As a management consultant to chemical companies, one of my tasks in the last few months was not to look at specific chemicals, strategies or markets but rather help a company assess the potential consequences of a Trump election victory for their substantial China business. The fact that the CEO of the company attended a workshop on the topic further highlighted its importance. While CEOs of chemical companies presumably always had to keep half an eye on global political developments, this aspect seemingly has become one of their major tasks.

Indeed, the past few months have seen a massive increase of indications for a bifurcation of the global chemical industry, with China on one side and the West on the other, and a few other regions trending toward one or the other side (India toward the West, some Arabian countries more toward China).

Trade Frictions Are Growing

Examples abound. One of the latest was the imposition of massive tariffs on imports of items such as electric vehicles, lithium batteries and solar cells by the Biden administration in mid-May – all products with a substantial share of value creation by the Chinese chemical industry.

The USA also urges Japanese companies to limit exports of specialty chemicals used for chipmaking, including photoresist to China.

The European Union recently imposed anti-dumping duties on imports of PET from China, arguing that this material was dumped onto the European market at artificially low prices. For electric vehicles from China, experts expect the imposition of duties between 15% and 30% in the next few months.

Brazil launched anti-dumping investigations into polyether polyols and titanium dioxide originating in China. Such initiatives from Brazil are particularly noteworthy given the very positive overall trade balance of Brazil with China.

„In recent months, there have been increasing signs that the global chemical industry is being split in two, with China on one side and the West on the other.“

India has recently been particularly active in starting anti-dumping investigations against China as several Indian companies struggle to compete with cheaper imports of chemicals from China. According to the Indian Express, of the 46 anti-dumping duties levied in the latest three years, 60% targeted goods only coming from China and another 26% targeting goods from China and at least one other country.  Many of these are on chemicals, and the acceptance rate of requested duties has doubled in the past few years. All this highlights the particular importance of chemical trade as a focal point of trade friction between the two countries.

China Reacts

Presumably as a reaction, China launched an anti-dumping investigation on Sunday into imports of polyoxymethylene (POM) copolymer from the EU, US, Japan and Taiwan, and has threatened further tariffs. With regard to India, China launched a similar investigation into imports of cypermethrin, a chemical used for the production of insecticides. China also recently imposed anti-dumping duties on propionic acid from the US.

China’s other main reaction is to take measures to reduce the dependency on imports, particularly in areas regarded as strategic. For example, China's chipmakers are in the process of localizing the supply of key chip materials and chemicals to counter U.S. export controls

Root Causes: Chinese Overcapacity and Political Pressure

What are the root causes behind the worsening of the trade conflict? There mainly seem to be two, which are on two entirely different levels.

First, China has recently massively expanded its capacity for the production of chemicals, and continues to do so – according to one estimate, 81% of global new chemical capacity in 2024 (by volume) will be in built in China. At the same time, domestic demand growth at least for basic chemicals has slowed from around an annual 10% to only around 3%. All this forces Chinese companies to increasingly look to chemicals exports as a source of additional sales. Meanwhile, given their typically large scale and modern facilities, they are generally very competitive in the global market.

This has caused a backlash in many countries. In the European Union, the closedown of a number of crackers is forecast as these are small and uncompetitive compared to Chinese crackers. Germany, traditionally a powerhouse with regard to chemicals productions, in 2022 and 2023 had a negative chemical trade balance with China for the first time ever. In India, the specialty chemicals segment and particularly agrochemicals are under pressure from Chinese imports, with companies such as UPL receiving ratings downgrades and suffering from decreased profitability. Given that China intends to increase its R&D spending and keeps expanding its chemical production capacity, this pressure on the chemical industry outside of China is likely to increase and expand to ever more areas of specialty chemicals. In some newish areas such as chemicals for solar cells and lithium batteries, China is already the technology leaders.

The other factor is the popularity of China-bashing, particularly in the USA. This seems to be one of the few areas that Trump and Biden can agree on, leading to an escalation of anti-China regulation in a misguided attempt to prove one’s patriotism. Of course, this is not helped by the Fentanyl crisis in the US, though to blame this on China seems to ignore the home-made causes of the crisis.

Company Reactions: Should I Stay or Should I Go?

Individual chemical companies are reacting to this conflict in different ways. Many focus their production in China on the Chinese market (“in China for China”), thus reducing the dependency on trade restrictions between the two blocks. Astra Zeneca recently announced the establishment of a separate supply chain for China, with a plant in Qingdao only serving the Chinese market – presumably a backup plan in case the trade bifurcation worsens. However, given the massive size of some of the investments, such as the one by BASF in Zhanjiang in the Guangdong province, this may not always be realistic. Others – particularly several South Korean and Japanese chemical companies have reduced their China presence, particularly in commodity segments and segments with fierce competition from domestic Chinese players.

The Negative Consequences of Trade Bifurcation

Apart from this, the trade bifurcation will also have wider consequences for the global economy as a whole – and most of these consequences are going to be negative.

For example, two weight loss and diabetes drugs marketed by Eli Lilly rely on active ingredients produced by WuXi AppTec, a company targeted by US politicians (“WuXi AppTec is a biotechnology company based in the People’s Republic of China and is closely affiliated with the People’s Liberation Army”, Senator Gary Peters) and thus may become harder to produce.

While the risk of more expensive weight loss medicine may seem bearable, Chinese exports also play a major role in the fight against climate change. This applies both to solar cells and lithium batteries, vital tools in the decarbonization of the global economy. For both, China is by far the most important and cheapest producer – any restrictions on Chinese exports will therefore either massively increase the cost of decarbonization or slow down its speed (most likely both).

Finally, China is a major contributor to global food supplies. Reportedly, more than 50% of all active agrochemicals originate from China or contain critical components sourced from the country. Reducing the flow of these chemicals thus also puts global food supply at risk.

One recent example from outside of the chemical industry indicates that many Western restrictions on China may end up backfiring anyway. The low-end AI chips that Nvidia is still allowed to export to China are apparently so underwhelming that their replacement offers a major boost to Huawei, the domestic champion in the area. It is quite possible that restrictions in chemical areas such as electronic chemicals will have similar effects in the long run.

Kai Pflug, Management Consulting – Chemicals, Shanghai, China