May 18, 2018

How energy deals could cut the U.S.–China trade deficit

Facilities for Tesoro Refinery (R) and Agrium Nitrogen Operations and Conoco Phillips LNG (L) in Kenai, Alaska. Photo: Farah Nosh/Getty Images

When President Trump demanded that China cut its $375 billion trade deficit with the U.S. by $200 billion, Chinese officials and the U.S. press shrieked. It seemed impossible. However, there's a simple way for China to give Trump this “win”: buying $200 billion worth of American oil, as well as liquefied natural gas (LNG) from Alaska, Texas and Louisiana.

The details: Alaska is estimated to have nearly $1 trillion worth of LNG that it's eager to sell and heartland states have several trillion dollars’ worth of oil and gas reserves available for export. While there would be some delays in delivery — new production and transportation infrastructure would first have to be built — the trade deficit is measured by date of sale, so the impact would be seen right away.

The backdrop: China has an immense energy demand, accounting for 60% of global growth in oil, gas and coal consumption since the 2008 Great Recession. It has more than $3 trillion worth of foreign exchange reserves, over $1 trillion of which is held in U.S. dollars. Buying and paying up front for U.S. energy, then, amounts to little more than changing the mix of assets in its portfolio. In fact, Commerce Secretary Wilbur Ross has repeatedly called on China to import more American LNG, recognizing that it would also help diversify China’s supply sources.

From the U.S. perspective, selling natural resources is less desirable than selling manufactured products. But by doing so, Trump could credibly claim to cut the bilateral trade deficit by more than half. Moreover, these contracts would allow American companies to secure loans to build oil and gas infrastructure whose construction would employ tens of thousands of American workers.

While this proposal may sound far-fetched, Governor Bill Walker of Alaska is already seeking Chinese financing for a $43-billion deal to export LNG, and the Alaska Gasline Development Corp. has almost completed negotiations with its Chinese counterparts. The Chinese oil conglomerate Sinopec has also proposed a $7-billion, 700-mile pipeline from the Permian Basin shale oil field in western Texas to the Gulf, another effort the package could include.

The other side: Most economists dismiss bilateral trade deficits as irrelevant. They insist that deficits are simply the consequence of Americans consuming more than they save. But this argument misses the political economy of trade and the opportunities it offers politicians to demonstrate that they are championing jobs for their constituents. Congressmen, senators, mayors and governors campaign on this issue regularly. Why not a president campaigning in states that produce oil and gas?

Finally, while the U.S. government would not say so, this deal would also make China more dependent on the U.S. for delivery of a vital resource. Strengthening economic ties is a major stabilizing factor with benefits for both countries. Since China depends on energy delivered across U.S. Navy–owned oceans, the marginal increase in its vulnerability is insignificant.

The bottom line: Trump’s demands may be unreasonable, but they're not impossible to fulfill. If China concludes that this maneuver can pacify him and avert a trade war, we might see movement in this direction.

Graham Allison is the former director of Harvard Kennedy School’s Belfer Center for Science and International Affairs and the author of “Destined for War: Can America and China Escape Thucydides’s Trap?”

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World coronavirus updates: Confirmed cases top 1.2 million

Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens and confirmed plus presumptive cases from the CDC

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