US-China Trade Tensions: Here we go again

The brief reprieve in the US-China tariff tit-for-tat seems to be coming to an end following Donald Trump’s tweet on 1 August, threatening to impose 10 per cent tariffs on $300 billion-worth of Chinese imports effective 1 September 2019. The announcement led to a steep fall in oil prices, as markets fear that the escalating trade war will further weaken the global economy and weigh on oil demand growth. If the tariffs do go ahead—and there is no reason to believe that they will be averted by China making big concessions—all of China’s exports to the US will effectively be taxed. As a result, China’s retaliatory duties will widen to cover most if not all of its imports from the US, including crude oil. Even though US exporters will find alternative destinations for their barrels, the prospects of an even shakier global economy will weigh on the oil complex. Moreover, as this latest turn of events only reinforces the sense that the US-China trade war is unlikely to be resolved any time soon, it makes a short term economic stimulus less politically palatable for Beijing. To be sure, Beijing will want to put a floor under the country’s slowing economic growth and tackle rising unemployment but ahead of the 70th anniversary of the founding of the People’s Republic of China (PRC) in October, China’s leadership will prioritise blue skies—which typically means industrial curtailments—over an economic bang. China’s oil and gas demand growth is therefore set to halve from 2018 levels.

By: Michal Meidan