China can’t cut its trade gap by RM795b

By DAVID FICKLING

The great thing about large numbers is they can get so huge that you can bamboozle people by chucking them around.

That’s the best way to view Beijing’s reported offer to reduce its trade surplus with the US by US$200 billion (RM794.6 billion) (the country’s Foreign Ministry cast doubt last Friday on whether such a proposal had been made).

In the context of economies with a combined gross domestic product in the region of US$30 trillion, it looks like a rounding error. The trouble comes when you try to work out where the reduction will come from.

Stretch Goal

The US is already exporting goods to China at close to record levels.

Consider, for instance, that the US exported US$154 billion of goods to China in 2017, and imported from it US$431 billion.

Taking US$200 billion off that deficit would involve either more than doubling US exports, almost halving its imports, or some combination of the two. To be sure, there are some trade categories that have seen spectacular growth in recent years.

China is scouring the world to feed its voracious energy demands, and the US began exports of crude oil and liquefied natural gas (LNG) only in the past few years.

The US was the fastest-growing major crude exporter to China last year, with a 1,476% improvement on 2016 that saw its volumes leapfrog those of Malaysia. Strengthening consumption and flat-lining output from domestic fields is likely to continue pushing up China’s oil imports, with the International Energy Agency estimating that demand will increase by about two million barrels a day by 2023, equivalent to about a fifth of US output.

It’s a similar story with natural gas. Long a laggard in methane consumption, China is fast turning into the big beast of the global LNG market, with import volumes doubling over the past two years.

That trend is only getting started: Domestic gas prices rallied as much as 32% in the past three weeks, a remarkable indicator of supply tightness given it’s almost summer.

Greasing the Wheels

Chinese imports of petroleum and natural gas from the US are soaring.

LNG consumption will rise by 23% a year from 2016 to 2020, taking imports to 61.2 million metric tonnes annually from 26.2 million tonnes in 2016, according to Wood Mackenzie, a consultancy.

Total regasification capacity will rise to more than 100 million tonnes a year in 2022, at a time when US liquefaction capacity will be approaching 70 million tonnes a year, according to the International Gas Union.

The trouble is, that will barely move the needle. Let’s assume for the sake of argument that the US supplies every additional barrel of oil consumed by China between now and 2020.

The additional 400 million-odd barrels, at mid-2020 Brent futures prices of around US$70 a barrel, gets us US$28 billion closer to Beijing’s US$200 billion target.

Assume that the US supplies every additional tonne of LNG under Wood Mackenzie’s estimates at current import prices of US$500 a tonne and you can add another US$17.5 billion.

Even doubling prices for each commodity gets less than halfway to US$200 billion.

There’s nothing else out there that can make the numbers stack up. Even if the US were to increase exports of every billion-dollar trade category to its maximum level of the past decade, that would still chip only US$23 billion more from the total.

With the threat of a trade war looming, it’s tempting to take whatever we can get to avert the self-destructive course the world is now on — whether it’s a cut in auto tariffs that won’t really help US auto companies, a Chinese government loan to a US President Donald Trump-connected resort development, or the promise of some unlikely trade number in the unspecified future. Just don’t expect these fantasy league numbers to be trans- lated into reality any time soon. — Bloomberg

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.