Trump Trade War Threatens U.S. Chemical Investment Renaissance

(Bloomberg) -- A brewing trade war with China threatens to derail the fastest-growing sector of the U.S. manufacturing economy as chemical companies rethink spending almost $100 billion on new factories.

Tariffs on U.S. chemical exports to China, coupled with new duties on steel imports used to build plants, would undercut the economic advantage that's fueled the industry's unprecedented expansion. Contrary to President Donald Trump's pledge to bring manufacturing back home, companies that expand production or build facilities outside the U.S. would reduce capital expenses while avoiding Chinese tariffs.

“Market shifts caused by tariff increases may convince investors to do business elsewhere,” said Cal Dooley, president of the American Chemistry Council trade group. Current plans for new chemical factories, expansions and restarts of facilities in the U.S. were based on the economics of existing tariffs, he said in a statement Wednesday.

China's proposal to levy 25 percent tariffs on about $50 billion of U.S. imports effectively would remove a large market for dozens of plastics and chemicals targeted by the measure. China imported $3.2 billion of U.S. plastic resins last year, making the country one of the industry's most important trading partners, Dooley said. Forty percent of the products on China's tariffs list are chemicals such as polyethylene, PVC, polycarbonates and acrylates.

Quickly Escalating

The Wednesday announcement was retaliation against Trump's proposals for $50 billion in similar tariffs for China imports. That followed a 25 percent duty the U.S. imposed on steel imports -- a move that DowDuPont Inc. already warned would add $300 million to a major chemical project on the U.S. Gulf Coast.

The new tariffs strengthen the case for DowDupont to locate its next big plant in a country like Argentina or Canada, said Jim Fitterling, chief operating officer of the company's Dow chemicals unit. Dow just completed a $6 billion Texas expansion, and higher steel costs don't help the case for another U.S. project, he said.

“You eventually get yourself to the point where you are saying, ‘Should I really be building that here or somewhere else?'” Fitterling said in a March 6 interview.

Shale Advantage

Chemical production has emerged as the biggest driver of U.S. manufacturing growth in recent years as the shale drilling boom lowered the costs of key raw materials such as ethane, according to the American Chemistry Council, an industry advocate. Cheap natural gas liquids like ethane give the U.S. a competitive edge over producers elsewhere that use oil-derived naphtha as a raw material.

The advantage prompted chemical makers to announce investments of $188 billion for new U.S. production, with more than half of the projects not yet begun, according to a chemistry council tally.

Companies with factories inside China or elsewhere outside the U.S. should be able to avoid China's new levy, said Christopher Perrella, a chemicals analyst with Bloomberg Intelligence. The low-cost position of U.S. plastics means the exports will find a market somewhere, even if supply chains need to shift, he said.

Even before the latest round of tariffs, Chevron Phillips Chemical Co. was growing wary of rising plant construction costs that threatened plans for another U.S. project. Construction costs are up 40 percent over five years, Doug May, a DowDuPont business president, said March 21.

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren

©2018 Bloomberg L.P.