Tariffs threaten to turn American chemical dream into nightmare

U.S. companies had prepared to competitively supply chemicals and plastics to China just as the Asian country was set to become the world’s biggest retail market. Now tariffs raise questions on whether investment to add chemical export capacity can remain viable.

An industrial cooperation accord was signed in Beijing on Nov. 6 by Airbus CEO Guillaume Faury as the Chinese and French leaders watched. Photo credit: Airbus

United States chemical companies spent a decade investing to turn plentiful new gas supplies into plastics so competitively they could ship to China and undercut products there but now uncertainty looms.

After over $200 billion in investments in the U.S. completed and planned, chemical producers watch their once promising export markets, China and Europe, threatened by tariffs and no longer as accessible.

“That calls into question whether investments in the U.S. are really going to be viable. They are predicated on export to China,” Ed Brzytwa, director for International Trade at the American Chemistry Council, told Petrochemical Update.

“We’re telling our members this is no longer a short-term situation,” he added. Even if there is a political change, any new administration may decide to keep tariffs for whatever reason, he said.

Tariffs have affected the chemical industry from the start, in some cases immediately as was the case for those seeking steel for ethane cracker construction. Steel prices rose with the import tariffs the U.S. put in place, as local producers quickly increased prices when imports became more expensive.

A May 29 report in the Washington Post cited a study by the Peterson Institute for International Economics saying U.S. consumers and businesses were paying more than $900,000 for every steel industry job saved with the tariffs, or 13 times the average salary of a steelworker.

U.S. auto, aircraft chemicals demand

In 2018, $140 billion worth of U.S. chemicals were exported, about 10% of the total U.S. goods exports, according to the association. The U.S. chemical industry supplies nearly all other industries, from food and medicine to automobiles and aircraft.

“If you look at a light vehicle on average in the U.S. there is about $3,000, $3,300 in chemistry” in parts like tires, dashboards, electronics, coatings, liquids, and seats, Brzytwa said. 

“Say tariffs are put in place of 20%, 25% on auto imports, whether from all countries or some. This would increase U.S. auto prices because domestic players will increase auto and auto parts prices.” This would reduce demand, leading to less chemicals sold, he said.

The European Union, a key export market for U.S. chemicals, will retaliate if North American tariffs target their auto exports.

“They will put chemicals on the retaliatory tariff list,” Brzytwa said. 

An aircraft taps a bigger proportion of plastic than autos as some later models now include composites in fuselage and wings. Chemicals have long been the airplane’s floors, carpets, seats, bins, windows, and safety devices.

According to the Airbus Global Market Forecast, China will demand 7,560 new aircraft over the next 20 years, when it will have the world’s biggest domestic aircraft market.

European-based Airbus on Nov. 6 announced plans to ramp-up production at the Airbus assembly line in Tianjin, China in a ceremony attended by the Chinese and French leaders.

Meantime, Boeing is concerned about China, which became in March the world’s first country to ban the Boeing 737 Max on security concerns. Company CEO Dennis Muilenburg cited during the latest earnings discussion a “lack of orders from China in the past couple of years.”

Metrics of trade war

“Our export growth to China went from double digits down to 2.5%, 2.6%,” Brzytwa said.

“Our projection of investment by chemical manufacturers in the U.S. announced, or under consideration, recently went from $204 billion to $201 billion. It was the first time I remember that number down,” he added.

Currently, China has a 21.1% share of the world’s retail market, while the U.S. has a 21.9% share,” New York-based research firm Emarketer said in June. China was to overcome the U.S. this year but now will only do so in 2021. China is also severely hit and its auto and auto parts industry, key for the economy, is slowing, the research group said.

There does not seem to be “any concrete and real” progress as far as changes regarding trade secrets and fair competitive practices that the administration initially cited to justify trade tariffs against China, Brzytwa said.

While China and the U.S. have both clearly lost, other countries like Brazil, Vietnam, Mexico may have had opportunities but amid uncertainty.

Administration unresponsive, more tariffs loom

"I think I testified five times in public hearings over the last year and a half, two years. We offered additional testimony, and written more detailed comments,” Brzytwa said. Experts had long warned about a trade war impact.

Chemical producers want to “alleviate the trade deficit that the administration is concerned about. We’re not seeing actions conducive to that vision. We advocate for more market access rather than less,” Brzytwa said.

Yet new tariffs could hit as soon as in mid-December.

If threatened new tariffs go into effect, “imports of chemicals and plastics impacted by U.S. tariffs would be about $25 billion. China’s retaliatory tariffs would eventually impact $12 billion of U.S. chemicals and plastics,” Brzytwa said.

“Members (of the American Chemistry Council) have been telling us that they will have to consider producing certain chemistry outside the U.S. to maintain access to China. They may cut jobs in the U.S. or not move forward with investment,” Brzytwa said.

By Renzo Pipoli