China Faces Diminishing Returns With U.S. Commodity Tariffs
China Cranks Up U.S. Commodity Pressures in Tariff Battle
(Bloomberg) -- China’s latest retaliation against U.S. tariffs is set to prove largely benign to commodity trade flows as Beijing runs out of raw materials to target.
Some products targeted by China tariffs were already squeezed by the long-running trade war. Meanwhile, other politically sensitive items, including soybeans, have been subject to top-end levies of 25% since last year.
Even duties on U.S. rare earths target only a single miner that exports small quantities of the materials used in magnets for electric motors. China has spared oil from tariffs for now, though refined products such as gasoline as well as biodiesel are already included. And crude shipments from America have slowed to a trickle anyway as Chinese refiners avoid the risk of becoming embroiled in the dispute.
The potential futility of China merely raising levies on goods that have already been roiled by the trade war evokes the U.S. move last year to target products for which no trade flow exists. Still, the flaring rhetoric between the Donald Trump and Xi Jinping administrations is affecting commodity prices, with metals and grains dropping due to the risk of weaker demand from the world’s two largest economies.
Since Trump fired his first trade salvo to force policy changes by Beijing last year, China and the U.S. have been engaged in a tit-for-tat over tariffs. U.S. farmers, oil producers and gas exporters have seen their shipments dry up to the Asian nation, which was previously the biggest buyer of American soybeans and crude oil.
The following is how duties hit several sectors:
Gas Dry Up
Beijing announced Monday that it will increase tariffs on LNG to 25% from 10% as of June 1. The smaller duty imposed in September had already dried up most trade as it made American cargoes more expensive versus shipments from elsewhere with prices linked to Brent crude.
China has only imported four cargoes of American gas so far in 2019, compared with 19 over the same period a year ago, according to Bloomberg analysis of vessel tracking data. While trade flows themselves are unlikely to change significantly, the dispute threatens the viability of a new wave of U.S. LNG projects.
“An ongoing trade war between the U.S. and China will continue to create hesitancy for Chinese buyers to sign up for new long term volumes,” Wood Mackenzie Ltd. analysts said in an emailed note.
Oil Risk
Shipments from America were kept off the latest round of Chinese tariffs, extending a policy since August last year when the Asian nation removed crude from a list of goods that will incur a levy. That’s done little to encourage buyers, though.
The world’s top oil buyer only imported 1.64 million barrels of American crude in the six months to March, compared with 60.5 million barrels in the preceding six months. While shipments have edged up in recent months during a temporary truce, they are still far below last year’s level.
Unipec, the trading arm of Chinese refining giant Sinopec, has avoided bringing American crude all the way home, though it has taken U.S. shipments to sell to third parties. The latest conflagration sets up refiners in the Asian nation for a costlier oil bill, as it closes the door to a critical source of supply just as global supplies are squeezed and Middle East producers are demanding higher prices.
Agricultural Combat
China already imposes a 25% duty on U.S. soybeans, shipments of which shriveled to almost nothing last year as the Asian nation instead turned to supply from Latin America, particularly Brazil.
The focus now shifts to purchases that China’s committed to this year. About 7.4 million metric tons of U.S. soybeans haven’t yet been shipped to the Asian country and, with tensions flaring again, speculation is swirling that some of the cargoes will be canceled. Soy futures declined to a 10-year low on Monday, dropping below $8 a bushel, as prospects for a thaw in trade relations looked further away.
Meanwhile, a tariff on biodiesel will increase to 25% from 10% from June 1, although shipments to China currently are minimal.
Rare Metals
China raised tariffs to 25 percent from 10 percent on American imports of rare earths, an esoteric group of materials used in everything from electric cars to high-tech military equipment. That may hurt sales from the Mountain Pass facility in California, the only operating rare earths mine in the U.S.
Most of the rare earths trade between the world’s top two economies goes the other way, with America reliant on China for about 80 percent of its supply. The Asian nation’s control of rare earths has long been flagged as a risk for advanced manufacturers in developed nations.
That may explain why the U.S. excluded rare earths, along with pharmaceuticals, some medical goods and other critical minerals, from its own list of prospective tariffs on roughly $300 billion worth of Chinese goods to be targeted in the next wave of measures. It’s the second time the U.S. has ducked levies on the elements.
--With assistance from Andrew Janes, Anna Kitanaka, James Poole, Joe Deaux, Michael Hirtzer, Stephen Stapczynski, Niu Shuping, Sharon Cho, Christine Buurma, Ramsey Al-Rikabi, Alfred Cang and Dan Murtaugh.
To contact the reporter on this story: Pratish Narayanan in New York at pnarayanan9@bloomberg.net
To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net, David Marino
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