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Chinese-US trade war threatens globalisation

Economic tensions may ease over the short term. But critical differences will only continue to divide rival global superpowers

As the US presidential elections approach and China concludes its 13th five year plan, a trade truce between the world’s two largest economies may be imminent. But any such deal is likely to arrest a further escalation in tariff tensions rather than fundamentally resolve bilateral differences.

In China, decision makers are preparing for protracted tensions with the US and, while both sides profess that they are not seeking to ‘decouple’ ties, 2020 may—even inadvertently—be the year that markets see the first glimpses of deglobalisation.

The on-again, off-again negotiations between the US and China could yield short-term respite and a freeze on new tariffs. This would likely calm market fears about weaker demand growth and a looming recession—resulting from the impact of the trade war on two of the world’s largest economies.

China is unlikely to yield to the US’s more fundamental requests to reform its domestic economic structure

But China’s economic growth slowdown will not likely reverse, given that it is as much a product of domestic policies as it is to the weak external environment. Moreover, US-China relations are still set for turbulent times. China is unlikely to yield to the US’s more fundamental requests to reform its domestic economic structure or to abandon its quest for global technological leadership. The view in Washington that China is a strategic competitor, if not a strategic threat, is increasingly bipartisan.

A Democratic president may change tactics toward China, but not the fundamental approach. In Beijing, it remains clear that it must hedge its energy supply security—for fear that the US could undermine it—and accelerate efforts to become a technological superpower.  

Supply reliance

Beijing has long been concerned about energy dependence. China is the world’s largest crude oil importer, buying close to 10mn bl/d in 2019—more than two-thirds of its total oil needs—and the second-largest LNG buyer, set to import over 80bn m³/d in 2019—over 40pc of its total gas demand. This concern extends to instability in oil and gas producing countries, as attacks on Saudi oil infrastructure in September 2019 highlighted, or the vulnerabilities associated with maritime trade, given US’ naval pre-eminence and potential ability to cut off supplies to China.

Over the past year, a new dimension has been added to this list: the risk of disruptions associated with US sanctions. Indeed, China’s crude oil supplies from Iran have fallen by more than half and imports from Venezuela have continued to fall.  

10mn bl/d – Chinese oil imports in 2019

A decision by Washington to sanction subsidiaries of Cosco Shipping Energy, China’s largest shipper, led to buyers shunning vessels owned by the firm. The subsequent surge in freight rates increased the cost of imports, at a time when a weakening renminbi has made the import bill higher still. The US-China tariff tit-for-tat has also rerouted commodity trade flows (including oil, LNG, as well as oil products), raising the costs of alternative sources.

Alternative resources

Over a number of years, China has sought to mitigate the vulnerabilities associated with import dependency through various means. Authorities have boosted the country’s strategic petroleum reserve, seeking to expand its presence across the value chain globally. They have also indigenised as much of the supply chain as possible, aimed at insulating the country and its companies from potential US sanctions.

The urgency of addressing import dependence has risen and fallen, the latter particularly since US shale production unlocked abundant oil and gas supplies. But, in 2020, import dependency will be back firmly at the top of the policy agenda and—even as global awareness of the energy transition rises—part of the answer for China will increasingly be to revert back to coal.

Electrification of the vehicle fleet will continue, albeit at a slower pace with the phasing-out of subsidies. China will continue to promote indigenous production of electric cars and buses given that this it is seen as a necessity from both an air quality and industrial standpoint. Yet, for now, electrification still means reliance on a coal-dominated power stack.

China can mitigate its growing reliance on imported gas by slowing its industrial coal-to-gas switch programme in 2020. The country will continue to develop its renewable resources and seek to fast-track innovation in energy management technologies and storage solutions. But, given that the priority for China is improving air quality—with carbon emission reductions a secondary benefit—‘cleaner’ coal can also play a bigger role.

On the other hand, China’s desire to look inward and to try to insulate itself from any energy threats related to its tariff dispute and generally spiky US relationship will be offset by its domestic goals and plans. 2020 marks the final year of China’s 13th Five Year Plan, and the drafting period for the next five-year blueprint.

Part of Beijing’s agenda has been liberalisation—an area that is of critical importance to China’s own development, as it will support the growth of the non-state sector, improve resource allocation and help foster the innovation that China seeks to ensure its rise up the global industrial value chain.

So, even as China seeks to indigenise processes and supply chains, its engagement with global oil and gas markets will continue to expand and grow. These two trends are not necessarily contradictory. China will look to accelerate its dominance in oil and gas supply chains and gradually set its own standards for both fossil fuels and the energy transition to which its putative business partners must adhere. Should the US and China choose to decouple, companies and markets could witness the first inklings of deglobalisation.

Michal Meidan is director of the Chinese energy programme at the Oxford Institute for Energy Studies (OIES)

Keep up-to-date with how the predictions in Outlook 2020 are playing out and get a first look at the themes that will shape Outlook 2021, as well as with relevant events such as the Outlook launch party and publishing schedules, by subscribing to Petroleum Economist’s bi-monthly Outlook newsletter.

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