Last week, during AMI’s Polymer Sourcing and Distribution Conference in Barcelona, Spain, ChemPMC presented an analysis of the U.S. and China Trade war and its impact on the polymer industry. This white paper covers the material presented during the conference; we hope you find it useful, and look forward for your comments about it.
First of all, I’d like to thank AMI for their kind invitation to speak to you today. This feels like a homecoming of sorts; 26 years ago I completed my chemical engineering studies at the Institut Quimic de Sarria, and I am very happy to be back in my beloved Barcelona and in front of all of you. For those who don’t know us, ChemPMC is a relatively young company in the chemical consulting business. We specialize in training programs, leveraging the extensive industry and consulting experience accumulated after all these years, as well as bespoke consulting services which include market research, feasibility studies, as well as supply and demand forecasting and modeling. I invite you to visit our website or my LinkedIn profile, where you will find free articles covering different aspects of the industry that may be of interest to you.
Today I was asked to talk to you about U.S. and China trade. As you know, those two countries have been at odds with each other the last year and a half, over their bilateral trade relations. What initially appeared to be just tough talk from President Trump, has become an all out trade war between both countries, which is impacting not only the commercial exchanges between them, but also the health of the global economy. This talk will cover the impact the trade war is having on the polymer industry. But, before we do that, let’s put in perspective the polymer trade between those two countries.
In the next slide, the chart to your left shows the United States overall exports of plastics and articles made out of plastics. As you can see in that chart, China is the third largest market for U.S. exports, right below the exports to the neighboring markets of Canada and Mexico. If we analyze in further detail the trade between the U.S. and China, what you can see is that most of our exports into that country are of virgin polymers. In 2018, we exported almost 6 billion dollars of plastics and plastics products to China, of which almost 4 billion were virgin polymers. This commercial exchange, which had increased at very rapid rates between 2001 and 2011, has been more or less stable (on a billion-dollar basis) ever since then. In 2018, almost 25% of our virgin polymer exports to China were polymers of ethylene. The second largest virgin polymer exported to China were polycarbonate and related products, followed by PVC and polyamides.
From the other end of the bilateral trade equation, the U.S. is the fourth largest supplier of plastics and articles made out of plastics into China. Neighboring South Korea, Japan and Taiwan are the largest suppliers to China. But both Japan and Taiwan have seen their market share decrease at the expense of other suppliers. Both South Korea and the U.S. have more or less kept a stable share of Chinese imports.
So, clearly, both the U.S. and China have a healthy and important exchange of polymers and plastics related products, but by no means either is the biggest trading partner of the other in this area. However, replacing each other by other suppliers or markets would clearly result in significant pains for both countries.
Going back to today’s subject, the U.S. and China are in the middle of a trade war. But the key question is – why are we clashing? Ostensibly, and publicly decried by president Trump, the main driver for this war is the sizable trade deficit that the U.S. carries with China. In 2018, even after one year of trade disputes and anti-trade measures by the U.S. government to force a reduction, the trade deficit with China reached almost 450 billion dollars, a record level not seen before. China alone represents almost 50% of the overall U.S. trade deficit with the rest of the world. Whether having such level of deficit with a trading partner is good or bad for an economy is not the subject of this presentation. This, however, is what President Trump argues is the main driver for this trade war with China.
However, as we take a more detailed look at the grievances and at the direction that the trade discussion is taking, what we can see is that there are many other reasons behind the U.S. attack on China. These are not new issues; they have all been aired in the past, but so far conversations and negotiations with China have not had any results in fixing them. Those issues, as aired by U.S. negotiators, include forced technology transfers when partnering with Chinese companies in investments in mainland China; the loss of intellectual property to Chinese competitors; government intervention in the Chinese currency market; the absence of a level playing field to access the Chinese market; subsidies that the government offers to state owned firms which distort commercial relations and competitiveness of Chinese exports; and non-tariff/regulatory barriers to trade with China. These are the real grievances that the U.S. has with China, and that are a big component of the negotiations between the countries.
The key weapon that has been wielded by both the U.S. and China in this war are tariffs. Almost a year ago, in July of 2018, first the U.S. and right after China applied a 25% tariff on 34 billion dollars of goods, followed by another 25% tariff on 16 billion dollars of goods in August. Then, by September, the U.S. imposed a 10% tariff on further 200 billion of goods, announcing that those tariffs would increase to 25% by January of 2019. China, on the other hand, imposed 5 and 10% tariffs, down from originally announced levels of 25, 20, 10 and 5%, on 60 billion of goods. As you can see, because of the asymmetries in trade between both countries, China could only countervail with tariffs over 60 billion of goods. The U.S., on the other hand, also announced it may impose further 25% tariffs on the balance of the trade the country receives form China, totaling $267 billion dollars. The tariffs affect all aspects of trade between the countries, and polymers are not an exception.
This charts shows in blue the U.S. top 10 exports to China by value, and in orange the U.S. exports of those products to the world in 2017. For some products like PC, China represents more than 25% of the total exports out of the U.S. For the rest, the exports to China share range approximately between 10 and 20%. All these materials are subject to a 10% tariff by the Chinese government. It is clear that the list of materials prepared by China was looking for those areas where the impact to U.S. based companies would be the highest.
At the same time, the Chinese government tried to minimize the impact for those Chinese converters that had a higher dependence on U.S. imports. This table shows the tariff level for the products that have the highest share of imports coming from the U.S. As you can see, with the exception of cellulose acetates, the tariffs for these products are only 5%.
These are the micro level measures. But what has been the impact on a macro level? In the next slide, the chart to your left shows the growth in imports by China, split by their origin, for 2017 and 2018, for the top exporters into the country. As you can see, in 2018 U.S. exports into China virtually didn’t grow, whereas imports from the other large suppliers to that market experienced growth rates that in some instances were larger than those in 2017. What we see here is a re-shuffling of trade, with China finding new partners for those products that come from the U.S. and that are subject to tariffs.
Specifically for the plastics industry, the U.S. has had to scramble to find new destinations for its plastics exports. The chart on your left in the next slide shows the growth in U.S. exports of plastics and articles made out of plastics by destination in 2017. As you can see, in 2017, the growth in exports to Mexico, Canada and China represented more than 50% of the overall growth in plastic products exports out of the U.S. Now, fast forward to 2018; polymer exports to China virtually didn’t grow, so the U.S. was forced to find a multitude of other markets to make up for the lost growth. So polymer exports have become more atomized than before, and producers are having to find a larger number of smaller markets to sell their products.
Why is this important? Because the U.S. is in the midst of the largest expansion in polymer exports it has experienced in its history. Polyethylene production in North America, which is the blue bar in the next chart, is expected to expand from about 19 million metric tons in 2017 to almost 30 million metric tons by 2022. This expansion in production will not be absorbed by the domestic market in North America, so exports which are shown in orange in this chart will expand significantly as well. By 2022, exports share of production will have increased from 25% in 2017 to almost 45%. China was always expected to be an important sink where U.S. producers could sell any excess production, but now those U.S. producers will be forced to find many more smaller markets to sell this additional product coming out of the country.
Another interesting effect is the change in trade patterns for some of the feedstocks that are used to produce polymers. One example is propane. The U.S. has seen an important increase in propane availability, due to the shale developments in the country. The abundance of propane has resulted in depressed prices and in a renewed interest to export as much propane as possible out of the country in order to prop up those prices. Propane is also subject to tariffs by China, and as a result imports into the country from the US have decreased, benefitting other suppliers like UAE, Qatar, Kuwait or Saudi. That said, there appears to be plenty of takers of US propane exports, as countries like Japan and South Korea have seen their imports of US propane increase. Now, just like in the case of plastics, a lot of the slack has had to be solved through sales to smaller markets. Nevertheless, this is a readjustment of the trade flows more than anything else. However, a lot of the expected propane export demand was to come from China, to be used in existing as well as newly proposed PDH units. Loss of access to this demand growth source would have a negative impact on propane prices in the U.S., which can be a positive development for polymer producers.
The other interesting consequence of the trade war is… money! Lots of money for the government, in the form of tariff revenue that is collected from the importing companies. In a year, and based on the tariffs that have been enacted so far, revenue collected would amount to 32.5 billion dollars. And the revenue may even be higher; if the 10% tariff is increased to 25%, revenue increases to 62.5 billion, and if the balance of imports from China is also subjected to a 25% tariff, the revenue could reach as much as 129 billion dollars! These are large numbers, and are particularly attractive to a government that has more than one trillion dollars in federal deficit… And you know how it is with taxes; once the government starts receiving a new stream of revenue, it’s very hard for it to give it up…
So we are at an impasse. This very aggressive chess game is going to continue. When I was preparing this presentation, the movements across the chess board appeared to be heading to a positive outcome of the game. First, the U.S. moved, providing three months reprise to the increase in tariffs to 25%. Then China offered to buy more American goods. Then, in February President Trump delays the implementation of additional tariff increases. By March, a more aggressive move by the U.S. administration seemed to signal that they would like to keep the tariffs available as a weapon to ensure compliance. In spite of this, by late April the agreement appeared to be close, with the final (and very important) details of compliance assurance still being negotiated.
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And then we got to May… Up until two weeks ago, I was expecting a resolution of the conflict or an announcement in that sense to take place before this conference. A hope for a signing ceremony at the end of May was so clear that it was made public. And then… Twitter attack! Global stocks fell and we are again in the brink of another massive increase of tariffs…
- China very relevant market for U.S. polymer producers
- Trade fight not just about trade deficit; other issues in play
- Impact higher for U.S. polymer producers; alternative sources of materials available for China
Trade patterns have changed; U.S. producers have had to look for smaller (and farther) markets
- Raw material (propane) exports affected; for now there is sufficient demand to replace China, but long term impacts may be significant
- Another round of tariffs hit the trade between both countries; it is not clear that a rapid resolution is possible