China abruptly changed course Wednesday and removed oil from a list of American products it is subjecting to tariffs, as the energy-hungry country acknowledged the limits on trade war losses it can absorb.
Beijing announced on Wednesday that it would impose retaliatory 25 percent tariffs on $16 billion worth of U.S. imports, a response to the Trump administration after it issued similar tariffs against China on Tuesday.
China’s new tariffs will target U.S. automobiles, steel products, medical equipment, and some energy products, including coal, diesel, gasoline, and propane.
But for now, China will not put tariffs on U.S. crude oil. An early draft of potential tariff targets published by China in June did include crude oil.
China is the largest U.S. market for crude exports. Experts say China spared U.S. oil because it may struggle to get it elsewhere due to disruptions from other major suppliers.
“China’s decision to take crude oil off the list may signal its realization that the country would have more to lose from a 25 percent tariff on U.S. crude as the supply related uncertainty deepens in the global oil market,” said Jane Nakano, a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies. “Denying itself access to U.S. crude would have made crude oil imports more expensive for China and may have triggered energy security concern, especially if world developments drive up the global oil prices.”
Among the most pressing supply issues for China, and other major buyers, is that Iran is facing renewed oil sanctions imposed by the U.S., and Venezuela is suffering from a political and financial crisis that has dramatically limited production there.
U.S. crude oil exports to China went from nothing before 2016 to a record 15 million barrels in June.
The growth came after former President Barack Obama in 2015 signed a law passed by Congress ending a 40-year-old ban on oil exports.
The surging U.S. shipments of oil to China has helped reduce America’s trade deficit with the country, while also providing fuel for Beijing’s growing energy demand.
“Crude oil trade should be an easy win-win for Washington and Beijing,” Nakano said. “The United States has crude oil it wants to sell, and exporting it to China helps the Trump Administration address its concern over bilateral trade deficit with China. China needs crude oil to sustain economic growth.”
Despite both sides’ interest in maintaining energy ties, trade tensions are affecting the oil trade relationship.
China’s largest refiner, state-controlled Sinopec, last week said it would delay importing U.S. crude until September. In another snub to Trump, China has declined to stop importing oil from Iran, ignoring U.S. threats to penalize countries that don’t wind down their purchases of Iranian crude by Nov. 5.
Independent refineries in China, however, have an appetite for light, sweet crude from U.S. shale production that is easy to refine, and likely helped lobby Beijing to not impose oil tariffs, experts say.
Even so, the oil and gas industry has warned Trump to de-escalate his trade war with China before it imperils U.S. liquified natural gas exports.
China said last week it could impose a 25 percent tariff on U.S. liquified natural gas, or LNG — the chilled, liquid form to which gas must be converted for shipment in giant tanker vessels across the sea.
The move, which surprised the U.S. energy industry, would be in retaliation for Trump directing his trade policy team to hike tariffs on China to 25 percent, instead of the 10 percent tariff initially under consideration.
China’s demand for LNG is soaring, especially as it seeks to combat a severe smog and pollution problem in many of its major cities that comes as a direct result of coal-generated electricity.
Experts say tariffs could stop China, the world’s fastest-growing LNG market, from signing long-term contracts with American developers.
That could be more damaging to the U.S., because while oil is fungible, and can easily find its way to other markets, LNG is not.
So the U.S. energy industry has reason not to celebrate oil being spared from the trade war with China.
“I would not read too much into any leverage U.S. might have on China,” said Edward Chow, who is also a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies. “At the end of the day, oil is fungible. We are on a downward spiral in the trade war. Items taken off a list can easily be put back on, as we saw with U.S LNG.”
