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Potential Impacts of the U.S. - China Trade War on the Chemical Industry Supply Chain

  •   9 Aug 2019
  •    Kai Pflug
  •    191
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    With President Trump currently pursuing a highly aggressive trade policy towards China, the impact on chemical supply chains in China, the U.S., and the rest of world could be substantial. U.S. and Chinese chemical companies are already being impacted, and their options to mitigate the consequences of this policy in the short term seem limited. This is due to several factors, such as the substantial effort required to develop new trade relationships and unwillingness to invest huge amounts of capital in establishing new supply chains.

    In this paper, we aim to analyze this trade in some detail, focusing on those chemical segments for which U.S. - China trade matters the most. We will also point out some consequences in reduced chemical trade between the two countries due to higher tariffs – even though currently it cannot be forecast with any certainty whether these tariffs will be lasting, or whether a trade deal between China and the U.S. can be achieved.

    According to data from the United Nations Conference on Trade and Development (UNCTAD) from 2007 to 2017 (2018 data is not available yet), Chinese chemical exports to the U.S. grew much faster than general exports. In the same period, U.S. exports to China underperformed relative to all exports from the U.S. to China (Tab. 1). 

    Tab. 1: Chemicals export China and US versus all exports (source: UNCTAD)

    China in 2017 exported USD 16.6 billion of chemicals to the U.S., or 11.8% of its total chemical exports of USD 141.2 billion (or about 1.1% of China`s total chemical market, which reached a value of about USD 1,446 billion in 2017). Meanwhile, U.S. chemical exports to China in 2017 reached a similar value of USD 15.7 billion, though due to the larger total U.S. chemical exports, this represents only 7.6% of the total U.S. chemical exports.

    Recent data points out that while the trade in chemicals is certainly affected by the trade conflict between the U.S. and China, it is not among the reasons for it. According to the U.S. census bureau, the U.S. in 2017 exported USD 130 billion worth of goods to China, while it imported USD 505 billion. Compared to this imbalance, the value for chemical exports (USD 15.7 billion exports from the U.S. to China vs USD 15.7 billion imports from China) seems very balanced.

    Unfortunately, given the nature of trade conflicts, this does not mean that chemicals are unaffected. Indeed, duties have already been imposed on a variety of chemicals. However, let us first take a closer look at the types of chemicals traded between China and the U.S., and their relative importance.

    The UNCTAD database lists 33 categories which can be regarded as covering chemical products in a broader sense. These 33 categories combined account for the total 2017 chemical exports from China to the U.S. of USD 16.6 billion.

    Six of these categories cover exports exceeding USD 1 billion:

    • Carboxylic acids and derivatives
    • Nitrogen-function compounds
    • Organo-inorganic and heterocyclic compounds, nucleic acids
    • Medicinal and pharmaceutical products excluding medicaments
    • Perfumery, cosmetics or toiletry preparations
    • Plates, sheets, films, foil & strip, of plastics

    In terms of total trade loss, these categories are those where the biggest absolute losses are to be expected in case of unified, high import duties. However, the importance of the U.S. as an import destination varies from slightly below 10% for the last category (Plates, sheets, films … of plastics) to almost 30% for the Perfumery category. Thus, assuming a 25% customs duty would reduce exports to the U.S. by 50%, the Chinese plastics producers would only lose about 5% of their total global export volume while producers of perfumery preparations would lose 15%.  

    Looking at U.S. exports to China, the top 6 categories account for 45% of total U.S. exports to China and include

    • hydrocarbons and derivatives
    • Medicinal and pharmaceutical products excluding medicaments
    • Medicaments and veterinary medicaments
    • Polyethers, polyesters, polycarbonate
    • Other plastics
    • Plates, sheets, films, foil & strip, of plastics

    For these categories, China accounts for between 5% and 35% of U.S. global exports, with the category “Polyethers, polyesters, polycarbonate” reaching the highest share and thus likely to be the most affected by a trade conflict between the two countries.

    As stated above, the overall trade imbalance in chemicals is relatively small, with China exporting USD 1.06 worth of chemicals to the U.S. for every USD 1 imported into China for the U.S. However, for individual categories the imbalances can be much bigger. Tab. 2 shows those categories for which the export from one country into the other is at least twice as big as the corresponding import.

    Tab. 2: Chemical categories with major 2017 trade imbalance between China and the U.S.

    Broadly speaking, the U.S. is a substantial net exporter for commodity and engineering plastics as well as for some small-volume specialty chemicals. The first reflects the U.S. utilization of cheap shale gas to produce plastics while the second one reflects the higher maturity and stronger focus of specialty chemicals for the U.S. chemical industry. In contrast, China is a net exporter to the U.S. for a number of organic intermediates as well as for colors and dyes, which reflects the cost advantage of China`s producers in somewhat more labor-intensive chemical production as well as the shift of key customer industries from the West to Asia.  As a consequence of these imbalances on the level of chemical categories, these categories are particularly vulnerable to tariffs imposed during trade conflicts.

    At the moment, it is far from clear how the trade conflict will play out. U.S. president Trump is always good for some surprises – however, these might take the shape of ever tightening trade barriers and increased tariffs, or some kind of grand bargain that he can sell to U.S. voters as a demonstration of his bargaining skills. However, in the case of further trade restrictions, several consequences are very likely.

    Chemical trade between the two countries will be reduced drastically, as both countries search for alternative suppliers in countries that are not affected by the trade conflict. Ed Brzytwa, director of trade of the American Chemistry Council, went as far as saying that as a consequence of China`s most recent retaliatory tariffs, “effectively, that market (China) is closed to U.S. exporters”.

    Insecurity about chemical investment in China will increase, and to some extent also that of chemical producers in the U.S.. In both cases, chemical production is at least partly scheduled to be exported back to the respective home country, which would obviously be endangered by higher tariffs.

    Global (and even Chinese) chemical companies may consider shifting investment from China to other countries that offer somewhat similar advantages (low production costs, proximity to huge markets, etc.) but will not be affected by the trade conflict, e.g., India or South-East Asia.

    Chemicals produced in the U.S. are already suffering from both higher cost of materials imported from China and the shrinking Chinese export market due to retaliatory tariffs, and will suffer even more.

    According to S&P Global Platts, for U.S. chemical producers, the trade conflict could lower the return on investment for hundreds of planned chemical projects recently built or already under construction.

    Apart from these direct consequences, it is important to note that indirect consequences may have a much bigger impact. While the amount of chemicals exported from China to the U.S. is sizeable, they account for only about 4% of total Chinese exports to the U.S. However, if a trade conflict reduces U.S. demand for the remaining 96% of current Chinese exports, this will certainly also be felt by the Chinese chemical industry, which domestically provides many raw materials for these exports.

    It is therefore not surprising that the U.S. trade policy has been criticized by a number of organizations and companies.

    BASF stated the company is "concerned about the U.S. announcements, and the response of several of its trading partners, to impose import tariffs on a wide range of products that could affect the chemical industry and its numerous customer industries" while Houston-based Phillips 66 remarked that the trade conflict is cutting margins for chemicals as the demand from China weakens.

    The Houston Chronicle is worried about impacts on jobs in the Houston area: “The Gulf Coast petrochemical industry, already bruised by trade tensions with China, faces higher costs, shrinking profits and tougher market access from the new round of tariffs imposed by the Trump administration, putting thousands of American jobs and billions of dollars in capital investments at risk if the trade war with China escalates.”

    Finally, American Chemistry Council president Cal Dooley stated that U.S. trade posture is having "significant adverse impact on some of the most competitive sectors of the economy" including chemicals. According to him, "When you respond in a unilateral fashion by imposing tariffs, no one should be surprised char the retaliation is targeted at the most competitive sectors in the US economy", continuing that the US chemical sector is on the winning side in global markets today.

    What will happen next? Solving the trade conflict has become even more complicated as it now includes various non-trade issues. In such a difficult situation, it is important for both sides to cool down the rhetoric as much as possible. In the meantime, both tactical and strategic planning for various scenarios is key for chemical companies in both countries.

    Co-authors: 

    Dr. Kai Pflug, Management Consulting – Chemicals
    Daniel Philip Senger, CDI Global 

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    ABOUT THE AUTHOR

    CEO of Management Consulting – Chemicals

    Dr. Kai Pflug is a chemist by educational background. After obtaining a Ph.D. in chemistry and a master in economics, Dr. Pflug first worked as an R&D chemist for five years before moving into management consulting. In 2000, he joined the chemical practice of Arthur D. Little in Germany as a consultant. In 2004, he moved to Shanghai for a niche consulting company, working as their Vice President APAC and establishing a representative office for them. Since 2009, he has been the head of his own consulting company, Management Consulting – Chemicals. The firm exclusively focuses on the chemical industry in China, covering topics such as strategy, marketing, target search and M&A. In his 15 years of living in Shanghai, Kai has conducted more than 100 consulting projects for a multitude of clients from the chemical industry. In addition, Kai has authored more than 200 papers, the majority of which cover some aspect of the chemical industry in China.

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