The escalation of the countries' trade war could reduce Chinese oil demand by making petrochemical production uneconomic, writes Kevin Foster

China's imposition of a 125pc tariff on US goods this week will effectively end almost all its commodity imports from the country.

Beijing announced it will raise the tariff on US imports to 125pc on 11 April, up from the cumulative 84pc rate that came into force on 10 April. The tariffs will take effect on 12 April. China imposed its tariffs in response to a series of levies introduced by US president Donald Trump since February. Those tariffs now stand at 145pc for US imports from China, Trump says.

Tit-for-tat tariffs imposed by the US and China have surged to unprecedented levels since the start of April. The US has exempted some commodities from its tariffs, but China's levies apply across the board. Commodities such as crude, coal and LNG were targeted for 10-15pc import levies in February and March, before the trade war escalated over the past week.

Tariff rates at this latest level will make almost all China's commodity imports from the US uneconomic, market participants say. China's total goods exports to the US far outweigh its imports from the country, but it has been a regular buyer of some US commodities, ranging from relatively small amounts of crude, LNG and rare earth ores, to more significant purchases of petroleum coke, LPG and petrochemical feedstocks such as ethane.

China's imports of US crude and LNG were effectively ended by the 10-15pc tariffs that Beijing imposed in February, in response to Trump's first set of tariffs. China imported 194,000 b/d of US crude last year, but its buyers have largely halted purchases since then. The same holds true for LNG, which was hit with a 15pc tariff in February. China imported 4.3mn t of LNG from the US in 2024, but last bought just 65,000t in February. US crude and LNG made up only small portions of China's total imports of those commodities last year, at 1.7pc and 5.6pc, respectively, limiting the market effect of the tariffs.

Chemical imbalance

The biggest effect of the new tariffs is likely to be on LPG and feedstocks for China's rapidly growing petrochemical sector. Almost all of China's ethane imports and close to 59pc of propane come from the US.

It may still have been economically viable to import US ethane at a 34pc tariff rate, but the higher levies will push Chinese cracking margins on ethane into negative territory. Ethane is almost exclusively exported by the US under term contracts, and several new steam crackers in China are designed to take ethane only. Companies unable to switch feedstock may be forced to cut operating rates or even shut down, market participants say. China's LPG market has reacted rapidly to the tariffs. Refineries have been selling LPG in the domestic market instead of using it on-site, while some propane users may opt to switch to other feedstocks, such as naphtha, or reduce run rates, given slow downstream demand.

The imposition of tariffs on US feedstocks is likely to further erode already weak petrochemical margins, which may, in turn, upend expectations for Chinese oil demand this year. The construction of new steam cracking units had been expected to more than offset shrinking Chinese gasoline and diesel demand, boosting overall oil consumption. But if petrochemical margins fall sharply, it is likely that some new units may be delayed and that run rates at existing units will be reduced, potentially leading to a drop in oil demand.

China indicated on 11 April that it would not respond in kind to any further tariff hikes by Trump, given that US imports were already unviable under the current tariff levels, but Beijing also said it reserved the right to hit back against the US in other ways.