INSIGHT: Chemicals face being caught in a wave of protectionism

07 April 2009 16:14  [Source: ICIS news]

By John Richardson

Chemicals anti-dumping cases on the riseSINGAPORE (ICIS news)--The global chemicals industry will be caught up in a wave of protectionism lasting at least the next two to three years, says Edmund Sim, an expert in trade law and partner with the Singapore practice of law firm Hunton & Williams.

"Despite pronouncements made at last week's G20 Summit, politically it will be very difficult for individual countries to resist further action. The economic crisis is going to last at least the next two to three years and so will higher levels of protectionism.” 

The crisis will be a repeat of the economic problems of the 1970s rather than the 1930s' Great Depression, he predicts.

"In the 1930s you saw the wholesale raising of tariff barriers, but in the 1970s non-tariff trade barriers were favoured. After the 1970s crisis, it took 15 years to dismantle these barriers, but this time it could take even longer.

"The World Trade Organization (WTO) - which has established thorough technical and legal processes - didn't exist back then.

"Because of these processes, the WTO system is good on the upside, meaning countries need to go through a lot of justification to introduce trade barriers in the first place. On the downside, though, it can also take a long time to remove barriers once they are in place."

The developing world is likely to continue favouring the anti-dumping route to help protect domestic industries.

Dumping, under international trade law, is defined as when a manufacturer in one country exports a product to another country at a price which is either below the price it charges in its home market or below its cost of production.

India's chemicals industry has been a big user of anti-dumping claims and measures this year.

Reliance Industries recently lodged a complaint over alleged polypropylene (PP) dumping by Saudi Arabia, Singapore and Oman.

Fresh duties have also been levied on caustic soda imports from Indonesia, Taiwan and the EU.

"The Indian companies deal with both anti-dumping petitions in their home markets and claims against them overseas in a very rational and technical way,” says Sim.

“They will study the economic benefits very hard and withdraw very quickly if they see a negative impact. This is not always the case in other countries."

Another approach might be raising tariffs from applied to bound rates.

Each WTO member, as part of its agreement with the international trade body, agrees to maximum levels for each product.

However, in economic good times tariffs are often set well below these ceilings to draw in much-needed imports.

Indonesia recently raised its PP polyethylene (PE) tariffs to its applied from its bound rates because of the crisis. This led to five percentage-point increases in both tariffs.

"Indonesia, as is the case with India, is not as involved as some other countries in the international supply chain so they have less to lose by increasing tariffs. Not so countries such as China, Thailand and Malaysia."

Oil and other feedstocks are often shipped to a developing country which then produces chemicals, polymers and semi-finished products. These inputs are then re-exported to the country where the finished product is to be assembled.

So, for example, if Thailand raised its PP import tariffs to its bound rate this might benefit local producers, but could result in greater net damage to the overall economy.

Global trade expands very quickly when tariffs are lowered below bound rates because inputs going into finished products cross numerous borders. Each individual shipment is included in trade statistics.

Conversely, a rise in tariffs up to bound rates would damage global trade, and employment in the developing world, as global supply chains disintegrate. This damage would be way out of proportion to the percentage increase in tariffs.

More subtle measures of trade protectionism might be pursued by developing and developed countries desperate to protect local industries and jobs.

Imports might increasingly be rejected because they don't meet more stringent application of environmental or industrial standards. New standards could also be introduced. 

"On environmental standards, it is going to be particularly easy for a company to get its way, particularly in a developed market, if it waves the green banner," says Sim.

The other possibility is that a country such as China, with a poor product-safety record, could be subjected to much more thorough health-and-safety checks on its exports.

And if the US introduces a global cap-and-trade and/or carbon tax system, local producers might successfully lobby for carbon import taxes on countries that don't have similar legislation, Sim adds.

"Subsidies for particular industries could also become more popular in developed and developing countries. This has the benefit, unlike tariffs, that you don't damage the global supply chain - although trade distortion will result.

"There are ways of petitioning against subsidies through the WTO, but it's the ‘glass-houses syndrome’ as you might end up drawing focus on your own subsidies."

Although there has been a big up-tick in anti-dumping petitions over the past few months, Sim has yet to see either the US or EU being very aggressive in introducing new trade-protection measures.

An anti-dumping petition was recently lodged by US plastic-bag manufacturers against Vietnamese, Indonesian and Taiwanese exporters.

The manufacturers are also bidding for countervailing (anti-subsidy) duties against Vietnam.

"The US has been relatively quiet because the Obama administration has been slow to fill a lot of vacancies at the Department of Commerce and so the department has lacked the expertise to take action. This could change in the second quarter,” Sim says

In the EU, Baroness Ashton replaced Peter Mandelson as European trade commissioner last October.

"Mandelson was very much pro-Free Trade and Baroness Ashton is just getting her feet under the table. It will be interesting to see what happens in the second quarter."

For the chemicals industry, the implications of subsidies for local industries - or more clauses in stimulus packages such as the recent ‘Buy America’ clause - could be huge.

A local polyolefin producer might find itself much more able to resist foreign competition - both directly from resin importers and indirectly through loss of downstream business.

This might mean that the less integrated and generally least efficient producers survive this crisis after all.

If banks are eventually nationalised in the US, lending might become state-directed on favourable terms to favoured industries.

"These kind of soft loans have for a long time supported chemical and other companies in countries such as China and South Korea,” says Sim.

Why could protectionism increase so sharply in this age of apparent accelerating globalisation?

"Because the economic case for free trade is always more intangible as the cost savings for individual consumers are very small, occur gradually and are hard to measure.

"But the short-term effects of free trade through job losses can be very concentrated on a few industries and therefore very visible. This is particularly the case when economies are struggling.

"During the 1970s the chemicals and steel industries campaigned successfully for trade barriers and we could see the same again. Individual companies stand to gain a lot."

Any way of protecting earnings in the current environment will surely be seized upon by chemicals companies.

It’s up to politicians to show a little vision and look at the longer-term implications of protectionism on global growth.

To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
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