January 24, 2019
Even by the mega-standards of industrial expansion projects in Southeast Texas, last week’s announcement by Houston-based American Ethane was big. We’re talking a huge upgrade to its Neches River terminal to support an ethane-export facility that will have the capacity to export $72 billion in gas to China. A thousand construction jobs, and 200 permanent high-paying jobs. The concept is even a first for any U.S. company. Any city in the country would kill for something like that.
But behind all the smiles at the announcement, there had to be a few nervous stomachs. The whole arrangement is obviously based on long-term exports to China. If it succeeds as planned, American Ethane will make a lot of money and hand out a lot of paychecks.
But at the same time this venture was being announced, the U.S. and China are still embroiled in a nasty trade dispute. For the moment, it doesn’t involve ethane exports, but down the road, no one can guarantee they won’t get swept in. If you’re planning to pull the trigger on a major expansion like this, you wonder about that possibility.
Late last week, news leaked out about China and the U.S. coming to an agreement that will calm the markets — and the stomachs of CEOs on both sides of the Pacific. At first the Dow surged with the news, but it has cooled this week as economists take a second look, and don’t like what they see.
Essentially China would go on a six-year buying spree to ramp up imports from the U.S. by more than $1 trillion. By doing so, China would reduce its trade surplus with the U.S. to zero by 2024 from $323 billion last year.
It’s an impressive offer, but U.S. negotiators reportedly wanted the Chinese to do even better, and perhaps eliminate the trade imbalance in two years, not six. That would be a lot to bite off in a short time frame, but if it could be done, American exporters would rack up substantial profits. Politically, it would be a legitimate win for President Donald Trump, helping keep the U.S. economy strong while staving off rumors of a recession in 2020.
China already imports lots of U.S. soybeans, airplanes and automobiles. All three of those are big job producers in the U.S. and help sway voters in key electoral states such as Michigan and Ohio.
We also export a lot of liquefied natural gas to China, and that could affect Southeast Texas too, because many LNG tankers head south from Sabine Pass. If another big deal or two with China were added to that mix, it would mean even more jobs and tax revenues for this region. Other ports along the Gulf of Mexico are struggling to get their LNG terminals approved or constructed. We’re one step ahead of most.
But getting this new trade deal signed is not assured. China is loath to undercut domestic production of anything for more imports. Chinese planners want to keep building up their economy to provide jobs for the millions of peasants who have transitioned from farm work to city jobs. The communist government needs to keep those workers employed and satisfied. Unhappy workers start to ask questions and wonder why they face so many political restrictions and internet censorship.
Whatever happens in other sectors, China wants to keep selling low-cost consumer goods to the vast U.S. market, which has gobbled them up for years. China knows that other developing countries such as the Philippines or Vietnam could start churning out some of these toys, socks and light bulbs in their own factories. They don’t want U.S. buyers finding new sources for these items.
So as usual in most trade disputes, both sides need each other. The real danger that we face is generous promises from China that might never live up to expectations. Chinese leaders want their country to become the world’s pre-eminent power, and they know they will need all the money they can corral to achieve that ambitious goal. Perhaps they can finesse this by buying more U.S. products while reducing other imports. Our gain would be someone else’s loss, like Brazilian soybean farmers.
So we’ll all see how this plays out, for American Ethane and plenty of other U.S. companies. The payoff could be massive here … if the political barriers can be cleared.
Look for Thomas Taschinger’s business column every Thursday.
