Trade Wars 101: crash course in how chemical markets are impacted
As the U.S. opens trade battles on multiple fronts including China, Europe, North America, and Turkey; business confidence and financial markets will be impacted, analysts warn.
The U.S. chemicals industry is amid a historic expansion, American Chemistry Council (ACC) analysis shows. $202 billion in U.S. chemical manufacturing investment has been announced over the past decade. Much of the investment is export-oriented, meaning the industry’s ability to capitalize on its newfound competitive position largely hinges on a U.S. trade policy that opens rather than closes doors to new markets.
“U.S. chemical exports last year reached $130 billion, accounting for 10% of all U.S. exports and 9% of all global chemicals exports. 30% of our workforce is in export-dependent jobs, and even more jobs are dependent on imported inputs and intermediate goods,” Ed Brzytwa, Director for International Trade for the ACC said.
Brzytwa explained in detail Trade Wars 101 at the Supply Chain and Logistics Conference in Houston in November.
U.S. Trade Terms
US Chemicals Industry and Trade
Trade is booming in the U.S. because of access to natural gas and the boom is poised to drive chemical exports even higher. The latest ACC estimates are forecasting a $70 billion trade surplus by 2025.
Image: American Chemistry Council
“We expect more trade in the future based on our access to cheap and abundant natural gas,” Brzytwa said. “We are exporting way more than we are importing and we need to export those products all over the world. The U.S. can’t consume all of those products on its own.”
Investments are predicated on growing foreign demand for U.S. chemical products.
“Many investments are being made by U.S. companies and many are being made by foreign companies,” Brzytwa said. “They are all about satisfying foreign demand for U.S. products. These products are low cost and they are high quality and we are an export platform for the rest of the world.”
The ACC is forecasting $30 billion worth of shale related exports by 2025, with $13 billion of that heading to Canada and Mexico.
At the end of November, 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.
With a new deal formalized, U.S. President Donald Trump threatened to withdraw from the old agreement, to force a divided Congress to opt for the newly negotiated deal.
After the scheduled signing of the trilateral agreement, the pact moves to the incoming Congress for ratification, where Democrats will control the House of Representatives and have already said they want some changes to be made.
The deals are similar, but USMCA will shift more auto manufacturing from Mexico to the U.S. and allow more dairy exports from the U.S. to Canada. USMCA also paves the way for the U.S. to lift its steel tariffs it placed on Canada back in May.
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 North America Chemical Industry is highly integrated, and practically one market, not three. Many jobs are dependent on this agreement,” Brzytwa said. If the president does not get a positive vote on USMCA, he could terminate NAFTA, so we still think that threat is out there”
Image: American Chemistry Council
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.
The loss of the trade agreement would create uncertainty for up to $85 billion in chemical investments, or roughly 42% 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.
“We think there would be a total loss of about $29 billion in chemical demand if there is not a positive vote for the new agreement and NAFTA is terminated,” Brzytwa said.
Sec 232: Aluminum & Steel
Using section 232 for investigation, the U.S. placed global tariffs of 25% on steel and 10% on aluminum in March 2018. Four countries were exempt: Argentina, Brazil, South Korea, and Australia. Canada, and Mexico and the European Union were not exempt. Canada and Mexico are in the process of negotiating a solution.
The EU, Canada, Mexico, India, Turkey, Russia, China and Japan have all retaliated or threatened retaliation with tariffs of their own.
Now, more than 3.5 billion worth of exports are impacted by the aluminum and steel tariffs across a range of chemicals and plastics, according to the ACC.
“We are not able to buy competitively costed steel and aluminum to build plants and facilities in the U.S. or to maintain our plants,” Brzytwa said. “The retaliatory tariffs are also impacting manufactured products that rely on chemicals such as in the agriculture and auto sector.”
As a result of the U.S. tariffs on aluminum and steel imports, there are increased costs to maintain and expand capital, direct impact to chemical plant maintenance and construction costs.
In addition, investments are more likely to be put on hold and/or cancelled and there are particularly painful consequences to projects in progress, Brzytwa said.
Meanwhile, increased cost of essential inputs into downstream products results in a decline in demand for U.S. chemicals, a decline in U.S. chemicals production, lost jobs, offshoring, and investments put on hold and/or cancelled, Brzytwa added.
A recent study showed that for every job gained in the steel and aluminum sector, there are 16 jobs in the steel consuming sector lost, Brzytwa said.
The impact of steel tariffs on chemical industry investments is significant.
“We are estimating it takes about 18,500 short tons of steel to build an ethylene cracker, so we are estimating a maximum $1.8 billion cost rise in expanding the U.S. chemical industry over the next five years,” Brzytwa said. “Some of our companies have had a hard time getting the steel they need because of the prices and because of the quotas on the trading partners.”
Sec 232: Autos & Auto parts
In May 2018, the U.S. began an investigation into whether the auto and auto parts import market threaten national security. Tariffs of up to 25% were considered. The public review process was complete in July 2018 and the tariffs could now go into effect by the end of 2018.
“There is universal opposition from the industry for the auto tariffs,” Brzytwa said. “U.S. manufacturers depend on regional supply chains and imported inputs to produce goods efficiently and to remain competitive.”
Tariffs on autos and auto parts will result in lost output and lost jobs in the U.S. auto industry, Brzytwa said.
A 1.5% contraction in output and 195,000 U.S. job loss is anticipated, according to the Peterson Institute for International Economics.
The auto sector is a key end-use market for chemicals and plastics.
“Tariffs would cause disintegration in global supply chains, making North American auto production costlier and reducing competitiveness,” Brzytwa said. “Disintegration of the global supply chains that have taken years to develop and have increased efficiencies, productivity, lowered prices, increased quality and enhanced the competitiveness of auto and auto parts manufacturers.”
If automotive tariffs are imposed, retaliation is expected, exposing more than $360 billion of U.S. exports, Brzytwa said.
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.
At this point, the U.S. Administration has threatened to impose tariffs on all imports from China.
A small reprieve was given at the G20 summit at the end of November.
President Trump was planning to raise tariffs from 10% to 25% on the goods already affected by the trade war but agreed to a 90-day extension on tariff hikes to allow the countries to hash out their trade disputes.
The extension doesn’t de-escalate the difficult trade relationship, but it does stop the escalation for now and provides some positive footing for future agreements.
The ACC is still forecasting up to $11 billion U.S. chemicals and plastics exports will be
exposed to retaliatory tariffs.
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 Doyle