Who does China trade with in order to keep the lights on? Not the United States.
Once burgeoning U.S. exports of fossil fuels to China are drying up as a result of Russia’s invasion of Ukraine and the expiration of the U.S.-China Phase One trade deal that was signed back in 2020. Europe’s scramble for a reliable supply of natural gas has led American producers to redirect their supplies across the Atlantic; meanwhile, Russia is turning to China to buy up its excess supply.
Should current trends continue, the result would be a reorienting of the global energy trade in ways not seen since the end of the Cold War, with the movement of commodities aligning with hardening political blocs. Some experts say that energy trade flows may be just the start, with its realignment a harbinger of things to come for other industries, including agriculture and manufacturing.
This week, The Wire looks at how the U.S.-China trade in energy commodities has changed this year, and what it means for the future of trade between the two countries.
FOSSIL FUEL FLOP
A recent analysis of U.S.-China trade data by the Peterson Institute for International Economics (PIIE), a Washington D.C.-based nonprofit, shows how the energy trade has changed over the last year.
While China never entirely fulfilled its commitments to buy more energy supplies from the U.S. as promised in the Phase One trade deal, Chinese buyers nonetheless increased their purchases of U.S. energy between 2020 and 2021. For two years, China raised its imports of American fossil fuels, with blockbuster long-term contracts for liquefied natural gas (LNG) — that is, gas which is cooled into liquid form, loaded onto ships and then reconverted into gas in the destination country. Beijing’s desire to transition to lower-emission fuel sources in part lay behind the rising demand.
So great was the demand that some U.S. suppliers began deepening investments in gas liquefaction facilities and other infrastructure on the west coast, in order to serve China as a long-term growth market.
But Chinese imports of American coal, crude oil and fossil fuels have fallen off in 2022: import volumes are down 78 percent for U.S. LNG, 49 percent for U.S. crude and 30 percent for U.S. coal.
Part of that may be down to Chinese factories producing less amid a broad economic slowdown, and so requiring fewer energy supplies. A desire to ensure energy stability following power shortages last year has also led China to ramp up domestic coal production at the cost of reaching its low-carbon targets. Sky high spot prices have incentivized U.S. producers to redirect their supplies to Europe, where imported natural gas is three times more expensive now than this time last year as a result of a fall in natural gas imports from Russia due to the war.
Meanwhile, China has imported 27 percent more Russian LNG and 4 percent more crude oil in 2022 compared to the same period last year. Purchases of coal have remained steady with volumes essentially unchanged, even as prices have shot up 91 percent.
EUROPEAN RESALE
Demand for energy supplies is so strong in Europe that China has taken to reselling some of its excess fossil fuel imports to European buyers. China exported $152 million worth of LNG to the EU, and another $210 million to Japan and South Korea in the first seven months of 2022, according to data analyzed by PIIE. That’s a huge increase compared to 2021, when China exported just $7 million of LNG in total globally.
The size of those shipments should be put into perspective: Europe is hardly becoming dependent on China for energy.
“Europe’s spending billions of dollars every month on oil and gas. [China’s energy exports] are not really going to move the needle,” says Chad Bown, a senior fellow at PIIE who tracks U.S.-China trade. “$152 million over seven months is an interesting, kind of quirky story, but it’s not going to solve any long-term problems for Europe.”
ENERGY IS JUST THE START
The emerging picture of the energy market is of trade flows increasingly falling in line with political blocs. The West and China’s mutual desire to mitigate reliance on one another for strategic resources means that recent trends in energy markets may be a harbinger for other industries, according to PIIE’s Bown.
“Manufactured products are often customized between buyers and sellers… and agricultural products are somewhat constrained by seasonality,” he says, explaining why there may be a lag before similar realignments appear in other areas of the U.S.-China trade. “Energy is one of the easiest sets of products to change to whom you’re selling and from whom you’re buying because it’s a homogenous product.”
Parts of the manufacturing sector and forecasts from the agricultural sector are sending bearish signs, too. U.S. exports of semiconductors and associated equipment to China — one of the few bright spots among the sectors targeted by the Phase One trade deal — are down 25 percent this year. Agricultural products have fared better so far, but the U.S. Department of Agriculture expects Chinese demand for soybeans, a crucial farm export, will underperform in the latter months of the year.
Eliot Chen is a Toronto-based staff writer at The Wire. Previously, he was a researcher at the Center for Strategic and International Studies’ Human Rights Initiative and MacroPolo. @eliotcxchen