The ‘Extremely Stable Genius’ Has Been Outsmarted By China: U.S. LNG Exports At Risk
The U.S. president, who refers to himself as an ‘extremely stable genius,’ is getting outsmarted by China in the trade war of his own making. The result is not just that American natural gas exporters will get hurt but also that Donald Trump has no trump card to play — that China can outlast him, politically.
China has little reason to allow Trump to save face. Trump, who also refers to himself as a ‘tariff man,’ wants the United States to be a leading oil and gas producer that is flush with new markets. But China is the world’s largest importer of oil and the second largest importer of frozen natural gas, or liquefied natural gas (LNG). While the market for U.S.-produced LNG is global, one of the world’s fattest energy consumers has options from where to buy those products.
U.S. oil and gas exporters are somewhat protected because they secured long-term contracts with China prior to the trade war. However, no such agreements will get signed going forward unless this dispute is resolved. LNG must be captured and frozen before it is shipped and unfrozen, all of which requires an expensive investment in export and import terminals. And those investing in or financing them want to see long-term contracts.
“I think the trade tensions and the tariffs are unproductive and create some added costs to our Chinese consumers,” Jack Fusco, chief executive of Chenier Energy, said on an earnings call, as reported by the Financial Times. “But as a company, we’re relatively insulated from the current future tariffs and we don’t expect any material impacts.”
Indeed, companies like Chenier, ExxonMobil and Dominion Energy are among this country’s leading LNG exporters. Chenier, in fact, was the first to receive such approval from the Obama administration in 2016.
Some background: Trump announced $200 billion worth of tariffs on Chinese goods entering the United States, which began in September 2018. China, meanwhile, responded in-kind, tagging $60 billion in tariffs on U.S. products headed to China. Initially that included a 10% tariff on LNG exports but now, it will become 25% on June 1 — the result of Trump ratcheting up tariffs once again on Chinese goods exported to this country.
The implication? Only two tankers loaded with LNG left the United States for China this year, notes the shipping data firm, Refinitiv Eikon. That compares to 14 the year before. China is thus looking for new suppliers that include Russia, Qatar and Australia.
“The idea that China should buy large amounts of natural gas from the U.S. must be revisited,” Wang Yongzhong, a senior fellow at the Chinese Academy of Social Sciences, told the South China Morning Post. He said that China imported 4% of its LNG from the United States in 2017.
The 2020 Albatross
Economists almost universally agree that free trade facilitates commerce among international partners, thereby increasing the amount of wealth and jobs as well as the quality of goods and services. To that end, the United States has been a part of trading agreements like NAFTA and the Trans-Pacific Partnership that have mechanisms to resolve disputes centered on labor, the environment or protectionism.
Now, about 5% of the U.S. economy is tied to trade with China. And the potential for increased energy trade with China had been huge — until the ‘extremely stable genius’ got involved: The International Energy Agency said that the United States could have been exporting 70 billion cubic meters of LNG by 2020 and 110 billion cubic meters by 2040. Chinese natural gas demand is forecast to grow by 60% between 2017-2023 because it is switching from coal to gas.
Once China inks long-term contracts with new suppliers, it will be hard to crack. And there are other, domestic deals at risk: a $43 billion natural gas pipeline from the North Slope of Alaska to an LNG export facility that is near Anchorage — to be funded by a Chinese national bank. There’s also China Energy Investment Corp.’s $84 billion non-binding trade agreement with the state of West Virginia — one that would give it access to that state’s natural gas patch.
Beyond energy markets, there’s also agricultural exports and specifically soybeans. And while Trump has offered up a subsidy to farmers, the tariffs could ultimately doom them if China gets new countries to feed its needs.
What it all means is that China has more staying power than Trump does, who stands for re-election next year. Trump is feeling the heat, given that the trade war is hurting businesses and consumers in states that he won in 2016.
“As to whom can inflict the most pain and last longer is a destructive way to look at this,” says Bryan Riley, director for free trade initiatives at the National Taxpayer Union, in an interview. “If this drags on, it will be bad for both countries. The tariffs are not working. But the Trump administration thinks it may need to double down. A more constructive approach would be to immediately get off-ramp and allow time to quietly resolve the dispute.”
Trade wars don’t work. History has shown that for each attack there is a counter attack — exercises that raise cost on consumers and inflict pain on exporters. To deal with potential disputes, countries enter into trade agreements. Trump, whose own former secretary of state refers to him as a ‘moron’ and whose tax records show he was the biggest loser for a decade, has now gotten the country into this mess. And the way out of this quicksand is if American voters toss him in 2020 or if the U.S. Congress impeaches and convicts him.