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Getting Energy Right in US China Policy

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Trans-Pacific View

Getting Energy Right in US China Policy

The U.S. energy sector will be central to any economic compromise or confrontation between Washington and Beijing.

Getting Energy Right in US China Policy
Credit: Official White House Photo by Shealah Craighead

By all accounts, U.S. President Donald Trump is gearing up to make good on his campaign promises to redress a range of grievances in the United States’ economic relationship with China. With the bilateral trade deficit already up 7 percent this year alone, the Trump administration has initiated 301, 232, and 201 investigations that could result in punitive actions next year. Meanwhile, potential off-ramps — including major business deals concluded during Trump’s visit to Beijing in November, and future outcomes from the newly-established Comprehensive Economic Dialogue — have stalled or fallen short.

The question now facing U.S. policymakers appears to be how, not if, to take actions against China to protect U.S. workers and demand greater reciprocity for U.S. firms. While most of the media attention to date has focused on high-tech industries and commodities like steel and aluminum, the U.S. energy sector — where the United States still holds significant advantages and leverage — will be central to any future economic compromise or confrontation between Washington and Beijing. Rather than focusing on big deals that might shrink the trade deficit, the White House should play the long game and develop an economic strategy for China that enhances the long-term competitiveness of the U.S. energy sector.

Deals in the Pipeline

Chinese energy demand is expected to increase by 27 percent by 2040. Liquefied natural gas (LNG), a cleaner power source than coal, will account for the bulk of the growth, as the Chinese government looks to reduce pollution in the face of increasing public protest. So far, China has relied on countries such as Iran, Russia, and Venezuela to supply its LNG demand, but Beijing plans to increase the proportion of natural gas consumption from today’s 5.9 percent of the overall energy mix to 10 percent by 2020, and 15 percent by 2030. China is now looking to the United States, an emerging exporter, to meet this mark and continue to diversify its growing imports.

The Trump administration announced multiple agreements between U.S. and Chinese oil and gas corporations, during Trump’s visit to Beijing. Deals included Cheniere’s memorandum of understanding (MOU) with China National Petroleum Corp. on long-term LNG sales, a $43 billion natural gas project between Alaska Gasline Development Corporation and Sinopec, and a preliminary 15-year deal for Delfin Midstream to provide LNG to China Gas Holdings.

By emphasizing U.S. LNG sales to China, the Trump administration hopes to chip away at the considerable trade imbalance between the United States and China. However, experts doubt these pledges will dent America’s $347 billion annual deficit in goods. Although the deals seem mutually beneficial, most are nonbinding MOUs rather than enforceable contracts. Beijing may intend to import U.S. LNG today, but may opt for lower-cost Qatari or Australian supplies in the future instead. The publicized deals may not manifest within the specified timeframe, if at all.

The result is that the United States is offering to help China diversify and decarbonize its fuel sources without insisting on meaningful change in its economic policies that would reduce the trade deficit in the long run.

A possible increase in LNG exports to China is an illusory victory for the United States. Deals that do little to reform the trade relationship while helping China tackle its environmental problems are only tangentially within U.S. interests.

The Road to Electrification

This succession of deals fails to address the near insurmountable challenges that American companies face in accessing China’s restrictive market. Even after Trump’s visit, the Chinese government retains a broad fiat in limiting competition within its borders by forcing joint ventures and stealing intellectual property (IP).

This is most evident in the electric vehicles (EV) sector. Already the world’s largest EV market, China also aims to be the world’s leading producer of electric cars. The country plans to manufacture 7 million EVs and hybrid vehicles by 2025, up from 507,000 in 2016.

Domestically, EV adoption serves the same purpose as switching to LNG for power generation. In Beijing alone, vehicles account for nearly one-third of smog-producing emissions. Even though China is the world’s top EV market, overall penetration — at 1.5 percent of all car sales — remains limited. However, heavy government investment in national charging infrastructure and strong consumer interest suggest high potential for continued growth.

China also sees enormous market opportunity beyond its borders as EVs gain popularity worldwide. The most optimistic forecasts predict that EVs will make up one-third of the world’s car fleet by 2040. European Union countries, the second most popular market for electric vehicles, are mounting aggressive campaigns to reduce pollution and combat climate change, with some planning to ban gasoline and diesel cars by 2040. Such trends indicate that the EV industry will become a commanding, lucrative market globally well before then.

To this end, China has designed rules to strip American vehicle manufacturers of their intellectual property. Beijing requires foreign automakers operating in China to have a joint venture with a Chinese firm as majority owner. For the past decade, Chinese agencies have also required them to demonstrate and share their intellectual property with their domestic partners. As a result, foreign automakers have been compelled to forfeit their intellectual property to the Chinese companies they are coerced to partner with. But foreign automakers are still rushing into China’s market because of its irresistible size. During Trump’s visit, Ford Motor, a cornerstone of the U.S. automotive industry, agreed to invest $756 million to set up a joint venture China’s Anhui Zotye Automobile to build electric passenger vehicles in China.

Rather than addressing this prejudicial practice, the United States is rolling back domestic programs that stand to benefit its vehicle manufacturers. The current iteration of Congress’ tax plan would eliminate tax credits on EV purchases, a measure that incentivizes U.S. vehicle manufactures to go electric. Car makers seeing market opportunity in EVs and looking for incentives are taking notice of this backwards trend in the United States —Tesla is rumored to be closing a deal in Shanghai’s free-trade zone.

In a future where EVs are more prominent if not dominant, China would undeniably benefit from the lack of competition from the United States.

Sunny Jobs Growth?

The Trump administration’s current trade strategy should place more emphasis on market access and global technological trends. One might focus on the attendant benefits that domestic manufacturing brings. Trump campaigned on the promise of lowering unemployment, specifically in the manufacturing and energy sectors. One deal with Sinopec, China’s largest state oil and gas company, would reportedly bring thousands of new jobs to construct a 700-mile oil pipeline and storage facility to the Gulf Coast.

However, the prospect of U.S. tariffs on Chinese solar panels contradicts this narrative. Solar panel prices, falling more than 70 percent since 2010, have driven explosive domestic jobs growth. Solar installation, expected to double over the next decade, is fastest growing occupation in the United States.

But, this past May, U.S.-based solar companies filed a case before the U.S. International Trade Commission requesting tariffs on imported photovoltaic modules, a critical component in solar panels. The commissioners suggested a 30 percent tariff, which would undoubtedly depress solar deployment in the United States. Although Trump has yet to issue a decision, his speech at the Asia-Pacific Economic Summit suggest harsh trade action.

Artificially raising the cost of panels with tariffs to possibly aid floundering, uncompetitive U.S. companies in an otherwise thriving industry would certainly stifle domestic jobs growth in a sector that employs around 260,000 people at over 9,000 companies.

Trade on Balance

Taken altogether, the Trump administration’s trade policy is intertwined with energy. Washington should pursue dialogue on structural market access that would produce sustained, significant reductions to the trade deficit that one off-deals could not. China will not liberalize its financial sector or meaningfully strengthen intellectual property rights for U.S. companies without external pressure, but it will gladly purchase U.S. LNG to satisfy its appetite for low-carbon energy imports.

The Trump administration should shift its energy policies to redefine the U.S.-China trade agenda on more favorable terms. Although LNG deals can bring investment into U.S. gas infrastructure, the United States should stipulate removal of non-tariff barriers, including market access, IP protection, and government procurement programs, in future negotiations. The administration should also simultaneously continue challenging China in the World Trade Organization when it engages in unfair trade practices, and work with allies to ensure China is upholding its obligations.

Forcing concessions on these issues will work toward a truly competitive market, yielding long-term benefits for U.S. companies operating and exporting in China. The United States should also adopt policies to help its domestic firms compete in the global market, like extending tax credits to EV producers and investing in the development of EV infrastructure like nationwide charging stations. Last, the United States should prioritize innovation, its national competitive advantage compared to China, to help it compete with cheaper, but lower quality, Chinese offerings. Technologies currently in U.S. labs — ranging from photovoltaic paints for easy installation to new battery chemistries that can drastically increase driving range — will strengthen America’s position in the growing global market for advanced clean energy technologies.

The Trump administration has correctly identified China as an unfair trade partner and can still redress the fundamental unfairness of America’s trade relationship with China. However, it would do better by eschewing its focus on the trade balance and pursuing targets with lasting, concrete benefits to the American people.

Ashley Feng is a research associate for China Studies at the Council on Foreign Relations.

Sagatom Saha is an energy policy analyst and Fulbright researcher.