Commentary: Global chemical trade under threat as Trump presidency will redraw the map
To the shock of all professional prognosticators, the US has had what some call its own “Brexit” moment. The election of Donald Trump as the next president of the world’s largest economy will have profound implications for global trade and the chemical industry. The US president holds broad powers on trade with the ability to move unilaterally in implementing tariffs and withdrawing from trade agreements without congressional approval. Legal challenges could ensue, but the immediate as well as long-term impact of such moves would be significant. Note that in March 2002, US President George W Bush, a Republican, slapped tariffs on steel imports of up to 30%, but exempted Mexico and Canada in light of the North American Free Trade Agreement (NAFTA). The duties were lifted in December 2003 following challenges by the World Trade Organization (WTO) and threats of retaliation from other countries.
Concerns on the impact of a Trump presidency on global trade were reflected by the initial plunge in equity markets worldwide. The US Dow Jones Industrial Average (DJIA) futures were down over 800 points, or more than 4%, on the night of the election on 8 November and S&P 500 futures off over 5%, while certain Asia markets sold off hard as well. Yet by 9 November, the US stock market recovered all its losses and actually blasted higher, led by steel, infrastructure, pharmaceuticals and banks.
There’s no secret Trump has taken a hard line on trade, vowing to renegotiate NAFTA in particular and take measures to slash China’s huge trade surplus with the US.
It’s worth pointing out that Mexico is the number 2 export destination for US chemical exports excluding pharmaceuticals (all figures ex-pharma below), just behind Canada, and accounts for a substantial portion of the US chemical industry’s overall trade surplus.
In 2015, US chemical exports to Mexico of $20.1bn were almost double those to the 3rd leading destination China of $10.6bn, and close to the $23.9bn exported to the entire EU (including the UK for now), according to statistics crunched by the American Chemistry Council (ACC).
And the US chemical trade surplus with Mexico of $15.3bn alone is 40% of the entire US chemical trade surplus with the world of $33.4bn in 2015, according to the ACC. All that tariff-free trade will be at risk with the Trump presidency, as the US seeks to redraw the terms of NAFTA. While specifics on those renegotiations are simply not available, the nature is plain, according to Trump’s 7-point plan. A Trump administration would work to immediately renegotiate NAFTA with the threat of submitting notice to withdraw from the deal. Under Article 2205 of NAFTA, any party may withdraw six months after it provides written notice. Trump’s plan is to “eliminate Mexico’s one-side backdoor tariff through the VAT (value-added tax) and end sweatshops in Mexico that undercut US workers”. Clashes on trade with not just Mexico, but China, South Korea and Japan – countries with large trade surpluses with the US – are all more likely in a Trump presidency.
TPP IS DOA
And out the window goes the Trans-Pacific Partnership (TPP) free trade agreement between 12 countries, including most notably Japan. It has yet to be ratified and almost certainly will not be in the US in its current form, if ever.
The US chemical trade balance with the countries involved in the TPP is a surplus of $6.2bn in 2015, according to statistics ICIS compiled from the ACC. US chemical exports to those countries were $36.2bn last year.
INFRASTRUCTURE AND ENERGY
Yet are there positives for the US chemical sector? Trump’s stated goal is to boost the US manufacturing and energy sectors. Trump’s $1 trillion infrastructure spending plan aims to “create thousands of new jobs in construction, steel manufacturing, and other sectors to build the transportation, water, telecommunications and energy infrastructure needed to enable new economic development in the US”.
A fiscal shot in the arm from infrastructure spending will boost local demand for chemicals and polymers. In energy, Trump’s stated goal is to “eliminate all barriers to responsible energy production”.
Energy is a critical element of the US chemical industry competitive advantage – in the production of ethylene and derivatives, as well as methanol and derivatives – all natural gas-based chemicals. And regulations on emissions are expected to be loosened in a Trump administration. “Initiatives to reduce the impact of the EPA (Environmental Protection Agency) appear likely early in the new term, and would likely be viewed as a net positive for the chemical sector,” said Jefferies & Co analyst Laurence Alexander.
“In particular, a longer-term question would be whether the new administration reduces the regulatory cost of launching new ag chemicals… or moves to soften the rollout of CAFE (Corporate Average Fuel Economy) standards, which might reduce some of the pressure for light-weighting vehicles, a key theme for producers of thermoplastics in recent quarters… Carbon abatement initiatives could be delayed or even curtailed, whereas the next wave of US petrochemical investment likely gathers strength,” he added.
Stock prices of US-based chemical companies were predominantly higher on 9 November.
It is a new world order for trade, with protectionism at the fore. For the US chemical industry, which currently enjoys a large trade surplus and is building massive capacity for further ethylene derivative exports, uncertainty reigns.
The same goes for the chemical businesses of its trading partners worldwide. “More friction on trade policy would likely raise questions not just about the usual targets (steel, ag) but also about the way multinationals handle their supply chains,” said Jefferies’ Alexander.