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As the impasse continues in the trade war between China and the United States, Washington now risks losing access to another key market. China increased tariffs on US LNG to 25% on June 1st in retaliation to a US increase in tariffs on $200 billion of Chinese goods also to 25%. Australia which has a thriving LNG sector now looks set to capitalise on this trade war impasse.
In 2018, China imported 23 million tons of LNG from Australia, which made up around 40% of Australia’s LNG exports. In 2019, Australia has already supplied over 53% of China’s LNG imports during the first five months of this year. Furthermore we have already seen US LNG exports to China fall 80% in this fiscal year, compared to the same period of time in 2018. As if to compound that problem, US exports to China have now fallen to virtually zero. China is also expected to increase LNG imports from 53 million tons in 2018 to about 95 million tons by 2025.
LNG producers in the US are now waiting to see how the tariffs could impact major natural gas production plant developments and future pipeline projects. Setting aside the immediate loss of LNG exports to China, the US also faces the risk of additional long term damage.
China may look to secure long terms contracts with Australia which could be for up to 20 years. In addition the forecasts of huge growth in new US LNG development projects running into hundreds of billions of dollars could now be in some doubt.
Ironically Trump had hoped to cement America’s role as a leading global LNG exporter, but his tariff policies are undermining those ambitions in a variety of ways. Whilst tariff increases are serious enough, the threat of an escalation in the trade war could also impact long-term natural gas development projects. They could struggle to offer competitive terms to buyers and damage projects aimed at Chinese exports.
The long-term impact on LNG exports will undoubtedly hurt US exporters. In addition the fact that US LNG is also sold via intermediary companies with multiple supply sources and customers to China could also pose significant challenges. The fact also that China’s three largest national oil companies have declined long-term contracts with US suppliers because they do not trust the United States, speaks volumes. In addition US LNG projects currently underway could be impacted precisely because of the current trade war which will undermine confidence in energy security.
The LNG sector highlights once again just how short-sighted Trump’s tariff policies are and why, in this example, it is damaging US LNG economic interests. The failure to grasp how such a sector operates and what the knock-on effects were likely to be in the event of tariff implementation is self-evident. Once again China is already looking at alternative jurisdictions and companies and are likely not to return to the US market anytime soon, particularly if they secure long-term contracts with more competitive price structuring.
In a broader context Trump needs to desist from trying to convince the American people that China is paying for these tariffs, which is highly misleading. Indirectly it is the American taxpayer who is and will continue to be impacted with higher costs. In direct terms the US LNG sector and third party companies will be impacted, in the context of this article.
However in a broader context, the US economy is going to suffer to the extent that it could end up costing Trump the 2020 presidential election, notwithstanding that Trump continues to peddle the illusion of US economic strength.