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Letter from China: US-China trade deal in the last chance saloon

Presidents Trump and Xi’s compact on rebalancing may be the next domino to fall

Relations between the US and China have sunk to new lows with unprecedented speed on virtually every bone of contention between the two economic superpowers recently—Huawei, Hong Kong, TikTok and Taiwan to name but a few. Next to unravel could be the sole glimmer of hope in Sino-US relations: the phase one economic and trade agreement signed in mid-January.

Seven months on, it looks increasingly unlikely that China will live up to the ambitious targets for purchases in the trade deal that include procuring US energy products. China is significantly behind on imports of American LNG, crude oil, refined products and coal and, unless something extraordinary occurs, Beijing will not meet its targets. Failure to keep up with purchases in the run-up to the US presidential election in November could collapse the agreement and accelerate the US-China decoupling.

$23.5bn – China’s commitment to US energy purchases in 2020

Trade data indicates energy imports are falling far short of the speed required to achieve the targets in the agreement. The deal signed by Trump and Chinese vice-premier Liu He committed China to importing at least $23.5bn worth of US energy products in 2020, rising to $38.9bn next year.

The $23.5bn goal works out to a monthly average of $2.11bn this year. But China imported just $1.29bn over the first six months of 2020, according to Chinese customs statistics—a mere 5.5pc of this year’s $23.5bn target and well behind a year-to-date target of $12.7bn. The objectives for next year look even more challenging as the average monthly bill will rise to at least $3.39bn.

Digging into the trade data underlines the paucity of China’s purchases in the face of the Covid-19 shock. Crude imports amounted to just 45,603bl/d in the first half of this year compared with 85,453bl/d in the same period in 2019.

LNG purchases have fared better but still lag far behind the pace required to move the needle on meeting purchasing commitments. China’s LNG imports more than tripled year-on-year in the first six months, to 878,754t, but this was from a low base in the same period of 2019.

Keeping the deal alive

While it would be easy to dismiss China as not trying or ignoring the agreement, purchases have accelerated in recent months. Chinese imports of energy products from the US increased sharply in May and June compared with the first four months of 2020, when demand was severely impacted by Covid-19.

China, the world’s second-biggest LNG buyer, did not import any LNG from the US from January to March but received 206,981t in April valued at $38.3mn, 331,766t in May worth $119mn, and 340,007t worth $97.8mn in June, according to Chinese customs data.

The recent uptick can be read as a sign of good faith from Beijing that it is attempting to live up to the trade deal

The falling costs for higher volumes across May and June illustrate one reason why China has struggled to honour the terms of the agreement. Setting the target for US energy imports in dollars rather than volumes has made it difficult for China to spend as much as needed when prices are at unforeseen lows. Effectively, the global fall in energy prices in the first half of 2020 means China must now import much larger volumes to meet the targets.

Still, the recent uptick can be read as a sign of good faith from Beijing that it is attempting to live up to the trade deal. The Chinese government can also cite as mitigating factors the gradual pace of recovery in its economy and the aforementioned collapse in crude prices, which has also affected the cost of other energy products such as LNG and LPG.

At the same time, however, the still relatively low monthly amounts to date will reinforce suspicions that the purchasing targets in the trade agreement are unachievable for China, and that Beijing is simply going through the motions of doing just enough to keep the deal alive.

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