INSIGHT: A change of heart from the US, some movement from China provide trade dispute relief

LONDON (ICIS)–There is a pause but the spectre of the US-China trade dispute still hangs over the global economy and chemicals trade.

Chemical markets in China reacted positively to the 90-day hiatus in tariff hikes agreed between President Xi Jinping and US President Donald Trump over the weekend at the G20 summit in Argentina.

Polyethylene futures prices on the Dalian exchange were up on Monday as were PE daily prices.

The more widespread reaction saw stock prices up in the Asia and European markets and February Brent up around $3/bbl on the previous close.

Photo by Pablo Martinez Monsivais/AP/REX/ShutterstockPresident Donald Trump meets with China’s President Xi Jinping during their bilateral meeting at the G20 Summit, in Buenos Aires, ArgentinaTrump G20 Summit, Buenos Aires, Argentina – 01 Dec 2018

Analysts warned of wishful thinking, however, that the truce would end the war. Contentious issues have to be resolved that relate not simply to trade but also to intellectual property.

My colleague, John Richardson, put those into context on Monday in his Asian Chemical Connections blog, questioning whether in just three months, China would be prepared to dismantle its state-sponsored economic growth model; its laissez faire grabbing of technology; and step back from its military ambitions in the South China Sea.

China is in a race against time. And although this could well be the China Century, there are obstacles to China achieving its added value manufacturing and technology goals.

Petrochemicals and polymers, particularly, are tied up in the midst of the damaging trade dispute.

China needs oil, so it stakes its claims in the South China Sea to help ensure critical sea lanes are kept open. The country is in a race against time, as Richardson suggests, to obtain sufficient higher value technologies to drive its rise up the manufacturing and service industries value chain. It is aiming to make this transition at the fastest pace ever seen.

Richardson believes that the US has more to give more ground than China if a deal is to be done.

Petrochemical and polymers producers need more than warm smiles and handshakes. Prices have plunged alongside crude in the spot-driven markets in Asia and have come under increasing downward pressure elsewhere.

In Europe the weaker crude prices and subsequently lower naphtha costs have eventually been fed down the chain to much reduced olefins and aromatics price. Margins have suffered as a result.

A rising crude price will lift petrochemical and polymer prices but as recent margin analysis has shown, the trend is downwards.

The US China trade dispute has taken its toll. Particularly worrying for China’s industry has been the prospect of 25% tariffs on plastic products from China imported into the US. There is relief from that, for the time being at least.

US polymer producers, buoyed by cheap and plentiful natural gas liquids (NGLs), had been seeking much deeper inroads to the China markets but have not appeared overly concerned about the impact the trade dispute has been having on their plans for export.

A slowdown in polymer demand from China would be of great concern for these producers and the big exporters from the Middle East, nevertheless.

At the same time, the negative impact of the dispute on the global economic output does no one any good.

China has made some concessions to the US, reducing import duty on US automobiles, for instance and tackling the export of the opiod Fentanyl.

Some analysts believe that there is more room for manoeuvre and that China can adjust its industrial policies while seeking to tackle the intellectual property protection question.

What is difficult to envisage is a realignment of China’s economy under the threat of the imposition of further tariffs. China has grown strong based on its manufacturing trade with the US.

A White House press statement on 1 December said that President Trump and President Xi had agreed that negotiations on structural changes would begin immediately.

They would cover “forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber threat, services and agriculture”.

“Both parties agree that they will endeavour to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.”

The statement added that China will agree to purchase “a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.”

Forecaster Oxford economics has suggested that the positive outcome seems to have largely resulted from a change of heart on the US side but that China has appeared willing to change some aspects of its ‘made in China 2025’ plan.

“Concretely though, we remain sceptical of a substantial trade deal between the two economic giants. Addressing the structural fault lines pertaining to intellectual property protection, technological transfers and industrial subsidies will require time, communication and goodwill – a rare trifecta these days.”

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Photo: China’s President Xi Jinping talks during a bilateral meeting with President Donald Trump, in Buenos Aires, Argentina. Source: AP/REX/Shutterstock. Photogrpaher: Pablo Martinez Monsivais

By Nigel Davis