ACC: Scrapping NAFTA hurts plastics investment boom, could help China

WASHINGTON—A U.S. withdrawal from the North American Free Trade Agreement could damage the shale-gas investment boom in plastics, slow exports and benefit China and others, according to a new study from the American Chemistry Council.

The Feb. 28 study, which was released as the latest round of NAFTA talks are ongoing in Mexico City, said scrapping the trade pact will raise U.S. manufacturing costs and open the door for chemicals and plastics products from other global competitors.

Under a status-quo scenario where NAFTA is retained or modified slightly, ACC said chemicals and plastics exports from the U.S. to Canada and Mexico are expected to grow from $44.2 billion today to $59.2 billion by 2025. A big reason for that is the shale-gas cost advantage of U.S. feedstocks, ACC said.

But if NAFTA is scrapped, those exports would only rise to $52.3 billion, even if Mexico and Canada only resort to the relatively low "most-favored nation" tariffs (MFN) that they could implement.

"In this case we think we're opening the door to greater competition and market access by manufacturers in China and other regions," said ACC President and CEO Cal Dooley.

He also suggested the heavy capital investment now underway in the U.S. chemical and plastics sectors could suffer because the United States would be less competitive globally.

Dooley said the chemical industry, including plastics, accounted for 48 percent of U.S. manufacturing investment in the United States in 2016 and 2017, and the chemical industry has a running total of $188 billion in announced investments planned. Most of that new production is ultimately planned for export, he said.

But with tight margins in the chemical industry, he said even the 6 percent MFN tariffs that Mexico could put in place would raise costs for U.S. exports.

"Demand will still be there, but U.S. chemicals on balance could be 6 percent more expensive compared to other suppliers around the world, be they chemical manufacturers based in Europe, Brazil or China," Dooley said.

"Our concern is if you see in a worst-case scenario by this administration, to withdraw from NAFTA, that will immediately have some significant impacts on our ability to export products to Canada and maybe even more importantly to Mexico," he said in a conference call with journalists.

The report suggests that over time, the tightly integrated North American supply chains within NAFTA would be disrupted, as manufacturers in Mexico and Canada seek cheaper suppliers from other parts of the world.

"A probable outcome is that Chinese producers, which are already competitive suppliers of inputs that are important to the Mexican economy (e.g. auto parts), would gain market share," it said.

Such a shift would not happen in the short-term, but over the long-term as supply chains adjust, it said.

The report noted that components of manufactured goods can cross borders between the three countries seven or eight times before a product is finished, and each of those crossings could potentially be subjected to tariffs.

Predicting NAFTA's future

Dooley declined to predict an outcome for the NAFTA negotiations, but suggested a complete withdrawal by the United States was unlikely.

"I don't think that the odds are that we will have an absolute withdrawal from the NAFTA agreement, but I can't totally rule that out," Dooley said.

But if the Trump administration takes a hard line position in areas like investor-state dispute mechanisms and on a U.S. demand that NAFTA by renewed every five years by the three countries, a so-called sunset proposal, those could be "non-starters" with Canada and Mexico, he said.

In particular, he said the chemical industry wants to retain the investor-state dispute mechanism and it opposes a five-year sunset proposal from the Trump administration.

Dooley said a sunset provision would introduce too much uncertainty for investors in large chemical and plastics projects, noting that the $188 billion in pledged chemical industry investment often comes in large chunks of $5 billion or more.

"Those $5 billion investments are not made on a five-year horizon," Dooley said. "They are being made on a 40-year horizon. They are also predicated on having some consistent rules of trade and market opportunities. Certainly, it's not in the interest of U.S. manufacturers to see a sunsetting provision."

ACC also released a statement March 1 opposing the Trump administration's new steel and aluminum tariffs, saying they come at the "worst possible time" because they raise costs and could jeopardize some of the planned chemical investments.

Dooley said also he feared other countries could aim retaliatory tariffs at U.S. chemical and plastics exports.