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China Is Unlikely to Meet Purchase Targets for U.S. Energy

Economic fallout from the coronavirus pandemic has cast doubt on whether China can meet its targets to buy U.S. goods under this year’s trade deal — with energy emerging as the biggest casualty.

China has made strides toward its agricultural and manufacturing targets, but it remains far behind — maybe hopelessly far — an ambitious target for purchases of oil, natural gas, refined petroleum products like propane and butane, and coal, prompting concerns from the U.S. energy industry which is encouraging the U.S. Trade Representative to increase pressure on China to reach the goal.

The targets in the deal implied China would purchase around $25 billion of U.S. energy in 2020 and even more in 2021. The latest data on U.S. exports for the month of May, released on Thursday, show China has so far this year purchased only $2 billion of that sum, near the year’s midway point.

The collapse in energy demand and energy prices amid the coronavirus pandemic explains part of why China is so far behind. Nevertheless, China’s U.S. energy purchases present contrast to the strides it has made toward targets for the acquisition of agricultural and manufactured goods.

“It’s peculiar and concerning,” said Anne Bradbury, chief executive of the American Exploration and Production Council, which represents oil and natural gas exploration and production companies. “The energy sector has been incredibly hard hit by the pandemic and now, more than ever, this agreement is important to the industry.”

As of May, China had purchased $5.4 billion of agricultural goods, with a goal for the year of $33 billion in purchases. That puts China behind, but it could still meet its targets, according to calculations from Chad Bown, a senior fellow and trade data expert at the Peterson Institute for International Economics.

Agricultural purchases are 39% of the pace needed to hit the phase one goal. But agricultural purchases are heavily seasonal in the fall when major crops like soybeans are harvested, giving China time to catch up if the deal remains intact.

And China has purchased $19.5 billion of manufacturing goods, where the goal for the year is $84 billion. That puts manufactured goods at 56% of the pace needed to hit the goal, according to Mr. Bown’s calculations.

But energy is far behind — running at only 18% of the pace needed to reach the goal. Catching up in the next 7 months would require massive purchases to begin immediately.

To hit the goal, China would need to start purchasing more than $3 billion a month of energy, more every single month than it has been able to purchase in the past five months combined.

A surge in domestic energy production over the past decade has made the U.S. energy industry an exporter after decades of foreign dependence, and China — with its 1.4 billion-person population and the world’s second-largest economy — represents the single largest potential market for exports like American crude oil and liquefied natural gas.

“We think China and the U.S. are destined to have a very strong long-term LNG relationship and we need to keep nudging things back on track,” said Fred Hutchison, the president of LNG Allies, the U.S. liquefied natural gas association.

The goals for energy exports were always aggressive, especially for LNG which is a relatively new U.S. export, said Mr. Hutchison. And the pandemic made the goals even harder, he said.

Because the two nations had agreed to a dollar target, the goals become vastly more difficult when energy prices plunge.

“The purchase commitments are made in dollar (value) terms, not volume terms, so even if China makes massive volume purchases, if prices are close to zero they are not going to reach the dollar value targets,” said Mr. Bown, of the Peterson Institute, in an email.

This explanation, however, hasn’t stopped Congress and industry groups from urging the USTR to amplify pressure on China to increase energy purchases.

In June, members of Congress led by Rep. Jodey Arrington, a Republican congressman from the oil fields region of West Texas and House Republican Whip Steve Scalise of Louisiana sent a letter to Robert Lighthizer, president Trump’s top trade negotiator and the head of USTR, urging him to do more to get China to buy U.S. crude oil.

“Trade data reported in the first few months of 2020 reveal that China has purchased a very small amount of U.S. crude oil in 2020, while simultaneously increasing its imports from Saudi Arabia and Russia,” the lawmakers wrote.

“We urge you to continue to pressure China and hold it accountable for all of its commitments,” they said. “Specifically, USTR should urge China to buy U.S. crude oil rather than purchasing more crude from countries known for distorting the global oil market.”

But pulling out of the deal or sanctioning China isn’t an easy step for the U.S. to take without jeopardizing the progress China has made purchasing agricultural or manufactured goods. During the nearly two-year trade war, when Washington increased tariffs on China, Beijing repeatedly responded by shutting down its purchases of American farm goods, a dynamic that hammered the U.S. Farm Belt.

Mr. Lighthizer has defended the purchase agreements, saying that the trade data only reflect finalized exports, and don’t reflect purchase agreements that have been made but not yet fulfilled.

Another complication for the U.S. is that although China is behind on the purchase targets of the phase one deal, it is also one of the few reserves of economic strength globally for U.S. exports.

The pandemic and lockdowns to prevent the virus’s spread have crippled trade around the world. But as the first to reopen its economy after the pandemic, China has been a strong trading partner. In April and May, China reclaimed its mantle as the largest trading partner of the U.S. For most of the past two years, during the trade war, it had dropped to third place behind Canada and Mexico.

“I think the expectation is that China’s demand for energy will be strong as it continues to grow, and we have the capacity to sell into that market,” said Stephen Comstock, vice president of the American Petroleum Institute.
Source: Dow Jones

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