In placing retaliatory tariffs on certain goods and products, America’s trade partners have signaled how well they understand American politics. By targeting products from areas supportive of President Donald Trump, they clearly hope to generate pressure to lift U.S. tariffs or even create broader political problems for the president. But China is sending much more interesting – and complex – messages with its indication that it may place retaliatory tariffs on U.S. energy exports.
Since the 1990s, China has made it a priority to secure adequate energy imports to fuel its economic growth. Acquiring this energy was, and to some extent still is, a major driver of China’s foreign policy. The fact that China now feels comfortable creating obstacles to the acquisition of some energy from abroad suggests several things.
First, and most obviously, China has assessed that tariffs on this energy trade will cause the U.S. more pain than they will cause China. This is likely an accurate evaluation. In a very short period of time, the U.S. has become a significant exporter of crude oil, liquefied natural gas (LNG) and refined energy products. Its energy trade with China, originally stymied by a mutual concern over the wisdom of building energy trade between the two countries, has blossomed. In 2017, the value of U.S. energy exports to China was greater than what either Turkmenistan or Qatar sent to the Middle Kingdom. It represented 6 percent of all U.S. energy trade, according to the International Energy Trade Centre.
In imposing tariffs on this trade, China could not only deprive the U.S. of a lucrative trade, but also have lasting effects on the development of American LNG trade – something the Chinese likely correctly assess matters a great deal to Trump. The U.S. is now at a point when new investment decisions must be made to build additional LNG export facilities if U.S. natural gas exports are going to grow in the coming years. Given that China is the fastest-growing market for natural gas imports in the coming years, tariffs that make U.S. LNG uncompetitive in this market could throw an important spanner into the investment decision process, potentially complicating the ability of the U.S. industry to take its expected place as the third-largest exporter of LNG by 2020.
If it makes good on its threats to impose retaliatory tariffs on energy trade, China would also be communicating its confidence that the new energy abundance is here to stay. Just last summer, it instituted new policies aimed to aggressively bring down coal use by substituting natural gas. This policy led to a 15 percent increase in natural gas consumption in 2017 and a 28 percent increase in natural gas imports. If China institutes tariffs on U.S. LNG exports, we can assume that it calculates that – even if its tariffs stifle the development of U.S. LNG export terminals – global gas markets will remain sufficiently flush with natural gas for China to meet its needs at a reasonable cost.
This conclusion is probably the subject of some debate within the Chinese system, and may be why energy exports were not included in the first round of retaliatory Chinese tariffs. Alternatively, the Chinese may have decided that, whatever the costs, they are not comfortable relying on the U.S. as a source of one of their most strategically important commodities, regardless of the financial risks that such a decision may entail.
If the Chinese do move ahead with these tariffs on energy trade, that will do more than create hardship for U.S. businesses. It will strike one item off the rapidly dwindling list of areas in which the U.S. and China can identify common interests and see value in cooperation. Just six weeks ago, the Brookings Institution predicted that a burgeoning trade in natural gas between China and the U.S. could be a lubricant to bilateral relations. It certainly seems like a long shot today.
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