When trade war breaks out, globalised industries ship out to dodge tariffs

Chemicals trade in a global marketplace. And the flow of goods around that marketplace generally follows the path of least resistance for highest reward. So anything that disrupts that flow (or threatens to) has to be taken seriously. The prospect of escalating trade protectionism between the US and China – to the extent it may kick off an all-out trade war – has businesses thinking very hard about their future plans.

Economists often say that a trade war is the kind of fight that no-one wins. Governments puff out their chests and claim to be boosting their national economies, while consumers are hit with higher prices and reduced choice. In the end, even if there appear to be some economic benefits locally, overall the most likely outcome is that such benefits are smaller than the growth that could have happened had the dispute not happened at all.

As a result of the opening salvos in this US–China skirmish, several major players – including Clariant – have already indicated that they might shift manufacturing of certain products away from the US, or increase their capacity within China, to avoid being stung by the new tariffs. Commodity companies with global production and supply networks may be able to exploit some strategic flexibility to minimise the effect of the intensifying dispute, but smaller firms, or units producing more specialist products, are less likely to be able to decamp to more favourable climes.

The trade implications of Britain’s impending exit from the EU throw up similar challenges. There is the threat of punitive tariffs – particularly if no satisfactory deal is brokered between the powers that be. We are also running out of time to construct the infrastructure (both physical and bureaucratic) to implement any new trade arrangements if a deal is agreed.

While some products are manufactured locally on both sides of the English Channel, many others – including key medicines like insulin, are not produced in the UK. Hence the headlines about the UK government stockpiling drugs and food. Similarly, the UK’s highly innovative chemical and pharmaceutical industry will face problems exporting via Europe. And although it’s likely that any immediate disruption in trade caused by Brexit would be temporary – until the system resettles into its new equilibrium – the long-term impact of that disruption could be significant.

Decisions about where to build new plants and expand activities necessarily take account of the associated trading opportunities. But when that picture is clouded by the uncertainty that trade conflict brings, decisions get put on hold. Those that can’t reposition themselves behind the battle lines hunker down to weather the storm. Investment stagnates, or is diverted to less restrictive and more profitable territories. Everyone loses again.