Escalating tariffs signal caution for China investments

Guangzhou, China — The escalating trade conflict between the United States and China was prompting some plastics investors to hit the pause button at the massive Chinaplas trade fair this week — with Chinese compounder Top Polymer Enterprise among them.

The uncertainty around tariffs was causing the Liyang, China-based firm to delay a $15 million investment in its first factory in the United States, near Atlanta, as both its supply chains and profits were taking a hit from rising tariffs.

"Right now, the environment is difficult for everyone, although at the moment it's the worst case scenario," President Marcus Tsong said in an interview at the company's booth at Chinaplas, which ran May 21-24 in Guangzhou and drew an estimated 180,000 attendees.

Tsong said his company remains firmly committed to moving ahead on its U.S. investment and hopes to complete it in early 2020. Original plans called for the factory to open this month.

But the back and forth over relations between the two countries has slowed the company's planning. Tsong's caution echoed others at the fair, which with 3,500 exhibiting firms ranks as one of the world's two largest plastics shows.

U.S. extrusion equipment maker Davis-Standard LLC, for example, noted that tariffs are causing its customers in China to put their orders for machines from the company's U.S. factories on hold.

He said U.S.-built Davis-Standard machines being exported to China will face much higher tariffs starting June 1, because they're in a block of goods targeted in Beijing's response to President Donald Trump's recent decision to raise tariffs from 10 percent to 25 percent on $200 billion in Chinese exports.

For Davis-Standard, China tariffs on those U.S. machines will rise from 5 percent to 25 percent.

"We have got customers [in China] now putting their investment plans for machinery from the U.S. on hold," he said. "We've already had that happen. They've not canceled orders. There's a wait and see thing."

One Chinese executive said the escalating tariffs in the last few weeks — a reversal of the sense that a deal between the governments was at hand — seemed to stop what had been a recovery in plastics machinery markets in China in March and April.

Richard Yan, CEO of publicly traded Chinese injection machine maker Yizumi Precision Machinery Co. Ltd., said plastics industry customers had ramped up purchasing in April in anticipation of a deal between Washington and Beijing.

"Now the situation has changed and customers are hesitating. It's a matter of confidence," Yan said. "People are now back to waiting and seeing."

2018 had been a more challenging year in China's industry. For example, the country's largest plastics machinery maker, Haitian International Holdings Ltd., told its shareholders in the Hong Kong stock exchange that the "U.S.-initiated" trade fight "has weakened investors' confidence."

Chinaplas organizer Adsale Exhibition Services Ltd. noted that China's output of plastic products increased by only 1.1 percent in 2018, influenced by a volatile market and tougher environmental policies on industry.

Chinese equipment maker Cosmos Machinery Enterprises Ltd. said it too has felt the impact of trade tensions.

Business slowed in the second half of 2018, and the last few weeks of tariffs and counter tariffs trade issues further hurt sentiment, said Stephen Wong, executive vice chairman of the Hong Kong-based firm.

"In the machinery field, it's not the actual impact on us but the uncertainty that will make people nervous about future investment," he said.

Like Davis-Standard, compounder Top Polymer faces escalating tariffs.

The maker of thermoplastic copolyesters and styrenic block compounds will now face 25 percent tariffs on some of its shipments from China to the United States, up from 10 percent.

To keep its market volumes up ahead of building its new factory in Georgia, the company is shipping materials from China, paying the higher tariffs and seeing its margins take a big hit.

"We have to have some volume ready before the plant is ready," Tsong said. "We have to tolerate a loss."

But he argued that the tariffs are also hurting U.S. plastics makers.

Tsong said that's because Top Polymer has been importing significant supplies of raw materials from U.S. plastics firms, including Kraton Corp. and Dow Inc., to make its materials.

But with those U.S. products now facing tariffs in China, his company is no longer buying from the U.S. directly and is looking domestically and elsewhere for new suppliers.

In spite of the difficulties, though, he said his small company, which employs about 150 in two factories in China, remains committed to its U.S. investment. It sees a strong business case for the U.S. factory, in part to be closer to decision makers in multinational firms, he said.

Other material suppliers at the show were also having to managing tariffs and hoping they would end.

But for some specialty products going between the two countries, it's not possible to shift production and the company risks losing business, Martin Pavlik, director of business development, said.

"What you lose is competitiveness in price because there are local producers in Asia or producers in Europe that are not affected," he said. "Although we have a lot of products that are benchmarks in the industry, it's all about the cost.

"We don't see right now an erosion of sales because we are putting a lot of different efforts in place but how long we will be able to hold, is a question of time," he added in an interview at the company's booth.

A regional executive in Dow Inc.'s packaging and specialty plastics business said the company has been able in general to manage the tariff impacts in his unit by shifting sourcing around among its global production base.

Bambang Candra, Dow's Singapore-based commercial vice president of packaging and specialty plastics for Asia Pacific, said it is still seeing healthy 10-20 percent annual demand growth for their plastics in packaging products in China.

"When you're talking about packaging, we believe the fundamental demand is still there," Candra said.

The U.S. plastics materials industry has argued strongly against tariffs by either country, with its lobbying organizations like the American Chemistry Council saying they harm U.S. exports to China, now the world's largest plastics market.

ACC said in early May that the tariffs are starting to damage the industry's supply chain and hurt the competitiveness of the U.S. petrochemical industry.

But companies in other parts of the U.S. plastics industry have welcomed tariffs on items such as plastic packaging and vinyl flooring, saying that they face unfair competition from China. Tariff advocates say China's industrial policies advantage its industry, and they say tariffs will mean more jobs in their U.S. factories.

While the mood at the trade show was generally against tariffs and trade conflicts, the mood within the larger U.S. industry is more split.

That may be in part because the United States runs an annual deficit of about $11.5 billion with China's plastics industry, with deficits in plastic products, machinery and molds. Only the resin sector has a surplus with China, reaching $2.7 billion in 2017.