End to US-China trade truce heightens threat to global economy

SINGAPORE (ICIS)–The US’ tariff hike on hundreds of billions of Chinese goods would trigger a further shift in global trade flows for some petrochemicals, possibly benefiting southeast Asian markets in the short run, while posing a more serious threat to world economic prospects.

Picture source: Amer Ghazzal/REX/Shutterstock

The 10-month old US-China trade row escalated on Friday as the US proceeded with raising tariffs on $200bn worth of Chinese goods to 25% from 10%, indicating that negotiations with Beijing have recently turned sour.

China will again be forced to retaliate as it had done in three previous occasions since July 2018, when its trade war with the US began.

The tariff increase was originally scheduled to take effect in January, but was held off by a three-month trade truce reached on 1 December 2018, which was extended as negotiations appeared to be progressing well.

Then came Trump’s surprise announcement on 5 May that no further extension would be allowed.

“[The] US-China trade war would impact petrochemical global trading flow to a degree, especially for the products which have active trading globally,” ICIS analyst Rachel Qian said.

In the case of methanol, the US’ expected capacity addition of 3.3m tonnes over a seven-year period from 2019 will have to find markets other than China, she said.

“US is turning into a net exporter by the end of 2019,” Qian said, citing that China is its most ideal market for the material.

With an unresolved US-China trade conflict, however, the US may have to target Europe, as well as other markets in Asia, for methanol; while China would likely procure South American cargoes originally intended for the US market, she said.

The US’ imposition of higher tariffs on Chinese goods came in the midst of the 11th round of negotiations in Washington aimed at ending the trade war that is threatening global economic growth.

“China deeply regrets that it will have to take necessary countermeasures,” said a spokesperson from China’s Ministry of Commerce.

“It is hoped that the US and China will work together and resolve existing problems through cooperation and consultation,” the ministry spokesperson said.

In the southeast Asian polymer markets, some converters in Thailand were hopeful that they will be able to fulfill more orders from the US following the new round of tariff increase on Chinese goods, including chemicals and plastics.

Trading in the region was largely quiet amid the month-long Muslim fasting month of Ramadan, which will end with the Eid-ul-Fitr holiday in early June.

In some petrochemicals such as acrylic acid and acetic acid, the share of the US to China’s exports was minimal to be affected by the tariff hikes.

China’s major export-oriented acetic acid producers such as Jiangsu Sopo Chemical and Shanghai Huayi Group are shrugging off the latest untoward development in the US-China trade war.

“We are not dependent on the US market and we had virtually zero acetic acid exports so far to the US,” a Shanghai-based trader said.

The recent tariff hike could prompt these US producers to ship cargoes from their southeast Asia production bases instead of shipping from China.

The bulk of the US’ acetic acid imports of more than 10,000 tonnes from China in 2018 were procured by US-based producers with operations in the northeast Asian country.

The total volume shipped out to the US represented 1.4% of China’s total exports of the material.

For butadiene (BD), China has refrained from importing material from the US in the first quarter of 2019, whereas for the whole of 2018 the US had a 4% share to China’s overall BD imports.

The US’ tariff hike may mean little to some individual markets, but the adverse impact on global trade and economy as a whole is far from negligible.

For much of Asia’s petrochemical markets, the impact on the US’ latest tariff hike on China was on sentiment as it augurs weak overall demand going forward as the Chinese economy reels from weak exports.

Exports is a major pillar of growth for China.

China’s overall trade is showing signs of strain, with exports in April down 2.7% year on year, with those to the US down 13%; while imports inched up 4%, with those to the US slumping 26%.

The US is China’s biggest export market in April, with a 16% share to total.

For the first four months of 2019, China’s overall exports to the US declined about 10% year on year, while imports from the same shrank 30%, according to China Customs data.

The Chinese economy, the world’s second biggest after the US, is projected to slow down further this year, with growth targeted at 6.0-6.5%, weaker than the previous year’s 6.6%, which was a 28-year low.

Trump’s pronouncement of receiving a “beautiful letter” from China President Xi Jinping overnight provided some glimmer of hope that a deal could still be struck between the US and China by the end of their two-day high-level meeting in Washington late on Friday.

By Pearl Bantillo

Additional reporting by Fanny Zhang, Nurluqman Suratman, Yvonne Shi, Felita Widjaja, Helen Lee, Alex Feng, Anna Xiang, Dora Xue, Sikee Shi and Aviva Hu