By John Richardson
CHINA is set to introduce a carbon emissions trading scheme later this year for steel and aluminium,, with the chemicals and polymers sectors set to join at a later date.
Next January, China is also set to introduce a new environmental tax that would represent an additional cost to its domestic chemicals industry.
And this year has already seen much stricter implementation of existing environmental legislation through probably the most extensive-evateer programme of nationwide environmental inspections. Chemical companies are being forced to comply with rules that for some producers were previously ignored. Adhering to the law has become an effective additional cost of production. Either that or producers are being forced to pay fines, or even shut down their plants.
This shows the determination with which Beijing is tackling an environmental crisis that threatens China’s long term, economic, social and political stability.
But the Chinese government might now be looking at the US, following its decision to withdraw from the Paris climate deal and be wondering whether at some point in the future it could become necessary to level the playing field. US chemicals and polymers exports to China could, as a result, eventually be the subject of carbon tariffs that protect local producers from “unfair” competition.
Would it be possible to, say, look at the lifecycle emissions of US polyethylene (PE) exports, all the way from the shale gas well to delivery to an end-user in China? How might this then erode the competitiveness of US PE exports? I have obviously picked PE because of the extent of US PE producers’ exposure to the China market because of the major wave of new US capacity. As the chart above again reminds us, looking just at high-density PE, China by 2020 is set to remain the biggest deficit region or country by far. The same applies to the other grades of PE.
It is very easy to say “no chance whatsoever” to the idea of carbon tariffs on US chemicals and polymers exports and on other exports based on what we understand today. As Reuters, for example, writes:
The Paris deal sets no penalties for withdrawal and says efforts to ensure compliance should be “non-adversarial and non-punitive”, leaving it up to governments or trade blocs to ensure any retaliation meets World Trade Organisation codes.
Plus, what the Federal government has decided to do is different from what many cities and states in America may continue to do. California is leading a group of cities and states that have pledged to continue comply with the COP21 agreement.
And any carbon tariff scheme that China decides to levy against US PE and other chemicals exporters may not only involve exemptions for certain cities and states that comply with the Paris deal. Individual companies could also be exempt, including those that lobbied strongly to persuade President Trump to stick with COP21.
US chemicals companies also have an opportunity to introduce measures to limit their emissions to the point where China sees the playing as being level enough. Or companies may be able to demonstrate that they are already carbon efficient enough to avoid any suggestion of carbon tariffs on their exports to China.
Or not. We really don’t know. Regardless of what you think about the rights and wrongs of the US decision – and I am again not expressing an opinion here – there is no doubt that it has caused a lot of international ill-will. How this might translate into new trade barriers in general, not just between the US and China, but also between the US and many other countries, is far from clear.
The Chinese government, like the White House, essentially cares about three things: Jobs, jobs and jobs.
True, for every yuan of extra costs levied on Chinese chemicals producers as a result of tougher environmental rules could come many more yuan of extra revenues – and so new jobs – because of the explosive growth of China’s “green” industries. Beijing plans to spend 2.5 trillion yuan on renewables by 2020, which is projected to create 13m jobs. This growth has been given a tremendous boost by the US decision to withdraw from COP21
But if Chinese chemicals producers lobby hard enough about unfair competition, using the threat of job losses, not just at the chemical plants themselves but also in all the associated downstream industries, how might government officials respond? Local government officials in provinces threatened by significant employment losses could be very responsive to this lobbying.
China’s One Belt, One Road Chemicals Self-Sufficiency
Let’s assume, though, that it is too complex and risky to levy carbon tariffs against the US. Some of the complexity has been described above, with the risk coming from the danger of a “tit-for-tat” response by the US. Nobody wants to a global trade war, but that would be the risk if the US were to respond with punitive new tariffs of its own.
But US chemicals and polymers producers could still lose out. Here is a scenario of how this could happen:
- China gains huge geopolitical and economic leverage from sticking to the Paris deal, in partnership with other countries and regions such as the EU. It thus finds it easier to advance its One, Belt Road (OBOR) initiative, which is so important to its long-term economic reform agenda. Remember that the OBOR would account for some 40% of global GDP.
- The realisation of its OBOR ambitions enables it to export its environmental goods and services to less-developed member countries in order to protect their economic growth. Countries such as Bangladesh can only progress if they are given the resources to limit the impact of climate change, such as better flood defences.
- In return, countries across the OBOR may become bigger customers for China’sc chemicals and polymers producers. It seems logical that countries in say African countries would be much more likely to buy from China, if China has made OBOR-related investments that have mitigated the impact of climate change – along with investments in other essential infrastucture, such as better electricity supply.
- This could then justify an aggressive expansion of Chinese chemicals capacities to serve rapid consumption growth in the developing countries that are part of the OBOR.
- And/or the “virtual” self-sufficiency I discussed earlier may happen as a result of the success of the OBOR project. Countries in say the Middle East may grow their chemicals capacities to largely serve China, with the help of Chinese money and engineering skills. China, in return, could benefit from preferential oil and gas imports from these countries – and from outsourcing lower-value manufacturing industries to OBOR countries with more youthful populations. China has lost its labour-cost advantage in some of these industries because of its ageing population.
None of us have, as I said, a clue about what happens next. Any number of scenarios are possible. But what is clear is that political risk will continue to dominate now that the Economic Supercycle is over. Ignore today’s elevated political risk at your peril.