Week Ending January 17, 2020

Industry Optimistic on China Trade Deal for U.S. Exports, Wary About Tariffs Remaining

This Article Appears as Published in Foster Report No 3282
Industry Optimistic on China Trade Deal for U.S. Exports, Wary About Tariffs Remaining

Energy trade groups are optimistic that phase one of the trade agreement with China announced at the White House January 15 will rekindle U.S. exports of LNG and other liquid fuels. Energy groups and others remain concerned, however, about tariffs that remain in place and when negotiations will bring those to a close.

Instead of removing the tariffs to increase the flow of goods, the deal leaves them in place and directs China to buy $200 billion of products over the next two years, including about $50 billion in the energy sector. Some U.S. tariffs are lowered under the agreement and others that were slated to increase will remain at their current level, officials said.

Details on the agreement have been limited, and analysts questioned enforcement, the purchase commitments with tariffs in place and any concessions made by the U.S. to complete phase one, among other elements. China has not agreed to reduce or eliminate any tariffs, but it made commitments to increase its purchases in four areas – manufactured goods, agriculture, energy, and services.

A senior Trump administration official said the provisions call for “good faith” commitments by both countries to meet the terms of the agreement, but the primary enforcement if one country feels aggrieved is to drop out of the deal. There cannot be countermeasures, higher tariffs or retaliation for any action taken. If the U.S. decides to charge China with a violation of the agreement on a specific point, it will have to decide whether it wants to stay in the agreement or not. There are broad economic interests that would keep them in the agreement, the official said, calling the enforcement plan an expedited mechanism to avoid one side being able to take retaliatory measures.

Some lawmakers on Capitol Hill and U.S. manufacturing groups were critical of the deal, and others deemed it a soothing of anger among the countries with limited potential benefit. The Alliance for American Manufacturing said it does nothing to curtail China’s subsidies to its manufacturers, with key issues unresolved.

President Donald Trump said phase one of the agreement marked an “incredible breakthrough” that rights the wrongs of the past and delivers prosperity to American workers, farmers and families. He said he would be traveling to China in the near future and commended numerous administration officials who held tough, honest and respectful negotiations with Chinese leaders.

The pledge by China to increase imports of American goods and services will take place over the next two years, and the trajectory is expected to continue after 2021, Trump said. He, along with Vice President Mike Pence and others, said the existing tariffs will remain in place and there remains work to do on phase two negotiations, but the second phase will not be completed until after the 2020 presidential election. “I will agree to take those tariffs off if we’re able to do phase two,” Trump said.

The American Petroleum Institute (API) and others said the phase one deal is a positive step, with calming of trade tensions between U.S. and China benefiting many sectors of the American economy. But there is more work to be done, said Mike Sommers, president and CEO of API. “We encourage the administration to stay at the negotiating table until the U.S.-China marketplace for energy trade is fully restored and all remaining tariffs are lifted — including U.S. tariffs on imports of industrial components used in our industry and Chinese retaliatory tariffs on U.S. energy exports,” Sommers said.

API noted that the background for the deal includes U.S. tariffs that increased the cost of industrial components in the U.S. energy supply chain, and that energy exports to China were on the rise until mid-2018. China’s retaliatory tariffs of 10% on LNG and halt of importing U.S. crude oil started in the summer of 2018, when U.S. tariffs were first imposed. U.S. exports of LNG, natural gas liquids and other petroleum products increased from early 2015 to June of 2018, when they fell to nearly zero.

China is the world’s second-largest consumer of petroleum products, behind the U.S., and has been a net crude oil importer despite being the fourth-largest producer of crude oil, making it a key energy trade partner, API said. China has been able to rely on other suppliers for its crude oil needs, including Russia, Saudi Arabia, Angola, Iraq and Oman. The reduced exports of LNG and oil to China has resulted in increased exports to other countries, but likely on less favorable terms, analysts have noted.

That perspective makes the $52.4 billion commitment from China on energy imports – which is broken into different categories, with $18.5 billion in 2020 and $33.9 billion in 2021 – a welcome development for U.S. LNG export project owners and the oil sector. Detailed numbers on the four categories will remain confidential in the interest of not distorting markets or harming business interests, the senior administration official said.

However, neither China’s 5% tariff on U.S. crude oil nor the 25% tariff on U.S. LNG is to be reduced or removed under the phase one deal, noted Gavin Thompson, vice chair of the Asia Pacific practice at Wood Mackenzie. The $52.4 billion commitment covers a lot of energy, but “for China to massively increase imports of oil and LNG from the U.S. while tariffs remain in place is going to be challenging,” Thompson said.

The higher tariff on LNG could be particularly daunting to meet the commitment, resulting in the cost either being absorbed by the importing company in China or passed through to consumers. “We expect that Chinese national oil companies will be reluctant to commit to large-scale purchases given this. At the same time, the next two years will also see a slower pace of gas demand growth in China, rising domestic production and the arrival of Russian pipeline gas, creating a more competitive gas market,” Thompson said.

Even so, U.S. companies will be targeting Chinese buyers such as CNOOC and PetroChina, and the reduced trade tensions could foster some deals, he said.

At a White House ceremony packed with lawmakers and officials from many sectors of the economy, including oil and natural gas companies, Trump referred to the U.S. leading the world in oil and natural gas production. “We’re bigger than Saudi Arabia. We’re bigger than Russia. We’re bigger than everybody,” he said, which garnered applause.

Officials from Cheniere, Tellurian and other companies trying to develop or owning existing LNG export facilities praised the agreement. Tellurian President and CEO Meg Gentle said the U.S. is oversupplied with natural gas production gains and is on a pace to become the largest exporter of LNG, surpassing a few other countries.

In an interview with CNBC, Gentle said the U.S. is becoming the low-cost gas supplier, with the ability to load export vessels at a cost of about $3.50/MMBtu, deliver it to Europe for about $4.50/MMBtu or transport it to Asia at about $5.50/MMBtu.

The economies of the U.S. and China are tied together in so many ways, the energy element of the phase one agreement should provide benefits for both countries, she said.

The agreement includes provisions for increased Chinese purchases of agricultural products, financial services and intellectual property protections for U.S. companies, Trump said.

In his rambling remarks during the ceremony, he said he is “approving some pipelines in Texas momentarily, which will give you, which would have taken 15 more years to get.”

It is unclear what pipelines he was referring to, and the White House press office had not responded to a question on that by press time January 16.

Trump may have been referring to proposed regulatory changes of the National Environmental Policy Act (NEPA), as he said the White House is taking a lengthy approval process down to a shorter period, “and I’m angry at my people for taking so long.” NEPA reform, which was announced January 9, has been a priority for the administration since Trump took office, and officials noted that the proposed regulatory changes came later than expected.

By Tom Tiernan ttiernan@fosterreport.com

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