By John Richardson
THE CUMULATIVE negative effect on global GDP as more and more countries became involved in a trade war is estimated by the above table on the left, from a research paper by economists as the Australian National University.
The table shows the impact of each country imposing an extra 10% tariffs on imports from all other countries – for example, if Japan’s average import tariff went from 5% to 15%.
The first column on the left indicates the impact of all countries imposing a 10% increase, which authors Warwick McKibbin and Andrew Stoeckel define as a global trade war. As you move right, the other columns show the negative GDP effects from just one country or region imposing the tariffs, so that each of the other columns add up to that first column.
US GDP growth under this worst-case scenario (the first column on the left) would fall by 1.3% in one year. Euro Area growth would shrink by 2.9% and Chinese GDP would be 4.3% lower. This would obviously amount to a global recession.
Supporters of President Trump’s trade policies will argue that this is wrong, and that instead the US economy will benefit.
I am not going to come down on either side of this debate, but will again repeat the point I have making ever since the president won the election: Every different approach to running an economy carries risks, and his approach is radically different as it breaks with the approach of every other White House administration since the Second World War.
What concerns me is that some petrochemicals companies may have overlooked the risks carried by this different approach. They could have either a.) Assumed he didn’t mean what he said during his January 2017 inauguration speech or b.) If he did mean it, he wouldn’t implement his agenda because White House officials would direct him to the economic mainstream.
For me, though, it has always been just a matter of timing. The president sincerely believes in what he said during his speech, as it is in line with views he has held for many years.
I have thus long been calling for petrochemicals companies to plan for the day when his agenda on trade in particular enters the implementation phase. The president yesterday signed into law his promise to impose heavy new US import duties on steel and aluminium. This could mark the beginning of the implementation phase.
The next important milestone will be the decision he has pledged to take over the next few weeks on the results of a US investigation into allegations of Chinese intellectual property rights abuses. On Tuesday, he said that new import tariffs across a range of Chinese exports to the US were being considered, along with additional restrictions on Chinese acquisitions of US companies.
The threat to US petchems exports
Now let’s take a look at the chart on the right at the beginning of this blog post. I picked a selection of petrochemicals and polymers and extracted data on US exports in 2017. As you can see, polyolefins, styrene and methanol exports dominate this chart.
Most of my analysis on the risks of a global trade war has focused on a scenario where the US finds it harder export PE to the key China market, just aslots of new PE plants come on-stream in the US. But the chart on the right makes the points that he risk goes beyond just PE and exports to China.
The chart’s headline (and the deliberatively provocative headline of this blog post, as I want to get your attention) estimates the financial risk to US petrochemicals companies. This is based on the following:
- I looked at a range of ICIS pricing CFR prices for these products in Southeast Asia and Northeast Asian for the week ending 2 March.
- Assuming that import volumes are the same in 2018 as they were last year, and that these prices are a reasonable representation of global pricing trends throughout this year, what is at stake is $12.4bn of export sales. These numbers will of course be wrong, but they give you an idea of the scale of what is at stake.
This $12.4bn of revenue isn’t even under the worst of scenarios going to vanish overnight. Obviously not. What instead might happen are incremental, drip by drip, trade protection measures that make it harder for the US to export to many countries and regions.
The most apparent form that these measures would take would be higher tariffs on US shipments. But something else to consider are new environmental taxes. The US has to move its petrochemicals exports long distances. Even without a trade war, these exports are vulnerable because of growing sustainability concerns.
Everything may turn out to alright in the end. Trade tensions could ease over the next few days and weeks. Or maybe President Trump’s approach makes economic sense. I am again not expressing an opinion on his economic theories.
But today’s elevated levels of risk mean that petrochemicals companies in the US and elsewhere have to plan for downside scenarios. This kind of planning is in my view crucial for satisfying responsibilities to employees, shareholders and other stakeholders.
