Singapore — The US on Friday implemented an additional 25% tariff on $34 billion worth of Chinese goods imports and has reportedly said that it will extend tariffs on a further $16 billion of imports in two weeks.
There was no official word from China on Friday, but state media Thursday cited the General Administration of Customs as saying that the country will levy 25% tariff on $34 billion worth of US imports of food products, agricultural commodities such as soybean, and motor cars immediately after the US tariffs come into force.
A second list targeting energy commodities such as crude oil, LPG and coal, chemicals and medical equipment, has also been published, although when the tariffs on these goods are to be implemented has yet to be determined.
China's Ministry of Commerce said on Friday that it would be "forced to fight back."
The Xinhua news agency quoted a ministry spokesperson saying: "With the 25% additional tariffs on Chinese products worth $34 billion effective on Friday, the United States has ignited the largest trade war in economic history."
S&P Global Platts analyses the impact on soybeans, LPG and crude.
Related podcast: China-US trade tension: Impact on key commodities
US soybean exports to China totaled $12.3 billion last year. This exceeds all other food and agricultural products that will be subject to tariffs and is even higher than the value of US exports of vehicles to China.
China is also the most important market for US soybean exporters, accounting for 57% of US exports last year. At the same time, China is dependent on the US. Around a third of the estimated 97 million mt of soybeans China imported in the crop year 2017- 2018 came from the US.
It is possible that tariffs could reshape trade flows. US sellers may try to sell to South America, which is both a major consumer and exporter of soybean. Brazil, already the world's largest exporter, had a record harvest this year, according to the US Department of Agriculture, and is well placed to take imports from the US, allowing it to export more of its domestic production to China.
This will not be without consequences for US exporters. The value of the Brazilian real has declined by 20% against the dollar since the start of the year, and US exporters will need to price their crop accordingly in order to be competitive. This has already been priced into the US futures markets with the value of the front-month CBOT soybean futures declining by 19% since the end of May.
Even if Brazil is able to increase its exports enough to reduce China's need to buy US soybeans in the short term, as we get closer to October when the Brazilian harvest is over, stocks are low, and the new crop is being planted, China may have little option but to source soybeans from the US. Chinese end-users may yet end up paying 25% more for their soybeans.
CRUDE OIL AND LPG
China is yet to announce the implementation date for an additional 25% tariff on US crude oil and LPG imports.
The value of US LPG exported to China doubled and coal tripled in 2017 compared with the previous year. Crude oil exports, however, grew more than 12 times over the previous year as a result of rising US shipments at competitive prices compared to other light sweet crudes, and low freight rates that supported the long-haul trade. The value of crude oil exports to China reached $4.4 billion last year according to US Census Bureau trade data. This trend continued in 2018. US crude exports to China in the first four months were worth $2.4 billion, equivalent to over $7 billion on an annualized basis.
China's strong demand for oil has seen it absorb much of the incremental growth in US exports of LPG and crude. China still accounted for less than a fifth of the total value of US crude exported last year. China's share of the total rose to over 20% in the first quarter of this year. US crude oil, however, accounts for only 3% of the volume imported and 7% of the value. Little, if any, US crude is bought via long-term contracts and Chinese buyers will have hardly any difficulty in substituting it with crude from other countries.
It is most likely that the impact on US crude and other energy commodities will change trade flows. US crude, for example, could be sold to Europe, and LPG to other Asian consumers. This would allow Europe and the Middle East to increase their exports of crude and LPG to China. In order for this to happen, US exporters will need to price their cargoes competitively, because it would be the US, not China, that will bear the brunt Chinese sanctions.
Most of China's current crude imports from the US are medium sour grades, such as Mars and Southern Green Canyon. Light sweet crudes, such as WTI, Bryan Mound Sour, and even shale oil from Eagle Ford, have joined the flow.
Chinese state-owned trading company Unipec will be the hardest hit should Beijing impose a 25% tariff. The company has bought 16 million barrels of US crude for June loading. The barrels are expected to arrive in China over July-August.
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