NAFTA talks ‘critical’ to the petrochemical investment boom- ACC

Abandoning or making dramatic changes on the North American Free Trade Agreement could damage the petrochemicals investment boom and invite lower-cost competitors to increase their presence in the U.S. market, according to a study from the American Chemistry Council (ACC).

If NAFTA is retained, chemical exports to Canada and Mexico are expected to grow from a projected $44.2 billion in 2018 to $59.2 billion by 2025, according to the ACC.

The ACC study, which was released as the latest round of NAFTA talks are ongoing in Mexico City, said abandoning the trade pact will raise U.S. manufacturing costs and prices, slow exports, and cause job losses.

The U.S., Canada and Mexico are in the middle of renegotiating NAFTA, from which US President Donald Trump has threatened to withdraw.

For the US petrochemical industry, both Canada and Mexico are major export markets, and their importance will further increase as new plants start up along the U.S. Gulf. 

The ACC said these negotiations are a great opportunity to modernize NAFTA, which originally took effect in 1994. 

By modernizing NAFTA, President Trump can help the U.S. capitalize on the chemical industry’s strong competitive advantage created by domestic shale gas and boost U.S. chemical exports to Canada and Mexico by 34% by 2025, the ACC said.

“President Trump has the opportunity to help American manufacturers achieve enormous growth under a new, stronger and more modern NAFTA,” Cal Dooley, president and CEO of ACC said in a statement. 

But a U.S. withdrawal from the trade pact would have virtually the opposite effect, creating a tariff burden of up to $9 billion on U.S. chemical exports to Canada and Mexico.

This would translate into higher prices for manufacturers and consumers and likely force the industry’s two largest trading partners to turn to lower-cost imports from China to satisfy their demand for chemicals and plastics.

Tariff Burden

Looking ahead, if NAFTA is retained, chemical exports to Canada and Mexico are expected to grow from a projected $44.2 billion in 2018 to $59.2 billion by 2025, including $12.6 billion in exports from new chemical investments.

Tariff relief has had a huge impact on export growth in the U.S. In 2016, the chemical industry saved approximately $700 million in tariff relief on exports, and $800 million in tariff relief on imports, according to the ACC.

“NAFTA has protected the U.S. and our investors from extreme tariff uncertainty for more than two decades,” said Emily Sanchez, director of economics and data analytics at ACC and an author of the report.

“Without those protections in place, tariff rates could rise dramatically, creating a domino effect that puts American businesses, investment, and jobs at risk," Sanchez added.

If NAFTA is abandoned or changed dramatically, exports to Canada and Mexico could be anywhere from 11.8% ($7.0 billion) up to 51.7% ($30.1 billion) lower, depending on the tariff situation.

In an ACC what-if analysis, even if Mexico and Canada only resort to the lower ‘Most Favored Nation’ (MFN) tariffs, exports could drop nearly 12%. If a more aggressive scenario played out where tariffs go up to the final upper bound tariffs are allowed by WTO rules, exports could drop by more than half.


Image: ACC report “Withdrawal from NAFTA would erode U.S. manufacturing competitiveness, February 2018

“The analysis shows that new tariffs on U.S. exports will result in a significant drop in chemical exports through 2025,” the report stated. “A drop in demand for U.S. chemicals puts new chemical investments at risk.”

Petrochemical Investment

Shale gas has created a competitive advantage for U.S. chemical manufacturers. The low-cost feedstocks, together with tariff relief provided by NAFTA, have helped position the U.S. as a leading global supplier of chemicals and encouraged investment.

Since 2010, chemical producers have announced 317 new projects valued at $185 billion in new investment. The projects are expected to yield $310 billion in new economic output per year and create 465,000 direct and indirect jobs , according to the ACC.

“NAFTA has given chemical producers confidence to invest by providing certainty that increased volumes of U.S. chemical and plastic products will be tariff-free for our NAFTA partners,” said Emily Sanchez, director of economics and data analytics at ACC.

Incidentally, more than half of the $185 billion of announced shale-related investments are planned future investments, and the uncertainty created by withdrawing from NAFTA could make the projects vulnerable to delay or derailment, the ACC noted.

DowDuPont said it is considering Canada or Argentina in addition to the U.S. Gulf Coast for its next major investment as President Donald Trump’s steel tariffs make domestic construction pricier, Dow’s COO Jim Fitterling told the CERAWeek energy conference in Houston.

DowDupont spent $6 billion in construction on the Texas Gulf Coast last year to take advantage of abundant, low-cost natural gas from the shale drilling boom.

Those plants contained about $1.2 billion worth of steel, Fitterling said. Trump’s proposed 25% duty on steel imports would have added about $300 million in costs to the project.

Competitive position

Manufacturers in the U.S. have maintained their competitive position in the global marketplace by extending their supply chains regionally.

“Without NAFTA, tariffs would be levied on manufacturing components, some of which may cross the border as many as seven or eight times before a final product is complete. Trade and tariff costs would rise to levels we’ve never seen before,” Sanchez said.

Increasing the costs to do business with the U.S. will invite lower-cost competitors to enter or increase their presence in the U.S. market, the ACC report said.

Without NAFTA, tariffs will increase the cost of U.S. goods for Canadian and Mexican firms, making chemicals and plastic products from China more affordable and attractive.

China has already deepened its trading relationships with Canada and Mexico in recent years.

The U.S. would effectively forfeit its North American market position to China.

“Chemistry touches 96% of all manufactured goods, and when the price of chemicals goes up, customers begin to look for cheaper substitutes,” Dooley said in a statement.

“Withdrawing from NAFTA will not strengthen America’s competitive advantage – and it might even give trading partners the power to price us out of the market entirely," Dooley continued.

By Heather Doyle