Medlock, Kenneth B., III, Ted Temzelides, and Woongtae Chung. "Mercantilism's Groundhog Day: The US-China Trade War and Some Regional Energy Market Implications." Baker Institute for Public Policy Center for Energy Studies. PDF. (https://doi.org/10.25613/nkkj-9b05).
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An expanding trade deficit and mounting concerns over intellectual property rights alongside slow economic growth and rising inequality created a political upheaval in the US that paved the way for anti-trade sentiment and protectionist policies. While this has impacted a broad set of US trading partners across a number of commodities, the relationship between the US and China, the world’s two largest economies, has drawn the most attention. As such, we examine the potential impacts of the US-China trade dispute for US and Northeast Asian economies, with a specific focus on energy markets.
In general, barriers to international trade are detrimental to US and global energy security, as they raise uncertainty, harm investment, and harm efficiency, ultimately leading to higher prices. Market depth, which is critical for energy security, can be compromised if policy becomes burdensome for new investments, capital flows, and market participation. Shifts in US-China trade policy will likely drive a reshuffling of the international energy supply portfolio. However, Northeast Asian trading partners that are mutual to the US and China—in particular, Japan, and South Korea—are at risk of being caught in a vortex of expanding collateral damage. That stated, long-run negative implications for the broader international energy market are likely to be mediated as long as the US-China trade rift remains bilateral in its focus.
Given the Trump administration’s apparent desire for trade surpluses, we consider it likely that the US will take steps to facilitate greater energy exports. This will carry spillover benefits for global energy markets and enhance energy security more broadly. However, if an implication of a protracted US-China trade war is slower global economic growth, there is a risk that any positive balance of trade impacts from expanding US energy exports will be limited. Therein lies a conundrum: promote growth through more open trade, thereby expanding US energy exports or adopt protectionist measures, thereby compromising trade and diminishing the prospects for expanding US energy exports.
We find evidence that tariffs on imported energy-related commodities, such as solar panels, do not appear to be negatively impacting imports due to a shift in the source of imports and counterbalancing policies at the federal, state, and local levels. In the latter case, for example, if direct and/or indirect subsidies to residences for the installation of solar panels encourage demand, then those policies work to offset the negative effects of tariffs. Hence, there appears to be a contradictory approach to policy when it comes to addressing costs.
Finally, the recently signed “Phase One” agreement is a positive step toward resolution of the US-China trade dispute, but the road ahead remains rife with challenge. The agreement, given the current energy commodity landscape across crude oil, natural gas and coal, presents some serious logistical challenges. These challenges will ultimately render a positive outcome dependent on the economic health of nations other than China and the US. In particular, meeting the terms of the Phase One agreement will depend heavily upon the broader market’s ability to absorb the increased volumes of crude oil, LNG and coal. Beyond this, a more robust “Phase Two” is not expected until after the 2020 US presidential election, so although the US-China trade dispute may be temporarily relaxed, it is far from settled.
