Chemical Businesses Caught In Crossfire of Escalating China-US Trade War

Chemical businesses in China and the US, along with dependent sectors downstream in the supply chain, are currently trapped in dire straits amid a protracted and worsening trade war between the two countries.

On May 13, 2019, China announced tariffs ranging from 5% to 25% on 5,140 US products on a $60 billion target list. Products affected include beverages, batteries, and chemicals, among many others. The Chinese Ministry of Finance said the tariffs will take effect starting from June 1, 2019. ^[1]

This is a retaliation initiated against the US which increased tariffs to 25% on $200 billion of Chinese imports days ago. And there is now a further worry: US President Donald Trump has threatened to impose additional tariffs on $325 billion of Chinese imports.

US Chemical Industry Badly Hit by Tariff Increases

Arguably, the US chemical industry is the sector most negatively affected by the increase in tariffs, as evidenced by its unsatisfying export performance last year. According to the American Chemistry Council (ACC) ^[2], a top trade association representing US chemical businesses, US chemical exports to China rose by only 2.7 percent in 2018, a marked contrast with their double-digit growth in 2016 and 2017.

The Peterson Institute for International Economics gave a rundown of China’s $60 billion tariff list released in September 2018 ^[3] (which is nearly the same with the new list mentioned above, only with 67 more items), concluding that chemicals amount to around $7.9 billion (see the table below). ICIS Chemical Business further specified that China tariffs in round 2 (August 2018) and round 3 (September 2018) involved $2.0 billion and $8.8 billion of US chemicals and finished plastics, respectively ^[4].

(Source: Chinese Ministry of Finance; calculated by the Peterson Institute for International Economics)

Unlike apparel or beverage producers, chemical businesses have little room to maneuver on, for example, tariff classification to circumvent duties. Even worse, some chemical components on US businesses’ shopping list are available only in China and represent critical inputs to US manufacturing. As a result, US chemical manufacturers have no alternatives but to take on the increased costs.

Moreover, since Chinese importers are largely driven away by tariff hikes, hundreds of thousands of US jobs are put at risk as a result of smaller external demand for chemical products. Given the currently grim situations, existing chemical companies are also hesitating to expand their plants, let alone build new ones.

In a statement released by the ACC in response to flaring trade tensions between the two countries, the trade group voiced their concerns over increased tariffs, stating that it is “starting to see signs that the tariffs are disrupting supply chains, cutting off markets and eroding US chemical-manufacturing competitiveness” and urging Trump to “remain focused on sensible solutions with China…and forgo the imposition of higher tariffs”.

Bad News comes at a Difficult Time for China’s Chemical Businesses

In recent years, China has been imposing more and more stringent environmental regulations on chemical businesses. The central government has launched several rounds of inspections on environmental protection accountability, vowing to investigate violations of environmental protection laws by, especially, chemical enterprises and parks.

Such a worrisome policy environment, which results in rectification, relocation, and even shutdown of thousands of businesses, adds to the insecurity of chemical enterprises and dampens the short-term domestic demand for chemicals.

Therefore, higher tariffs collected by the US, one of the major destinations of Chinese chemical exports, undoubtedly make matters harder for Chinese businesses at this juncture.

According to the Society of Chemical Manufacturers & Affiliates (SOCMA), to date, the US has levied tariffs on 1,517 Chinese-origin chemical products valued at around $15.4 billion. ^[5] Notably, the $200 billion US list, which was initially proposed by the United States Trade Representative (USTR) on July 10, 2018, covers a wide spectrum of chemical products China exports to the US (see the table below for major chemicals involved).

(Source: USTR; sorted by the Guardian ^[6])

Like their US counterparts, Chinese exporters will face higher export costs. Under such circumstances, it is conceivable that US importers will negotiate harder as they do not want to bear the costs alone. When exports are crippled, some Chinese manufactures will resort to domestic sales, which will intensify competition in the domestic market.

Moreover, China is highly dependent on US exports in some sectors. For example, some Chinese buyers used to be committed to buying liquefied natural gas (LNG) from the US. According to S&P Global, previously in February 2018, China National Petroleum Corporation (CNPC), the largest state-owned producer, signed a 25-year supply deal with US-based Cheniere for about 1.2 million metric tons/year of LNG. ^[7] However, since LNG is now included in China’s 25% tariff list, Chinese buyers are forced to swap their US shipments for cargoes from other countries.

If there is any consolation, the increased tariffs may, in the long run, prompt Chinese government and enterprises to accelerate the pace of industrial transformation and upgrading and move towards “high-quality development”. Yet given the painful fallout, this can barely reassure the market. The top priority for China and the US now is still to find common ground and reach a trade deal, in a bid to establish sound trade relations which can be conducive to benefit both sides, as realities show that the zero-sum approach makes no sense in today’s global trade market.