BY JASON BORDOFF
Trump’s much-touted trade victory has crashed and burned with the coronavirus pandemic, and nothing more dramatically signals that than the energy part of the deal. Amid the collapse in oil demand and prices unleashed by the pandemic, it is now all but certain that China will fail to meet its targets for energy purchases and expose the folly of Trump’s trade strategy. While Trump was right to address China’s problematic trade practices, the administration’s approach made little sense before the pandemic—and makes even less sense now.
To recap: The two countries ended more than 18 months of heated trade war, including Chinese tariffs on U.S. energy exports, when they signed the first phase of Trump’s deal. The centerpiece was an agreement that China would buy goods and services from the United States in 2020 and 2021 worth a combined $200 billion above 2017 levels, a figure that would mean roughly doubling U.S. exports to China by 2021 in four key sectors. By far, energy was the sector with the largest promised growth, with the Chinese pledging to raise purchases of U.S. energy by $19 billion in 2020 and $34 billion in 2021—a staggering 240 percent and 440 percent increase, respectively, over 2017 levels.
The targets were unrealistic even before the ink was dry in January. That may not have mattered to Trump and his advisors, because the deal was structured so that China’s actual purchases would not have been counted until after the November election. COVID-19, however, has brought forward the moment of reckoning: Trump’s deal is certifiably dead, because there is no way for China to come anywhere near reaching its commitments.
Let’s do the math. For energy, the trade agreement targets Chinese imports at an average monthly rate of $2.2 billion during 2020. In reality, China imported almost nothing in January, again almost nothing in February, and a mere $320 million worth in March, according to ClearView Energy Partners, a consultancy. That’s a more than 90 percent shortfall from Beijing’s target for the first quarter.
This dramatic shortfall is not surprising, of course. Chinese energy use collapsed in the first quarter of 2020 as a result of lockdown measures and the economic collapse resulting from COVID-19. Shrinking global demand has also meant a collapse in the price of oil, which would require an even bigger increase in the volume of energy China must buy to hit the spending target. The trade deal also did not formally take effect until Feb. 14, and China did not remove its own tariffs on U.S. oil and gas until March 2.Trump’s deal is certifiably dead, because there is no way for China to come anywhere near reaching its commitments.
At the same time, the COVID-19 shutdown does not entirely explain China’s almost complete lack of progress on meeting its energy purchase commitments. Despite the pandemic, imports of crude oil from Saudi Arabia and Russia actually rose during the first quarter as China took advantage of cheap prices to fill up its strategic stocks. Moreover, even as China’s economy reopens and gasoline use rebounds—in part driven by commuters eschewing crowded mass transit—preliminary data from oil tanker movements suggests Chinese imports of U.S. crude oil will actually fall in April compared to March, not just in terms of value but total volume, too.
Even if China’s imports of U.S. energy rise in the months ahead, the trade deal commitments will be impossible to reach. Again, it’s simple math: Fulfilling the energy part of the deal would require China to spend an average of $2.9 billion per month from April through December to buy U.S. energy—at $30 per barrel (the U.S. government’s projected average price for 2020), that’s equivalent to about 3 million barrels of oil per day, or the total of all U.S. daily crude exports in 2019. That China would buy every last drop of exported U.S. oil is unrealistic enough—but today, that oil is not even available, as U.S. oil exports are projected to fall this year along with the collapse in U.S. shale output, which is projected to drop by roughly one-third over the next year.
Moreover, China could not take 3 million barrels per day of U.S. crude oil even if it were available. Even if China were to replace all of its oil imports from Saudi Arabia, currently its largest supplier, with U.S. oil, that would only be 1.8 million barrels per day. Beijing could meet its targets by buying other fuels as well, but other types of energy such as liquefied natural gas, liquefied petroleum gas, and coal represent only a fraction of the value of crude oil exports. China would need to dramatically shift its entire energy import portfolio from its current suppliers to the United States. Even then, the math does not add up.
The limits of the Trump administration’s trade strategy have been especially evident in recent weeks as it scoured for ways to provide relief to hard-hit U.S. oil producers and their workers. In response to the oil price crash, U.S. output is down at least 1.5 million barrels per day since the end of February. A survey by the Kansas City Federal Reserve projects 40 percent of U.S. oil firms will go bankrupt if prices remain at low levels. Rystad, an energy consultancy, projected 220,000 oil workers would lose their jobs.
In response to the carnage, the Trump administration suggested a vast array of possible measures to support oil and gas firms—including paying producers not to produce, expanding lending through the Federal Reserve, filling up the U.S. strategic petroleum reserve, and imposing tariffs on imported oil. In the end, however, the only action available to the administration that made much difference was to coax Saudi Arabia and Russia to come back together and organize a historically large production cut by OPEC and other oil-producing nations.
Strangely—or perhaps revealingly—diplomatic pressure on China to live up to its trade obligations was never even mentioned by administration officials despite pleas from industry. While the oil industry was divided on most proposals to raise oil prices and support companies, they could all agree that China buying more U.S. energy would be a good thing. COVID-19 has revealed China’s promises to buy U.S. energy to be hollow, and Trump’s trade strategy to have failed.Had China actually made meaningful progress on its commitments to buy U.S. oil and gas in recent months, that would have provided some relief to U.S. producers at a time when they were running out of tanks to store their oil, which for a brief moment sent U.S. oil prices into negative territory for the first time in history. If Trump either can’t or won’t push China on oil, the energy industry is now proposing that the administration at least boost liquefied natural gas export projects by allowing China to count new purchase agreements immediately instead of spread out over the duration of the project.
The oil price crash may explain part of China’s lack of progress toward meeting its energy targets. But it also exposes the limits of Trump’s strategy of managed trade based on deals promising specific purchases, rather than doing the hard and systematic work of removing trade barriers, resolving concerns around Chinese industrial policy, and dealing with topics such as intellectual property, exchange rates, and subsidies. China’s record on these issues has been problematic for years, and bullying China into buying more American stuff was never a coherent response to it. COVID-19 has revealed China’s promises to buy U.S. energy to be hollow, and the Trump administration’s trade strategy to have failed.
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