, Australia, Malaysia and in time Russia.
Since U.S. LNG is priced against the Henry Hub benchmark in Louisiana instead of an oil indexation like other producers (offering the opportunity to lock in lower prices for long-term off-take agreements) and since the U.S. will have five major LNG export projects operational by 2020 (becoming the third largest global LNG producer with a shot by the middle of the next decade of even rivaling top producer Qatar and Australia) - China might want to leave the U.S. gas part of its energy equation intact and pick another sector to use in retaliation.
By Tim Daiss
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