Downstream ’19: Supply Chain must change strategy amid Trade War
As the U.S. trade war escalates with multiple countries, the battle is leaving the supply chain with little choice as impacts from the tariffs grow.
Now nearly a year since the Trade War first began, companies are at a point they must either scale back their reliance on global business, raise end prices, or figure out how to operate with higher costs and slimmer profit, a government and public affairs specialist said.
“I have spent a lot of time worrying about what is going on in the Canada, Mexico and U.S. markets,” Suzanne Foti, Vice President of Government and Public Affairs for Solvay said. “I am concerned that the same chemicals on the China list may get on the Europe list now as a result of the Boeing Airbus Dispute.”
Foti was being interviewed as part of a supply chain panel at the Downstream 2019 Conference in Houston.
“If this happens, I wonder what the supply chain will do. Where will they get these products? If we must increase our prices for these products, what does this mean for the industry we serve.”
U.S. and EU
The Boeing Airbus dispute could potentially impact the business of chemistry because it could lead to the U.S. and European Union imposing tariffs on chemical products used to make the airplanes and other products, Ed Brzytwa, Director International Trade, American Chemistry Council (ACC) said.
The U.S. and the EU have threatened billions of dollars-worth of tariffs be imposed on goods including aircraft, in the latest step of a long-running transatlantic dispute at the World Trade Organization.
Airbus has issued a warning about any escalation of the dispute over aircraft subsidies between the U.S. and the European Union, saying proposed tit-for-tat tariffs will hit the supply chain and the consumer.
Rethink supply chain strategy
“In the beginning I think we looked at this (trade war) as a short-term situation. As it morphs into a longer problem, we are having to re-think our supply chains,” Foti said. “Longer term supply chain and investment strategy and even where those investments get placed have to be reconsidered.”
The biggest challenge the supply chain is facing now is looking at how to source their input chemicals from a tariff country, especially for a product that provides 85% or higher concentration of the raw material used to make the product, Foti explained.
“From that perspective, we have had to really look at our supply chain. We are always very customer centered so we have had to talk to customers about how we can negotiate this,” Foti said.
This is especially true for specialty chemicals because they are typically made in one place with intra-company transfers and an assumption of free trade.
“When there are more announcements of potential tariffs, a company requires a wide range of analysis to figure out how they are going to manage the change and the intra company transfers,” Foti said. “Then there is company productivity time that has to be managed as employees are taken in to figure out these trade issues.”
The bottom line for the U.S. chemicals sector is that higher tariffs, even with possibly better rules, are not providing enough new market access to help the U.S. feed that new chemical manufacturing to the rest of the world, Brzytwa said.
Image: American Chemistry Council
At the end of 2018, the U.S., Mexico, and Canada signed a new trade agreement, called the US-Mexico-Canada Agreement (USMCA), refreshing the original North Atlantic Free Trade Agreement (NAFTA) in place since 1994.
After the scheduled signing of the trilateral agreement, the pact moved to the Congress for ratification, where Democrats control the House of Representatives and have said they want some changes to be made.
At this point, Congress may consider whether to start the ratification process.
This creates significant uncertainty for announced investments as many of those investments are counting on trade with Canada and Mexico.
Failure to pass USMCA creates uncertainty for investments. The ACC predicts this failure would result in a decline of about 42% or $85 billion in announced investment.
The U.S. chemical sector has capitalized on duty-free trade under NAFTA ever since its inception, more than tripling U.S. chemicals exports to Canada and Mexico – from $13 billion in 1994, to $44 billion in 2018. Chemical exports are projected to grow to $59 billion by 2025, the ACC said.
The top U.S. chemicals export partners are Canada, Mexico, China, Belgium and Brazil.
1/3 of all U.S. chemical exports are sold to Mexico and Canada, with 44% of those being intracompany transfers. 1/4 of all U.S. chemical imports are from Mexico and Canada with 64% of those being intracompany transfers, according to the ACC.
46,000 U.S. chemical industry jobs depend directly on chemical exports to Canada and Mexico, Brzytwa said.
“We think that terminating NAFTA would raise prices, destroy demand and jeopardize investments,” Brzytwa said. “We think there would be loss of investment, loss of jobs, and would create a massive amount of uncertainty.”
The tariff burden on U.S. chemical exports to Canada and Mexico could be between $700 million up to $9 billion final bound tariff level, according to the ACC.
Best case scenario, trade would fall by 4% and worst-case scenario, trade could fall as much as 45%, Brzytwa is predicting.
Sec 301: US-China Trade
China is the U.S.’s number one import source while Mexico is second and Canada is third.
Just over 20% of all imported goods come from China. Only 13% from Mexico and 13% from Canada.
About 31% of all chemicals imported from China are from a related party, which compares to 56% for U.S. total from all partners.
In 2017, the U.S. imported $505 billion in goods from China. The U.S. exported about $120 billion to China in 2017.
With the third round of US-China tariffs now in effect, China finished plastics products and U.S. exports of commodity chemicals are beginning to see impacts.
There are direct and indirect hits from the tariffs causing bigger consequences for the industry.
More than 1,000 chemicals and plastic products exports, $19 billion, and 1,500 chemicals and plastic products imports would all be impacted. In addition, tariffs put export-oriented investments at risk, the ACC estimates.
“A full-blown trade war between the U.S. and China, which is the path that we’re on, would not only have dramatic effects on both economies, but it would also significantly curb global growth,” Brzytwa said.
By Heather McGuire Doyle