VINACHEM

The threat of additional US tariffs, retaliatory tariffs from trading partners, and their potential impact is fostering a heightened level of uncertainty, dampening consumer, business and investor sentiment, along with clouding the 2025 outlook for chemicals and economies.

The US chemical industry, a massive net exporter of chemicals and plastics to the tune of over $30 billion annually, is particularly exposed to retaliatory tariffs.

Chemical company earnings guidance for Q1 and all of 2025 is already subdued, with the one common theme from the investor calls being little-to-no help expected from macroeconomic factors this year. Tariffs only cloud the outlook further.

Tariffs have long been a feature of US economic and fiscal policy. In the period to the 1940s, tariffs were used as a major revenue source to fund the federal government before the introduction of the income tax and were also used to protect domestic industries.

After 1945, a neo-liberal world order arose, which resulted in a lowering of tariffs and other trade barriers and the rise of globalization. With the collapse of the Doha Round of trade negotiations in 2008, this drive stalled and began to reverse.

Heading into this year’s International Petrochemical Conference (IPC) hosted by the American Fuel & Petrochemical Manufacturers (AFPM), it is clear that the neo-liberal world order has ended.

Rising geopolitical tensions and logistics issues from COVID led many firms to diversify supply chains, leading to reshoring benefiting India, Southeast Asia, Mexico and others, and to the rise of a multi-polar world. It is also resulting in the rise of tariffs and other trade barriers around the world, most notably as US trade policy.

FLUID US TRADE POLICY

The US administration’s policy stance on tariffs has been very fluid, changing from day to day. It is implementing 25% tariffs on steel and aluminium imports on 12 March and has already placed additional tariffs of 20% on all imports from China as of 4 March (10% on 4 February, plus 10% on 4 March).

On 11 March, the US announced steel and aluminium tariffs on Canada would be ramped up to 50% in retaliation for Canadian province Ontario placing 25% tariffs on electricity exports to the US. Later, Ontario suspended the US electricity surcharge, and the US did not impose the 50% steel and aluminium tariff.

The US had placed 25% tariffs on imports from Canada (10% on energy) and Mexico on 4 March but then on 5 March exempted automotive and then on 6 March announced a pause until 2 April.

China retaliated by implementing 15% tariffs on US imports of meat, fish and various crops, along with liquefied natural gas (LNG) and coal.

Canada retaliated with 25% tariffs on C$30 billion worth of goods on 4 March and then with the US pause, is delaying a second round of tariffs on C$125 billion of US imports until 2 April.

Mexico planned to retaliate on 9 March but has not following the US pause.

US President Trump has also threatened the EU with 25% tariffs.

We have a trade war and as 1960s Motown artist Edwin Starr sang, “War, huh, yeah… What is it good for?… Absolutely nothing.”

Canada, Mexico and China are the top three trading partners of the US, collectively making up over 40% of US imports and exports.

The three North American economies, until recently, had low or non-existent tariffs on almost all of the goods they trade. This dates back to the 1994 NAFTA free trade agreement, which was renegotiated in 2020 as the USMCA (US-Mexico-Canada Agreement).

A reasoning behind the tariff threats on Canada and Mexico is to force Canada and Mexico to stop illegal drugs and undocumented migrants from crossing into the US. These tariffs were first postponed in early February after both countries promised measures on border security, but apparently more is desired.

But the US also runs big trade deficits with both countries. Here, tariffs are seen by the administration as the best way to force companies that want US market access to invest in US production.

IMPACT ON AUTOMOTIVE

US automakers are the most exposed end market to US tariffs and potential retaliatory tariffs, as their supply chains are even more highly integrated with Mexico and Canada following the USMCA free trade deal in 2020.

The USMCA established Rules of Origin which require a certain amount of content in a vehicle produced within the North America trading partners to avoid duties.

For example, at least 75% of a vehicle’s Regional Value Content must come from within the USMCA partners – up from 62.5% under the previous NAFTA deal.

Supply chains are deeply intertwined. In the North American light vehicle industry, materials, parts and components can cross borders – and now potential tariff regimes – more than six times before a finished vehicle is delivered to the dealer’s lot.

US prices for those goods will likely rise. The degree to which they rise (extent to which tariffs costs will pass through) depends upon availability of alternatives, structure of the domestic industry and pricing power, and currency movements.

In addition, some of the Administration’s polices dealing with deregulation, energy, and tax will have a mitigating effect on the negative impact of tariffs for the US.

The 25% steel and aluminium tariffs will add nearly $1,500 to the cost of a light vehicle and will result in lower sales for the automotive industry which has been plagued in recent years by affordability issues. If it had been implemented, the 50% tariff on steel and aluminium imports from Canada would only compound the pricing impact.

All things being equal, 25% tariffs on the metals would push down sales by about 525,000 units but some of the favorable factors cited above as well as not all costs being passed through to consumers will partially offset the effects of higher metal prices.

Partially is the key word. Since so many parts, components, and finished vehicles are produced in Canada and Mexico, US 25% tariffs on all imports from Canada and Mexico would add further to the price effects.

The economic law of demand holds that as prices of a good rise, demand for the good will fall.

ECONOMIC IMPACT

Tariffs will dampen demand across myriad industries and markets, and could add to inflation. By demand, we mean the aggregate demand of economists as measured by GDP.

Aggregate demand primarily consists of consumer spending, business fixed investment, housing investment, and government purchases of goods and services. Tariffs would likely add to inflation but the effects would begin to dissipate after a year or so.

By themselves, the current round of tariffs on steel and aluminium and on goods from Canada, Mexico and China will dampen demand due to higher prices. Plus, as trading partners retaliate, US exports would be at risk.

Preliminary estimates suggest the annual impact from these tariffs – in isolation – on US GDP during the next three years could average 1.4 percentage points from baseline GDP growth.

Keep in mind that there are many moving parts to the economy and that the more favorable policies could offset some of this and, as a result, the average drag on GDP could be limited to a 0.5 percentage point reduction from the baseline.

POTENTIAL GDP IMPACT OF US TARIFFS – 20% ON CHINA, 25% ON MEXICO AND CANADA

Real GDP is a good proxy for what could happen in the various end-use markets for plastic resins and the reduction of US economic growth. In outlying years, however, tariffs could support reshoring and business fixed investment.

The hits on Mexico and Canada would be particularly. China’s economic growth would be affected as well. But China can shift exports to other markets. Mexico and Canada have fewer options.

Resilience will be key to growing uncertainty and will lead to shifting trade patterns and new market opportunities. This is where scenarios, sound planning and strategies, and leadership come into play.

US EXPORTS AT RISK, SUPPLY CHAINS TO SHIFT

US PE exports are particularly vulnerable to retaliatory tariffs.

The US is specifically targeting tariffs on countries and regions that absorb around 52% of US PE exports – China, the EU, Mexico and Canada, according to an ICIS analysis.

Aside from PE, the US exports major volumes of PP, ethylene glycol (EG), methanol, PVC, styrene and vinyl chloride monomer (VCM), along with base oils to countries and regions targeted with tariffs.

The US exports nearly 50% of PE production with China and Mexico being major outlets. China has only a 6.5% duty on imports of US PE, having provided its importers with waivers in February 2020 that took rates to pre-US-China trade war levels.

The US-China trade war under the first US Trump administration started in 2018 with escalating tariffs on both sides, before a phase 1 deal was struck in December 2019 that removed some tariffs and reduced others.

After the waivers offered by China to importers in February 2020, US exports of PE and other ethylene derivatives surged before falling back in 2021 from the COVID impact. They then rocketed higher through 2023 and remained at high levels in 2024.

Since 2017, the year before the first US-China trade war, US ethylene and derivative exports to China are up more than 4 times, leaving them more exposed than ever to China.

With tariff escalation, chemical trade flows would shift dramatically. Just one example is in isopropanol (IPA).

Shell in Sarnia, Ontario, Canada, produces IPA, of which over 85% is shipped to the US, mainly to the northeast customers, said ICIS senior market analyst Manny Borges.

“It is a better supply chain for the customers instead of shipping product from the US Gulf,” said Borges.

“With the increase in tariffs, we will see several customers shifting volumes to domestic producers or countries where the tariffs are not applied,” he added.

US IPA producers are running their plants at around 67% of capacity on average and have sufficient capacity to supply the entire domestic market, the analyst pointed out.

This dynamic, where US producers supply more of the local market versus imports, would likely play out across multiple product chains as well, especially in olefins where the US is more than self-sufficient.

Even as the US is more than self-sufficient in, and a big net exporter of PE, ethylene glycols, polypropylene (PP) and polyvinyl chloride (PVC), it imports significant quantities from Canada.

In the event of a 25% tariff on imports from Canada, US producers could easily fill the gap, although logistics would have to be reworked.  – Source: ICIS