16 May 2019

Exploring the Impact of Increased Chinese Tariffs on LNG Growth

On Monday, May 13, China proposed to increase the current tariff of 10% to 25% on liquefied natural gas (LNG) exported from the United States. The proposed increase would go into effect on June 1 in response to the proposed increase on certain Chinese goods imported into the U.S. While this may have limited immediate impact on LNG exports from the United States for LNG plants that have already been constructed (there have been only two cargos of LNG sold to China from the United States this year), it has the potential to slow the growth of LNG exports, including reduced LNG off-take and equity investments in the United States from Chinese entities. China is currently the largest importer of LNG in the world, having surpassed Japan in 2018. The U.S. is projected to be the third-largest LNG exporter, with much of those exports forecasted to go to China.

In implementing this latest round of tariff increases, China has relied on its Foreign Trade Law and Import and Export Tariff Regulations. According to reports from Chinese legal experts at the JunHe firm, the Chinese government will permit Chinese importers to petition its Customs Tariff Commission of State Council to exclude particular products from the increased tariff. Reportedly, exclusion requests for the list of products, including LNG, would need to be submitted to the commission’s website between September 2 and October 18.

China’s announcement on May 13 follows its earlier decisions in June 2018 and August 2018 to increase duties in response to actions by the United States Trade Representative (USTR) pursuant to Section 301 of the Trade Act of 1974 to address U.S. findings with respect to certain Chinese practices affecting technology transfer, intellectual property rights and innovation. In parallel to the tariff increases, USTR initiated a dispute under World Trade Organization (WTO) procedures challenging certain Chinese intellectual property practices that USTR believes are covered by, and inconsistent with, China’s WTO obligations. Depending on the outcome of the WTO dispute, the United States might take further action to secure modifications in China’s practices.