By John Richardson
THE above chart, showing US linear-low density polyethylene (LLDPE) expansions and rising surpluses, is just one jigsaw piece of only one global manufacturing chain that could be completely reshaped by the Trump administration’s approach to free trade. This approach is today under the spotlight as President Trump and President Xi Jinping of China meet in Florida.
The Mar-a-Lago meeting is a reminder that we don’t know whether or not Mr Trump will be able or willing to follow through on his campaign promises on trade policy.
On one side of the struggle for future trade policy is Peter Navarro, the head of the National Trade Council, Wilbur Ross, the commerce secretary, Robert Lighthizer, Mr Trump’s nominated trade representative and Trump chief strategist Steven Bannon. They all view today’s global trade world order of open markets as the reason for the decline in “middle America”. And they have of course blamed China’s approach to trade for most of America’s ills.
On the other side appears to be more conventional, mainstream voices, such as perhaps that of Treasury Secretary Steven Mnuchin. He was this week reported to be receptive to the arguments of CEOs of foreign manufacturing companies during their tour of Washington.
We also don’t know how much latitude Congress will give the President to redraw the tax code through a border adjustment tax (BAT), presuming, that is, that a BAT ends up in a tax bill put before Congress. A BAT would severely disrupt today’s free-flow in and out of the US of raw materials, components of finished goods, and the finished goods themselves. In general, Congress now seems more likely to block rather than support the president following the collapse of his healthcare reforms.
But what about executive orders? President Trump signed a couple of executive orders on trade in late March that may, or may not, be a prelude to more significant policy initiatives that bypass the authority of Congress.
At stake for US LLDPE producers is access to the key China market. As the second chart below shows, there are few other export games in town except China.
- In the first place on deficits will remain China. In 2010, it imported 2.5m tonnes which will rise to 4m tonnes by 2020.
- Next comes Europe where imports will rise from 1.3m tonnes to 2.3m tonnes during the same period.
- The levels of imports then fall off the shelf. One big future economic hope is Africa, but its imports will only rise from 500,000 tonnes to a million tonnes. South & Central American imports will edge up from 450,000 tonnes to 800,000 tonnes.
Note that I haven’t included the Asia & Pacific region in the above chart, which includes India and Southeast Asia, because we expect it to move from a slight deficit to a slight surplus by 2020.
The unavoidable issue for the US LLDPE industry is thus the US-China trading relationship. One can bury one’s head in the sand and hope everything will turn out all right in the end, but that’s not really a strategy.
We have so far only seen a “war of words” between the US and China over trade. But words can by themselves disrupt trade even without the “nuclear option” a full-scale trade war that leads to mutually destructive trade barriers.
Take the South Korea-China dispute over South Korea’s decision to deploy the US THAAD missile defence system as a real example of the damage that words only can do. During March, Chinese customs officials introduced extra checks on South Korean PE and polypropylene (PP) exports to China because of the dispute. This forced the South Koreans to divert cargoes to Europe.
China is not wasting any time in protecting itself against the worst of possible outcomes – a US-China trade war. This protection involves an acceleration of its One Belt, One Road initiative (OBOR).
The OBOR is set to become the world’s biggest-ever free-trade zone as it involves 65 countries, including big swathes of Asia, the Middle East and Eastern Europe. The US is not a part of the OBOR. You can thus see that wherever possible, China may end up importing LLDPE from its OBOR partner countries rather than the US.