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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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What Beijing’s Retaliation Means For Oil

Heightened trade tensions between the U.S. and China over the last few days, that seemed to catch many media outlets and pundits off-guard, were actually always lurking just beneath the surface. U.S. negotiators had indeed made headway with China in talks over the last several weeks, provoking even optimism from President Trump just days before he increased tariffs on some $200 bn worth of Chinese goods from 10 percent to an economically damaging 25 percent.

However, U.S. negotiators pushed too hard. White House economic adviser Larry Kudlow said on Sunday that China needs to agree to “very strong” enforcement provisions for an eventual deal and the sticking point in negotiations was Beijing’s reluctance to put into law changes that had been agreed upon. He added that U.S. tariffs would remain in place while negotiations remain.

Major changes to Chinese law, enforced and monitored by another country is something China will never accept nor could it if it wanted to not only save face at home but abroad. To do so would be an unacceptable concession for the country that is still sensitive to what it considers years of subjugation from foreign powers until at least the mid part of the last century - a topic that is not only still taught to every Chinese student but which has become part of the Chinese national psyche.

Beijing fires back

On Monday, China fired back. A commentary in the Communist Party’s People’s Daily said “at no time will China forfeit the country’s respect, and no one should expect China to swallow bitter fruit that harms its core interests.” The hawkish Beijing-based Global Times, which often expresses the view of the Chinese Communist Party (CCP), said that China had no reason to fear a trade war with the U.S.

A commentary in Chinese state-run news agency Xinhua, citing Chinese academics at a think tank over the weekend, said that facing U.S. tariff hike threats, China has adhered to its bottom line, defended national dignity and people's interests. Imposing new tariffs goes against the will of the people and the trend of the times. China has the resolution, courage, and confidence to rise to all sorts of challenges, they said. Related: Oil Opens Higher After Saudi Arabia Reports Attacks On Oil Tankers

However, one expert, Chen Wenling, chief economist with the China Center for International Economic Exchanges, missed the mark when he said that the trade war had been provoked by the U.S. and has been ineffective. Not only has the U.S. not provoked China over trade, but Washington is also decades late in trying to level the trade playing field. Similar trade concerns among China's other taring partners, especially the EU have and are still being voiced with increased calls for action.

Trade fallout

The fallout from an increase in tariffs on Chinese goods only slightly impacted oil markets on Monday morning in Asia. U.S. oil benchmark West Texas Intermediate (WTI) crude futures were down 0.2 percent to $61.58/barrel in early trading. Global oil benchmark, London-traded Brent crude futures were up 0.2 percent in early trading at $70.73 a barrel.

Going forward, however, the fallout from increased tariffs on Chinese goods will dampen global oil demand, as well as cause more stagnation in global growth, while Trump's indication that he could impose new tariffs on another $300 bn worth of Chinese goods could be severely damaging for global growth, especially still fragile emerging markets. Though a slowdown in global economic growth will take several months to be felt, it will come at a precipitous time for President Trump as the 2020 presidential election cycle heats up. On the other hand, slower economic growth and less demand for oil would put downward pressure on oil prices, resulting in lower gas prices at the pump - a bonus for the president.

On the supply side of the oil markets equation, Saudi Arabia, Russia and other major producers, with memories still fresh from the cataclysmic drop in oil prices from more than $100 per barrel in mid-2014 to dropping below the $30 price point in January 2016, can be expected to withhold as much production as possible to keep prices from plunging too low. The U.S. and China together accounted for some 34 percent of total oil consumption in the first quarter of the year, according to the Paris-based International Energy Agency.

Kudlow did hold out a prospect on hope over the ongoing trade war on Sunday when he added that there is a “strong possibility” that Trump will meet Chinese President Xi Jinping at a G-20 summit in Japan in late June.

By Tim Daiss for Oilprice.com

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  • Mamdouh Salameh on May 13 2019 said:
    When President Trump first imposed tariffs on Chinese exports to the United States, I said then these are the first shots in the petro-yuan/petrodollar war of attrition. If a trade war between China and the United States erupts, China will not run from a fight with the United States and will retaliate by imposing its own sanctions on US exports. And if the trade war escalates further, China may punish the United States financially by offloading its holdings of US Treasury bills estimated at $1.3 trillion in what is known as the “nuclear option”.

    However, the trade war between the two superpowers is not about oil prices. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, refusal by China to comply with US sanctions on Iran, Taiwan, China’s claiming 90% of the South China Sea and above all the fear of the US losing its unipolar status. It is a truth universally acknowledged that a great power will never voluntarily surrender pride of place to a challenger. The United States is the pre-eminent great power. China is now its challenger.

    China will not only retaliate with punitive tariffs of its own but could also walk away from the trade talks knowing full well that a continuation of the trade war will hurt the US economy far more that China’s and that President Trump badly needs a deal to bolster his chances in the coming US presidential elections in 2020.

    China’s economy is 28% bigger than the United States’ on the basis of purchasing power parity (PPP) and far more integrated in the global trade system than the United States’ thus enabling it to withstand the adverse impact of the trade war far better than the United States’.

    If China was prevented by tariffs from exporting some $800-bn worth of goods to the United States, it can sell them all over the world. For the United States to replace China’s exports with imports from other countries will add extra costs to American customers, increase inflation, exacerbate US budget deficit and add some 2.35% to the $22 trillion of outstanding US debts.

    A continuation of the trade war is casting a dark cloud over the global economy creating uncertainty and slowing down global demand for oil thus exerting a downward pressure on oil prices. Still, China’s thirst for oil will continue unabated.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Brian Bresee on May 13 2019 said:
    China has not only abused the United States, but the whole world with their trade practices. China wants to continue to steal the intellectual property of others, and somehow their national pride is at stake with someone calling them out on it. Add currency manipulation and brutal regulatory hoops to jump through for foreign companies, and China is proven a trade abuser. Just look at the trade imbalance as proof.

    What Trump is doing will put US citizens back to work in good paying jobs, something even leading Democrats agree on. What China is doing in these trade negotiations is sure to get Trump re-elected.

    Oil consumption will remain the same through out the world, just less in China and more everywhere else that replaces China in manufacturing.

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