Tariffs undermine benefits of US tax cuts, deregulation – ACC economist

24 September 2018 22:10 Source:ICIS News

HOUSTON (ICIS)--The uncertainty surrounding NAFTA as well as tariffs that the US and China are imposing on each other are undermining the benefits that the US chemical industry has enjoyed from the nation's tax cuts and deregulation, the chief economist of the American Chemistry Council (ACC) said on Monday.

The US has a trade surplus in chemicals, making the sector especially dependent on access to global supply chains and to export markets, said Kevin Swift. He made his comments during a luncheon hosted by The Houston Economics Club (THEC).

The US chemical industry has experienced a renaissance during the decade, benefitting from a strong US manufacturing base, access to abundant and affordable energy, a favourable regulatory environment and the state of both the US and global economy. The recent tax cuts provided the US with another boost, and business fixed investments have since increased.

These benefits could be offset to some degree by the tariffs, which the ACC has opposed.

"In summary, we feel at the ACC that the best tariffs are no tariffs. Zero," Swift said.

On the same day that Swift spoke, the latest round of tariffs by the US and China went into effect. The US tariffs covered $200bn worth of imports from China, and China's covered $60bn worth of imports from the US.

A total of 1,517 chemical and plastic imports from China, valued at $15.4bn, have now been targeted by three rounds of US tariffs, the ACC said. China has imposed retaliatory tariffs on more than 1,000 chemical and plastics exports from the US. These exports are worth $10.8bn, according to the ACC.

Now that both countries have adopted the tariffs, it could be difficult for them to back down and remove them without losing face, Swift said.

China is just one of the several foreign markets that could be disrupted by US trade policy. The US is in the midst of renegotiating its free-trade agreement with its North American neighbours, Canada and Mexico.

These two markets are important to the US because they are the destination of one-third of the nation's exports, Swift said. Out of those exports to Canada and Mexico, 44% are within the same company. In other words, a company's US division would export chemicals to its divisions in Canada and Mexico.

In fact, Canada and Mexico are the two largest US export markets for chemicals, followed by China, Belgium and Brazil, Swift said.

For imports, products from Canada and Mexico make up a quarter of the chemicals the US acquires from foreign markets, Swift said. Out of those imports from Canada and Mexico, 64% are intracompany.

These shipments are under quite a bit of uncertainty, because NAFTA talks are still ongoing. The US and Canada are still renegotiating NAFTA. Although the US and Mexico has reached a preliminary agreement, the text regarding the chemical portion of the rules of origin is still unavailable.

Swift noted the benefits of NAFTA, which allowed producers in all three countries to become more specialised and to gain economies of scale. Overall, companies have become more efficient and productive.

Terminating NAFTA would raise prices, destroy demand and jeopardise investments, he said. The prices of US chemical exports to Canada could rise by 0.8-4.4%. Those to Mexico could rise by 2.3% to 35.2%.

The tariff burden on US exports to the two country could range from $700m assuming most-favoured nation tariffs to $9bn assuming final-bound tariff levels, he said.

In the best-case scenario, US chemical exports to Canada and Mexico could fall by 4%, he said. Under the worst case, they could fall by 45%.

Terminating NAFTA would create uncertainty for 42% – or $85bn – of announced investments, he said.

Under the worst-case scenario, the US could lose $22bn in demand for chemical exports, Swift said. An additional $7bn could be lost from industries that use chemicals.

Before Swift's speech, credit agency Fitch Ratings said on 21 September that it lowered its forecasts for GDP growth.

It now expects China's economy to grow by 6.1% in 2019, down 0.2 point from its forecast in June, Fitch said. For the world, it should grow by 3.1%, down 0.1 point.

Despite the decline in forecast, global GDP is still growing above its historical average of 2.6%/year, Fitch said. This year, the world economy should grow by 3.3%, up from 3.2% in 2017.

The rationale behind renegotiating NAFTA was updating the decades-old deal and to address the trade imbalances among the US, Canada and Mexico.

For the tariffs against China, the US is imposing them because of alleged unfair policies and practices involving how it treats US technology and intellectual property. The nation has accused China of forcing US companies to transfer technology to their counterparts in the country. Click here to view related stories and content on the US-China trade war topic page

By Al Greenwood