HomeNewsOUTLOOK '19: Chems m...

OUTLOOK '19: Chems may face more tariffs in US, China trade war

  • Dec.28,2018
  • Source: ICIS News

Chemical companies could face more trade barriers and tariffs if the US and China fail to reach some kind of agreement that addresses their trade grievances.

In 2018, the US introduced tariffs on a range of Chinese imports.

For each of the three rounds, China has responded in kind, targeting chemicals and agricultural products.

US farmers are especially dependent on China as a destination for their crops, and the tariffs could reduce their income.

Farmer income is among the biggest factors in determining demand for agrochemicals and fertilizers. When farmer income declines, sales of these products often follow.

For chemicals, companies in the US began announcing new chemical projects at the start of the decade. The resulting output from these new projects would greatly exceed demand in the US.

From the start, these companies intended to export much of the material from the new plants, and they expected that they would meet rising demand from emerging markets, particularly China.

If the tariffs remain, it could make it more difficult for these companies to sell the output from their new plants.

On 1 December, the US and China reached a 90-day truce, in which both sides would not impose any new tariffs. The ceasefire ends on 1 March.

If the two sides do not reach an agreement, the US will make good on an earlier threat to increase tariffs on $200bn worth of Chinese imports, bringing them to 25% from 10% announced in September.

China would likely respond as it had done with the previous three rounds of tariffs announced by the US.

The US has expressed several grievances in regards to trade with China. It is unhappy with its trade deficit with the country.

In January 2018, the US Trade Representative accused China of pursuing interventionist policies and practices that are intended to limit market access. Chinese regulators pressure foreign companies to share technology as a condition to investing in the country, the US alleged.

The US has even accused China of outright theft of technology and intellectual property.

For now, the acrimony between the two nations has eased, although it is unclear whether they will reach an agreement.

On 14 December, China's Ministry of Finance said the country will temporarily suspend some of the additional tariffs it had imposed on automobiles and auto parts from the US.

The suspensions will start on 1 January and last for three months. It involves 211 tax items, the ministry said.

In announcing the December trade truce, China's Ministry of Foreign Affairs said the two countries will hold more talks, try to eliminate all tariff increases and come to an agreement that benefits both sides. The ministry said that the country expressed its willingness to open up its market, increase imports and address various issues between the nations.

For its part, the US described the meeting as highly successful.

US chemical executives have said that the tariffs should not affect volumes of chemicals. US shipments that had been destined to China would simply shift to other markets. Likewise, nations will shift their exports from other markets to China, making up for the disappearance of US shipments.

Trade flows will re-arrange, but trade itself will continue.

However, trade flows do not immediately change on the flip of a switch. It takes time and money to find new markets and establish new trade links.

Moreover, tariffs are taxes, and taxes lower economic growth. If the tariffs persist, they will lower GDP growth.

Chemical demand changes at multiples of GDP, so slower growth will also slow demand for chemicals.

* * *

The US may be able to resolve another pending trade issue in 2019, when Congress is scheduled to vote on the replacement for the North American Free Trade Agreement (NAFTA).

The replacement, called the US-Mexico-Canada Agreement (USMCA), preserves much of the earlier deal while making a few adjustments.

It updated and streamlined customs procedures and increased regional content rules for automobiles. For Mexico, it required that a certain percentage of parts need to be made by workers making at least $16/hour.