Trade war looms

Source: ECN

2018/03/23

On 22 March President Donald Trump was expected to stick to his promise of imposing trade tariffs against China, aimed at reducing the country’s $375bn China trade deficit.

The moves are ostensibly a reaction against alleged violation of intellectual property rights. President Trump may also have become frustrated by an apparent lack of concessions from China on trade despite months of negotiations as well as his own visit to the country in November last year. Going against the advice of many in government, and the vast majority of US business groups, he is forging ahead with protectionist measures that he believes will save domestic jobs and industries.

Trump may well believe this is a trade war he can win, and with the mid-term elections coming up in November, he hopes to please his supporters. But most economists insist there will be no winners, only losers, as tit-for-tat measures harm global trade and push up prices for consumers and businesses.

China on 22 March said that it opposes the expected tariffs, warning that the country will take all necessary measures to defend its rights and interests, state media reported. There could be retaliatory measures against US exports of soybeans, sorghum and live pigs – aimed particularly at impacting rural pro-Trump regions.

“China will absolutely not sit back watching its legitimate interests be damaged,” state news agency Xinhua said in a report quoting an unnamed spokesperson at the Ministry of Commerce.

Of course, these would only be the first battle over trade, with more measures in prospect for the future. Chemicals and polymers could become a target from both sides as there is strong trade between the two. The US exported $11.5bn to China in chemicals in 2017 and imported $15.5bn, so it has a trade deficit of 3.9m tonnes/year. ICIS data shows that the shale-related US ethylene expansions will increase capacity by 10.1m tonnes/year or 35% by 2019. A second wave currently at planning stage will add a further 6.5m tonnes/year. The figures for polyethylene (PE) are even more astonishing: through 2019 capacity is scheduled to increase by 42% or 6.5m tonnes whilst by 2022 the hike will by 77% or 12.1m tonnes/year. With US domestic demand growth unlikely to increase substantially over the next two to three years, most of this new capacity will be aimed squarely at export markets.

US chemicals executives could, therefore, be forgiven if they are feeling a little nervous about the prospect of deteriorating trade relations with a major trading partner nation. Although this new production will be some of the lowest cost to produce globally, reduced access to the China market would not be good news. If economic growth falters because of a trade war, this will also thwart efforts to export these new capacities.