Coronavirus Threatens to Blow Up Trump’s Energy Trade Deal With China

The goals were never realistic, but now Beijing has good reason to back away from its purchase commitments to Washington.

By Keith Johnson, a senior staff writer at Foreign Policy.
A view of Dongsi Shitiao crossroad in Beijing on Feb. 10. Many Chinese cities are nearly empty of cars and traffic in the wake of the virus outbreak.
A view of Dongsi Shitiao crossroad in Beijing on Feb. 10. Many Chinese cities are nearly empty of cars and traffic in the wake of the virus outbreak. Andrea Verdelli/Getty Images

Energy trade was the centerpiece of U.S. President Donald Trump’s just-completed pact with China, seemingly matching soaring U.S. production of oil and natural gas with bottomless Chinese demand for fuel.

While it was always going to be a stretch to meet the ambitious Chinese purchase targets laid out in the agreement, the recent explosion of the coronavirus and the impact it has had on China’s economic growth have now made those grandiose energy visions completely unrealistic—just as Trump takes to the campaign trail to tout the deal’s benefits ahead of his reelection bid.

The outbreak of the novel coronavirus, which has infected tens of thousands of people and killed more than 1,300 in little more than a month, seemed to have peaked—until new diagnostic techniques this week showed that the virus had infected thousands more and killed hundreds more than previously thought.

And the uptick in the disease’s virulence has been matched by growing signs of its impact on China’s and the global economy: Cargo ships are piling up outside ports full of undelivered commodities; oil and petrochemical refineries are scaling back operations due to declining demand for their products; Chinese consumer spending is anemic; and supply chains worldwide are shuddering. Air freight, a key indicator of global trade, seemed on the uptick after a dismal 2019, until it collapsed again in January, a potential harbinger of a broader slowdown in cross-border trade flows.

The International Energy Agency just underscored the dramatic impact the virus is having: For the first time since the financial crisis a decade ago, the world’s demand for crude oil will decline in the first quarter of the year, led by a precipitous fall in oil demand in China, the world’s biggest oil importer.

The energy market impacts of the coronavirus will likely doom the $50 billion in additional oil and natural gas purchases that Trump was banking on as one of the few positive outcomes of his 18-month trade war with China, which resulted in slower growth in both economies, billions of dollars in new taxes for U.S. consumers, and lost markets for U.S. farmers and oil workers.

To be sure, the virus may have read the last rites to the hoped-for energy trade, but the deal was already impossibly ambitious even before the disease suddenly upended travel and business throughout the world’s second biggest economy at the beginning of the year.

Under the terms of the “phase one” deal signed last month, China agreed to purchase an additional $18.5 billion in energy products this year and $34 billion next year—above and beyond what it was already buying to power cars, planes, and factories. That would have required a 275 percent increase in Chinese energy purchase this year and a whopping 500 percent increase over 2017 levels next year. (Similarly aggressive expectations for increased agriculture sales to China are even more difficult to meet, since American farmers wracked by bankruptcies and lost markets would have to massively increase their spring planting in the next few weeks, even as the coronavirus decimates China’s short-term growth prospects.)

“Even before the virus, these goals were completely unrealistic. It’s as if children were writing those numbers, completely divorced from the way that business and international trade works,” said Gal Luft, an energy expert and co-director of the Institute for the Analysis of Global Security, a Washington-based think tank.

To be fair, the children were warned: The U.S. oil industry explained to the Trump administration that the energy targets were beyond the reach of even the surging American oil patch, with the extra crude shipments theoretically earmarked for China outstripping the entire projected growth of U.S. oil output. But Trump reportedly liked the sound of round numbers for his fantasy trade package and pulled objectives seemingly out of thin air. (Since the deal was finalized, he has upped his imaginary ante even further, speaking of Chinese commitments to buy $300 billion worth of American goods.)

“It’s like shooting an arrow first and then drawing a circle around it and calling it a target,” Luft said.

An even bigger problem than U.S. supply constraints is China’s demand for more oil and natural gas, even before the virus poleaxed economic activity. On paper, before the virus hit, China was on track to gobble up as many as 600,000 more barrels of oil per day this year, making it seem like a good market for U.S. crude oil production, gushing at record levels and looking for buyers.

But China’s oil refineries are largely geared to the heavier grade of crude it buys from the Middle East, not the light oil America’s shale patch produces. In addition, China maintains import tariffs on U.S. crude oil, a lingering effect of the trade war. Finally, a lot of China’s current oil imports are either strategic in nature—such as those from Russia or Venezuela—or tied to long-term contracts, such as with Saudi Arabia, making it harder to ditch them for an influx of American crude. That combination already made the United States a less-than-ideal supplier for China.

The other piece of America’s energy renaissance—natural gas—faced its own challenges in China. Beijing has so far maintained even steeper tariffs on U.S. natural gas exports, redoubling the challenges for U.S. suppliers to be competitive in an already oversupplied market; U.S. gas exports to China fell to zero after the tariffs were levied. China, meanwhile, has ramped up its domestic production of gas and is now receiving cheap gas by pipeline from Russia, among others—narrowing the room for U.S. tankers full of liquefied gas to find a profitable way into the Chinese market. As with oil, many of those gas deals include long-term contracts that would be hard for China to back out of just to do Trump a favor.

“It is unlikely that China could both meet its existing contractual obligations and sufficiently increase its purchases from the United States,” Fitch Solutions said in a note.

Obviously, that outlook has only gotten dimmer thanks to the impacts of the coronavirus. Slower economic activity will almost certainly dampen China’s demand for gas, narrowing U.S. export options even further. And the slowdown is rippling throughout other parts of the energy-dependent economy: China’s petrochemicals industry, for example, will likely require less imported feedstock (denting some exporters’ hopes) and also produce fewer of a handful of key industrial plastics (hurting some countries that need to buy them).

“The coronavirus is offering markets a taste of just how disruptive a downside scenario in China can be,” the Oxford Institute for Energy Studies said in a note.

Despite the human toll of the coronavirus, the outbreak may offer one silver lining to both Beijing and Washington: China would have been hard-pressed to meet its purchase commitments, and Trump was committed to breaking off the trade truce if that happened.

“In a way, the virus is a gift to both sides because it gives them a good excuse not to implement something that was not implementable,” Luft said.

More broadly, the much-hyped state-managed boost in U.S.-China trade in energy, agriculture, and other products was, from the start, an unlikely shift for a China that has sought for decades—and especially in recent years—to increase its economic independence, not lessen it.

China has for years obsessed over its energy security, going to great lengths to ensure that the United States cannot at a time of crisis interfere with oil and gas imports, for example. China has redoubled efforts to increase its food security. More recently, China has sought to wean itself from reliance on overseas suppliers of key technologies, from semiconductors to mobile telephony.

“They know what happened to Japan” when the United States cut off oil supplies in 1941, forcing Tokyo into a corner, Luft said. “It’s not their mentality to be dependent on anybody, let alone the country that has now defined them as the enemy. The notion that China will hook itself to a country that has decided that it is no longer a friend, and be dependent on this country for food and energy, is nonsense.”

Instead, like many others—such as the European Union promising to buy more soybeans, South Korea making token concessions on cars, India swallowing trade insults to avoid an escalation—China has learned to offer Trump paper victories he can tout at rallies while buying time to get its economy in shape for the long haul.

“When you’re a one-trick pony, everybody learns how to read you—and play you,” Luft said. China figured if they offered Trump some promises of commodity purchases, he’d call off the trade war for a year or so. In the meantime, “they can move in a direction they want to go. And by then, they will be much more independent and much less vulnerable.”

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP