A de-escalation of the US-China trade war looks set to blow a multi-billion-dollar hole in Australian export revenues, as the US prepares to ramp up its LNG exports.
While the full details of the deal are unlikely to be made public, reports suggest ‘phase one’ of the US-China trade agreement will compel China to buy US$200 billion (AU$289.9 billion) worth of US products over a two-year period.
Given roughly US$50 billion (AU$72.5 billion) of that is earmarked for US energy, analysts believe the deal spells bad news for Australia’s LNG exports.
According to US Census Bureau data, China bought roughly US$5.5 billion (AU$8.0 billion) worth of energy from the US in 2019.
Should the trade deal live up to expectations, China would therefore have to increase its consumption of US energy by a whopping US$19.5 billion (AU$28.3 billion) a year to fulfil its new obligations.
Commsec commodities analyst Vivek Dhar said this meant China would likely have to cut back on Australian imports.
How are they going to buy that extra amount? It’s something we’re trying to figure out in the energy sector, in terms of how global trade flows will need to move to get that to happen,” Mr Dhar told The New Daily.
The immediate risk for Australia, he said, is in LNG.
The impact on the sector as a whole will be insignificant, as most energy exports are tied to long-term contracts.
But Mr Dhar said China could easily turn its back on the LNG it buys from Australia on short-term contracts, of which it bought 7 million tonnes in 2019.
Mr Dhar said that amounts to roughly AU$4.4 billion in today’s prices, or just under 10 per cent of Australia’s total LNG exports in 2018-2019 ($50 billion).
“Where we think the switch will be flipped the most is in crude oil, but what’s most relevant to Australia, which isn’t big in the crude oil export space, is LNG,” Mr Dhar said.
“That’s where we could see some trade impacts … and the US is also expected to ramp up its LNG exports over the next five years.”
According to a joint report from the South China Morning Post and Politico, China will also commit to buying US$75 billion (AU$108.7 billion) worth of US manufacturing goods, US$40 billion (AU$50.0 billion) worth of agricultural produce, and up to US$40 billion (AU$50.0 billion) worth of services.
Under such an agreement, China would have to increase its imports of US agricultural goods by roughly US$13 billion (AU$18.8 billion) a year.
But unlike LNG exporters, Australia’s drought-stricken farmers are unlikely to be affected by the boost in agricultural trade between the US and China.
Farmers won’t be affected
Most reports suggest the new deal will focus on soybean and pork, of which Australian farmers export very little.
“If those are the key commodities that the deal focuses on, then the impact on Australian agriculture’s not going to be substantial,” Prue Gordon, general manager of trade and economics at the National Farmers Federation, told The New Daily.
“If anything, there’s potential for it to be positive, because anything that calms international trade waters, which we hope this deal will, is good for Australian agricultural exporters.”
Nonetheless, University of Melbourne economics research fellow Jiao Wang said the trade war should act as a wake-up call to Australia’s economic managers.
“The end of the resource boom in around 2003 was the time to really consider diversification of the economy,” Dr Wang told The New Daily.
“The trade war is just another reminder of that.”
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