Trade LNG More, End the US–China Trade War

Increasing LNG trade could benefit many in the light of current US–China trade tensions. In an increasingly multipolar world, international cooperation through global trade must be strengthened and the LNG market offers unique opportunities to stabilize the system.

Posted on 05/26/19
By Tomoo Kikuchi & Yohei Tanaka | Via East Asia Forum
The United States is expected to become the world’s third largest producer of LNG by 2020. (Photo by Ken Hodge, CC license)

In 2015, 24 per cent of total global energy was consumed in the form of natural gas, closely behind oil at 33 per cent and coal at 29 per cent. Its use is rapidly on the rise — in the United States, natural gas is expected to replace coal as the main source of energy together with oil by 2050.

International trade in liquefied natural gas (LNG) has risen in response to these changing demands. In 2017 Qatar held 27.6 per cent of the total LNG export market share followed by Australia at 19.2 per cent. The United States had a market share of only 4.5 per cent. This is expected to increase significantly.

On the other hand, smaller countries such as Japan occupy 28.8 per cent of the total LNG import share. China’s share of imports currently sits at 13.5 per cent. On a global scale, greater trade in LNG could encourage stronger international business ties and trade links.

The United States cannot run trade deficits indefinitely through the ongoing US–China trade war. Under such conditions, it seems there are five ways that LNG trade can contribute to a more stable world economy.

First, China’s LNG imports from the United States may be able to help rebalance deficits and counter the damaging effects of the current trade war. Currently, 50 per cent of the total US trade deficit is with China. The United States also happens to have a national surplus of natural gas. The United States is expected to become the world’s third largest producer of LNG by 2020.

If China chooses to import greater volumes of US LNG, trade tensions would ease. If such measures are not taken by China, the United States’ trade demands may become more severe. Greater export restrictions, including higher tariffs, would have long-term repercussions for China’s export-oriented economy and cause political instability.

Second, increased LNG imports from the United States could also help China internationalize its Renminbi. The world’s dependency on the US dollar is destabilizing for the global economy, as well as a constraint on US monetary policy. The inclusion of the Renminbi into the SDR currency basket in 2015 reflects an effort to stabilize the global financial system. China may accept larger LNG imports from the United States if the Renminbi can be used as a clearing currency.

This may not be practical for businesses that trade mostly in US dollars. Oil and gas companies have little incentive to settle in Renminbi, as their equity and debts are in US dollars. But should the Federal Reserve increase its Renminbi holdings in the future, this will facilitate the redemption of US treasury bonds held by China.

Third, Australia and Japan can both play an important role in spurring the global growth of LNG trade. Japan has been the largest LNG importer for over a decade. Since 2013, Australia has been its biggest source of LNG imports.

The Japanese government plans to make Tokyo a global LNG hub by the mid-2020s. To this end, there is potential for Japan to import more LNG from Australia. The two countries should cooperate to relax the destination clauses in LNG contracts, which limit the destinations of transportation and unloading of LNG.

For further expansion and liquidation of LNG trade, Japan can also import more LNG from the United States and sell it to China. This will prevent China from becoming too dependent on US LNG imports.

Fourth, LNG could also help China mitigate the effects of climate change. Over the coming years, China will become more exposed to climate hazards. Yet China continues to rely on coal for 72 per cent of its primary energy consumption, while natural gas makes up only 6 per cent.

Various life cycle assessments indicate that LNG produces 30–40 per cent less CO2 than coal from extraction to combustion. In fact, over 95 per cent of coal’s CO2 emissions come from combustion. Burning low-quality coal also emits sulphur oxides and nitrogen oxides, which severely pollute the environment.

China is currently behind on its target to reduce coal reliance to 55 per cent by 2020. Even if Beijing cannot abolish fossil fuels entirely, China has an incentive to shift to a less carbon-intensive fuel such as LNG to reduce emissions.

Fifth, LNG will also enable China to diversify its sources of energy. Currently, China imports natural gas mainly via pipelines from Turkmenistan and, more recently, Russia. For geopolitical reasons, China is reluctant to become dependent on these pipelines for its LNG imports. Diversifying its sources of gas will allow China to gain political leverage and ensure greater energy security.

Increasing LNG trade could benefit many in the light of current US–China trade tensions. In an increasingly multipolar world, international cooperation through global trade must be strengthened and the LNG market offers unique opportunities to stabilize the system.

Tomoo Kikuchi is Visiting Senior Fellow at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

Yohei Tanaka is Lead Economist and Deputy Manager at the America and Africa Project Division of INPEX, a Japan-based oil and gas exploration and production company.

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