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Brexit, US-China Trade Talks: Time Is Running Out

Business, China, Company Strategy, Europe, Polyolefins, South Korea, US

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By John Richardson

BY MARCH 2019, Britain needs to have successfully negotiated the terms of Brexit – and be certain that when the clock stops ticking the terms of the deal will work in practice.

And the task of hitting this already ambitious deadline has just been made even harder by the snap General Election British Prime Minister Theresa May called yesterday. This seems likely to distract Britain’s Brexit negotiators, and adds to uncertainty across the rest of the EU.

“We are going to ring many, many alarm bells during the Brexit negotiations. Things risk veering off course. There seems to be a disconnect in communication between both sides,” Mark Mensink, director general of the European Chemical Industry Council, told Bloomberg in this interview.

At risk is the humble, but very useful, soap bar. As Bloomberg describes, its ingredients move backwards and forwards multiple times between the UK and mainland Europe. The same applies to other chemicals and polymers and the finished goods at the end of many of the chemical industry’s value chains.

Most people who work for the continent’s chemicals manufacturers cannot remember a time when trucks used to have to wait at borders for many hours to get paperwork cleared.

But that’s what used to happen before the European Single Market was launched in 1993. The risk is that these delays will return if Brexit talks stumble. This would obviously affect other industries apart from just chemicals.

Then there is the issue of tariffs. If every shipment between the UK and the mainland ends up incurring a tariff, then what happens to the competitiveness of the UK chemicals industry? I think we all know the answer.

Less than two years away is is really only just around the corner for corporate plannners, and so how about less than 100 days? Donald Trump set that particular clock ticking when he met with Xi Jinping earlier this month at the Mar-a-Lago summit in Florida.

A “War of Words” enough to disrupt US-China trade

US Commerce Secretary Wilbur Ross revealed afterwards that the two leaders agreed to implement:

“A 100-day plan with way-stations of accomplishment.  We made very clear that our primary objectives are twofold. One is to reduce the trade deficit quite noticeably between the United States and China. The second is to increase total trade between the two countries

Ominously, he added, “Words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing them.”

You might have since been comforted by President Trump’s announcement that he no longer plans to categorise China as a currency manipulator. But is this a permanent change in policy or just a short-term tactical decision because the US needs China’s support in dealing with the growing North Korean geopolitical crisis?

Adding to the confusion was that just a few days after Mr Trump made his announcement, Mr Ross said other countries’ claims that the US was imperilling the global economy by moving towards greater protectionism was “rubbish”.

He also said that critics of the US, including the IMF, were in effect saying about today’s international trade order:

“’We like it that way. So we don’t want you to disrupt it.’ That’s what they are really saying when you strip it away. That’s the bottom line. But that’s not going to happen. Our tolerance for continuing to be the deficit that eats the surpluses of the whole rest of the world — the president is not tolerant of that anymore.”

New report: Insights on changing global trade patterns

US chemicals companies, and the end-use industries that they supply, are of course in the same situation as their counterparts in the UK. They just don’t know whether the open markets upon which they have built their entire business models will continue.

The most pressing and immediate issue for the US chemicals business relates to polyethylene (PE) and the sharp rise in US capacity over the next three years.

US PE producers have to gain more, not less, market share in China because China is by the far the world’s biggest deficit region – and they are starting from a weaker position: Their total PE exports to China fell to around 400,000 tonnes last year from 1m tonnes in 2006.

If a US-China trade war broke out then the effect on US PE producers is obvious. China would impose new import tariffs and look elsewhere for its imports.

But something less dramatic, but also very disruptive to US PE trade, might occur. The 100 days of US-China trade talks run out on 18 July. If the US is unhappy with the results, we may only see an intensification of the “War of Words” between the US and China.

This more hostile atmosphere could occur just as new US PE plants start to come on-stream. Who is to say that China won’t respond by increasing customs inspections, and so slowing-down, US PE shipments to China? This is the approach they recently took with South Korea because of the China-South Korea dispute over the deployment of a US missile-defence shield in South Korea.

This is all just conjecture, of course, and you can easily argue against any of my suppositions. But what is clear is that in today’s exceptionally uncertain global political environment, “business as usual” is the least likely outcome.

This is why ICIS, in partnership with the UK-based chemicals company International eChem, has launched a new series of quarterly reports, with the first issue, which is out now – War of Words – focusing on the US-China relationship.

The reports will provide the insight and analysis needed to prepare for a radical shift in global trade. We  believe that today’s global trading environment  – where raw materials are routinely shipped half-way around the world and then returned as finished product – is most unlikely to survive for much longer.

Please click here for subscription details, or contact me directly at john.richardson@icis.com.