President Donald Trump’s trade war with China has already hurt U.S. farmers and manufacturers and now threatens a more recent export business that has been booming: energy.
On Monday, the trade war escalated dramatically, with U.S. tariffs going into effect on $200 billion worth of Chinese goods. This was immediately countered by Chinese tariffs on $60 billion worth of U.S. exports. While earlier Chinese retaliation took aim at things such as soybeans, the latest round includes a 10 percent tariff on U.S. exports of liquefied natural gas, or LNG, the first time Beijing has targeted U.S. energy exports.
That could be bad news for the U.S. energy patch, which has taken advantage of a decade-old fracking revolution to become a big supplier of natural gas and crude oil to countries all over the world, including China. The Chinese tariff, though smaller than the duty Beijing threatened to levy earlier this year, makes U.S. gas a bit more expensive and less competitive in the world’s second-largest LNG market.
As a result, Beijing will probably look to get more energy from other suppliers, experts said. Russia is already building a massive gas pipeline to supply China from Siberia, and this month the two countries announced plans to fast-track another Siberian pipeline, which if built would double Russia’s gas trade with China.
But the Chinese tariff also threatens to have implications in years to come. By essentially limiting U.S. access to one of the most important gas markets, the tariff could have a chilling effect on the next wave of U.S. gas export projects under planning. Many of the proposed projects need China and its voracious appetite for gas to line up financing.
“I think these tariffs, and the escalating trade war, are a significant headwind for the next wave of U.S. LNG,” said Jason Bordoff, the director of Columbia University’s Center on Global Energy Policy and a former energy advisor in the Obama White House.
The United States only started exporting big amounts of LNG beginning in 2016, and China has become one of the biggest buyers of U.S. LNG, behind only Mexico and South Korea. Beijing is snapping up increasing amounts of natural gas as it seeks to reduce the use of coal, which has driven dangerous levels of air pollution in many Chinese cities. Expectations that China will need to buy more and more cleaner-burning gas, and especially dirt-cheap U.S. gas, underpin the gas business for many upcoming U.S. export projects. That could make China’s retaliatory tariffs especially painful a couple years from now.
Unlike the first wave of U.S. export terminals, which weren’t predicated on feeding the Chinese market, the next wave of investment relies on China’s sheer size and growth potential. The expansion this year of the first big U.S. export terminal, for example, depended in large part on a new supply contract with China. More investment like that could be in doubt if China is off-limits.
“It takes the wind out of the sails a little bit,” said Giles Farrer of Wood Mackenzie, an energy consultancy. The Chinese tariff “restricts the target market a bit for second-wave developers” in the United States, he said.
That would only help rivals in other countries hoping to boost their own LNG exports. Russia, the Middle East, East Africa, and the eastern Mediterranean are all areas hoping to develop more liquefied gas export capacity.