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Xi’s Davos Speech: Risks, Opportunities For Chemicals Industry

Business, China, Company Strategy, Economics, Fibre Intermediates, Olefins, Polyolefins, US
By John Richardson on 18-Jan-2017


By John Richardson

CHINA’S President Xi Jinping yesterday delivered a speech to World Economic Forum in Davos that has been widely praised. What made the speech very striking was how its tone and content contrasted with just about everything US president-elect Donald Trump has said.

Let’s look at just two aspects of the speech (please read and study the full transcript here) and contrast Xi’s comments with Mr Trump’s statements on these same issues:

On the benefits of globalisation

Xi:  Economic globalisation has powered global growth and facilitated movement of goods and capital, advances in science, technology and civilization, and interactions among peoples. It is true that economic globalisation has created new problems, but this is no justification to write economic globalisation off completely.

Trump in a campaign speech on globalisation in July 2016: It has left millions of our workers with nothing but poverty and heartache. When subsidised foreign steel is dumped into our markets, threatening our factories, the politicians have proven, folks, have proven they do nothing.

On the future of free trade:

Xi: We will advance the building of the Free Trade Area of the Asia Pacific and negotiations of the Regional Comprehensive Economic Partnership to form a global network of free trade arrangements. China stands for concluding open, transparent and win-win regional free trade arrangements and opposes forming exclusive groups that are fragmented in nature.

Trump in his Gettysburg speech in October 2016, where he laid out his full agenda for his first 100 days in office: First, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205. Second I will announce our withdrawal from the Trans-Pacific Partnership. Third, I will direct my Secretary of the Treasury to label China a currency manipulator. Fourth, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately.

What happens next?

As always, we need to divide this into short and long-term effects. In the short term:

  1. A global trade war remains my base case for 2017. Despite Xi’s comments in his Davos speech about China wanting to avoid a trade war, events could well develop their own unstoppable momentum, pushing China into a position where it feels it has to react.
  2. The same could apply to the US-China geopolitical relationship. We cannot rule out the risk of military conflict over either or both China’s “Nine-Dash Line” territorial claims in the South China Sea and the status of Taiwan. Nominee for US Secretary of State Rex Tillerson said this last week about the Nine-Dash Line, during his confirmation hearings: “We’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed”. Last week also saw Mr Trump once again question the “One China” policy, where the US recognises that Taiwan is part of China. This produced another strong reaction from China.

A week is a long time in politics in the West, whereas China’s leaders tend to regard five-year plans as very short term. Nevertheless, we cannot afford to bury our heads in the sand and not plan for what the world might look like in the next 5-10 years if US-China policy stays as it is today:

  1. China builds strong new trading and geopolitical relationships through both its proposed free-trade agreements and via the 65 countries that make up its One Belt, One Road initiative.
  2. The basic raw materials, including commodity chemicals and polymers, and the higher-value goods and services, including speciality chemicals and polymers, that China needs to escape its “middle-income trap” are exclusively provided by these 65 countries. These countries in turn benefit from Chinese infrastructure and other investments that can be best-described as a “Marshall Plan times 100 or even 1,000”.
  3. Meanwhile, the US chemicals industry has to largely fall back on its internal demand because of its exclusion from many export markets. The same lost opportunities will of course apply to the rest of the US economy.
  4. The above chart illustrates how the US chemicals stands to lose out on. Based on the ICIS Supply & Demand database, it shows the percentages of linear-low density polyethylene and purified terephthalic acid capacities and consumption that will be inside the OBOR region byu 2020. It is the same story across many other chemicals and polymers in our Supply & Demand database.

Xi’s Davos speech, and how it contrasts with Mr Trump’s comments and policies, is a further reminder how in today’s New Normal political risk has to be the No1 subject for scenario planning by all chemicals companies.