Chemicals in the 2nd line of fire in US-China trade dispute

22 June 2018 16:11 Source:ICIS Chemical Business

The talk has become serious and the implications dire. The US chemical industry has a great deal to lose from escalating trade tensions with China. The Trump administration on 15 June released a second list of proposed tariffs on China that included chemicals, plastics and lubes valued at $2.2bn.

The first set of tariffs will be imposed on around $34bn in imported goods from China starting on 6 July. Then on 18 June, US President Donald Trump asked the US Trade Representative to find $200bn worth of Chinese imports on which the US could impose 10% tariffs.

Chemicals are in the second tranche of tariffs, to be imposed at a later unspecified date.

“The administration has now pit US chemical manufacturing directly against China at the front lines of this conflict,” said the American Chemistry Council (ACC).

“We appreciate, and will vigorously utilise, the opportunity to share our comments and concerns with the Office of the US Trade Representative and others in the coming weeks to prevent this situation from escalating further,” the ACC added.

China is unlikely to give much ground in this threatening dispute as it drives hard to strengthen domestic manufacturing and its domestic economy, with eyes firmly fixed on long-term strategic goals.

Trump is looking to act on election pledges and generate support ahead of mid-term elections in November.

Chemicals sit in the middle of this dispute, targeted by both sides for their importance in manufacturing value chains and in forward-looking investment.

“Chemistry touches 96% of all manufactured goods and is the foundation for the entire North American supply chain,” the ACC said. “What gives chemistry a competitive advantage – lower US feedstock and chemical production facility costs – ultimately helps reduce costs for American businesses and consumers and has turned the US business of chemistry into one of America’s top exporting industries, accounting for 14% of all US exports.”

Of course, that proportion has been likely to rise given massive investment in shale-based chemicals. But the current dispute threatens investment and ultimately the smooth running of supply chains.

The ACC calculates that as much as half the $194bn of planned chemical industry investment in the US is at risk of delay or abandonment. As many as 24,000 jobs in chemicals and downstream industries are under threat from China’s retaliation in the escalating dispute.

China is one of the US chemical industry’s main trading partners. China already imports 11% of US plastics, worth $3.2bn. The new capacity coming on stream in the US this year and next could face a severe uphill battle to enter China markets should 25% tariffs be imposed. China is rapidly becoming self-sufficient in the major petrochemicals and increasingly so in polymers.

Tariffs of 25% on low-to-medium density polyethylenes would be keenly felt and it is not as if China has no sources of polymer other than the US.

In the ACC’s words: “Enabling a retaliatory trade war will only advantage China’s growing industry at the expense of American production”.

China moved swiftly to counter the US tariff threat, announcing it would impose a 25% tariff on $50bn of US imports – $34bn of imports from the US as soon as 6 July. And like the two-tiered US list, chemicals and related products are included in a second list on which a decision would be made separately. This includes polyethylenes, polyvinyl chloride (PVC), polycarbonate, acrylonitrile and polyamide alongside propane, LPG and hydrocarbon gases, naphtha, crude benzene, toluene and xylenes, and crude oil.

Likely China will wait before the US imposes tariffs on its second tier (which includes chemicals) before implementing its own chemical-laden second tier. Trade brinksmanship between the US and China will be in play, with global chemical markets in the waiting.

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Additional commentary by Joseph Chang

By Nigel Davis