How Will Upcoming Chinese Tariffs Affect Chemical Distribution? with Ben Sawicki & Matt Francoeur of The Chemical Company

Coming in response to China’s Made In China 2025 initiative, which pushes to make China a competitor in advanced manufacturing, a flurry of tariffs is leaving many U.S. businesses unsure of what the future holds for Chinese trade relationships. The main tariffs going into affect in the next few months include Section 232 tariffs, which affect steel and aluminum trade, and Section 301 tariffs, which have a much broader reach. Within that reach falls chemical distribution, and here to explain how tariffs could permanently impact chemical trade for producers and end users are Ben Sawicki and Matt Francoeur, Marketing & Sales Specialist and Regulatory & Sales Specialist for The Chemical Company. TCC, which distributes an assortment of chemicals from cosmetics, to food additives to plasticizers, has found its products among Section 301 tariffs, including some that have no direct American competitor. “It’s important for everyone all the way down the supply chain, it’s going to increase costs and be a different accounting function that we’ve never seen before,” Sawicki said. Sawicki and Francoeur break down the process of challenging tariffs as a producer, the impact of 10-25 percent tariffs on crucial agricultural chemicals, and how to react to unexpected tariffs as a business owner.

HIGHLIGHTS FROM THE EPISODE 

TRADE RELATIONSHIPS WITH CHINA

BEN SAWICKI: So The Chemical Company, we’re a chemical distribution firm founded and still headquartered in Jamestown, Rhode Island. We’re founded by Nick Roach who’s currently the CEO and his son Rob Roach is now the president and overseas a lot of the day-to-day now with the business. So proud to be family owned and we have a great group of people and great organization up here in Rhode Island. Yeah, as I said, we’re a bulk distribution firm. So we operate globally, definitely within the US, Latin, and South America with some operations in Europe and Asia as well and we have a satellite office over in Nanjing, China. Our biggest product line by volume is plasticizers. We’re also big in alcohols. We do some with the agricultural field as well, so a lot of different stuff. We do good amount of business with China and we’re always looking at Chinese imports which is obviously why the tariff implications could be pretty large for our business specifically, but we are pretty well-rounded and do operate from Europe, Canada, Latin America, South America, as well as obviously US operations too. So we’re obviously monitoring the situation closely and we’re happy to have Matt Francoeur in here as well monitoring a lot of the regulatory stuff both with China specifically and otherwise. So he’s been a great asset to TCC and we’re happy to have him and obviously excited to be on the podcast to talk about a little bit and see what we’re seeing.

DANIEL LITWIN: Absolutely. So I’d to know a little bit more about that relationship with China. How long since The Chemical Company has been around has there been that line of trade with China? And what has that relationship been like? What kind of chemicals are you importing from China, and why are they seen as such an important partner in this trade?

BS: China has been always been important I think in the chemical industry. Obviously both myself and Matt are 25 and under age wise. So obviously Rob and Nick have been around a whole lot longer in the industry, but China has always been an important partner for sure. Obviously, one of the big ones for us is dicyandiamide, important because there’s no other producer, but China has always had business operations where they are able to produce a variety of different chemicals at a low cost.

So I think the convenience of low cost and relatively easy shipping in and out. It is obviously takes a good bit of lead time to get over here from China, but it is based right on coastally, so there is that ease of transport via vessel. So I think it’s been important for a lot of reasons. I think Nick and Rob knew that it was important a little while ago and obviously set up that satellite company. We have two full-time staff over in Nanjing, China primarily working with vendors and manufacturers and producers over in China. So we have that pretty ease of communication with China.

It can be a little bit difficult sometimes dealing with a variety of different manufacturers over here in the US. So they’re a great asset for us and I think these tariffs might change the global landscape of how important or unimportant or where China fits into that distribution strategy and that manufacturing strategy for a lot of chemical companies. Obviously, I think they’re not going anywhere. There’s always going to be a player and a big player at that, but I think these tariffs could definitely change that landscape and it will be easy to see kind of where that best settles and how that ends up.

A SUMMARY OF NEW TARIFFS

Matt Francoeur: Yeah. So to kind of kick it off, I think it’s important to draw a distinction between the two main categories of tariffs that have been published. The first you heard the steel and aluminum tariffs that happen, I think, it was back in January to March. Those are based on Section 232 of The Trade Expansion Act of 1962, which gives up legal authority to impose tariffs based on national security interest and that falls largely into the discretion of the president and the ones we’re talking like today are Section 301 tariffs which fall under The Trade Act of 1974 which allows the US Trade Representative to open investigations and make rulings on unfair trade practices. These investigations can be opened by the US Trade Representative industry petition or the World Trade Organization Disputes and this happen to be opened by the US Trade Representative in response to intellectual property theft and Made in China 2025 to pretty large issues on the grand scale with China and ones that have been not dressed so much in the past.

List 1 is a 25 percent tariff on about 820 items from China. That one is final and in effect and it really doesn’t affect the chemical industry too much like we said before. The bulks are Sections 84 through 90 of the Tariff Bill and include electrical and mechanical machinery which really have a large effect on the automobile industry as well as agriculture. The second of which you’ll see is kind of a big theme of these tariffs. The agriculture industry has been very adversely affected. List 2 is also final in an effect. It’s a 25 percent tariff on 280 items from China. It was effective as of August 23rd, so fairly recently, and it contains 279 of the original 284 tariff lines. And there is a tariff line reduction because there I think almost a thousand industry comments not support in that kind of fighting and petitioning these tariffs.

The only other recourse that industry has besides that is a product exclusion request which for List 1 there’s a deadline of October 9th, so that’s coming up pretty quickly, again for the chemical industry, not terribly important. In List 2, that effective date or the product exclusion request deadline has not been published yet as far as I know. And really what it comes down to for us is List 3 which is 6,000 items for China which is substantially larger than the other two and it also includes… and it affects 20 billion dollars in business with the US and China. It’s extremely heavy on chemicals notably in Sections 28, 29, and 38, which to us means organic and inorganic chemicals. And so far like I said before, we’ve identified 21 TCC’s chemicals that are imported from China that are listed on there. The notable is dicyandiamide which is only produced in volume in China and like I said before important for agriculture applications.

BS: And that piece with China too with dicyandiamide, correct me if I’m wrong, obviously you know a whole lot more of it than I do, but the point of the tariffs is to give the advantage or not give an unfair advantage to international producer. So with dicyandiamide, it almost doesn’t make sense because there is no US producer that we could be taking profits away from essentially.

MF: Exactly. It does really negatively affect American business and the agricultural industry as a whole. For List 3, it’s kind of interesting. It was originally proposed of the 10 percent across the board tariff, but there have been kind of ramblings for the interviews with President Trump talk about moving it up to 25 percent across the board which difference between 10 and 25 percent where you bring in hundreds of thousands dollars of worth of chemicals with each shipment is massive. It’s a huge difference.

BS: So with 6,031 products, obviously I don’t think someone sat there and analyzed each product for an hour to make sure that this was a good use. So obviously I think that’s where these retaliatory comments and public comment hearings come in and that’s why the process works so well. I think hopefully a lot of people that play with dicyandiamide were imported or use it however they might would be hopefully one of the ones that if it goes through the process and goes correctly and all the facts are correct that hopefully will be taken off the list because there is no domestic source that we’re competing against.

CHEMICAL PRODUCTION: LOCALLY VS. OVER-SEAS?

DL: So what I’m hearing here is that there are a lot of these chemicals that are solely produced in China that are getting some tariffs lumped on them and clearly like List 3 has over 6,000 items on it. So like we’ve mentioned, probably wasn’t that cherry picked or the list wasn’t mapped out that in depth. There was like kind of slapping everything on and then doing some revisions afterwards. But it sounds like a lot of these products are still getting tariffs even though they’re only produced in China. And so that gets me thinking, do you think it’s valuable to even produce some of these chemicals in the United States locally? Do we have the skilled labor force for it? Is that something that could be seen as a solution to this issue or should this solution just stay with, “Okay, we need to keep these products being imported from China and figure out the best sort of trade deal to make that continue to happen?”

BS: Yeah. I would say that it’s an option for certain products. There’s going to be certain things that I’m sure will shift through production in the US or over here, but I know a lot of products included on the list are produced in other countries, a lot of them are produced in Europe, throughout Asia, some I knew South or Latin America, it may not be a matter of increasing production necessarily elsewhere, although we obviously will need more capacity if these plans either slow down what they’re producing or even we’ve seen some just come to a halt because they can’t eat the 25 percent increases for whatever reason.

So we definitely will probably see increased capacity whether that is in the US or elsewhere. I think it’s just going to depend on a product basis. There’s some stuff that might have some pretty severe regulatory issues with hazard materials or toxic materials. I’m sure that’s the case as I’m sure Matt could elaborate more on. The other thing I think we’ll likely see if a product is big in China and all of a sudden there’s a 25 percent increase on that price from China, more than likely we would assume producing partners and manufacturers from other geographical locations. I’m just going to add 20 percent just because they can to stay competitive.

So it’s going to be interesting to see if that is the situation that ends up happening or not and kind of what may shift over the US, what may shift elsewhere, other geographical locations, but definitely would be an option and I’m sure we’ll see increase and at least some capacity because that extra or lost capacity needs to go somewhere.

MF: Yeah. So I guess to follow up, it boils onto environmental regulations, John obviously has been getting more and more strict on the environmental side, but still a lot of these chemicals are pretty nasty to produce. So that’s a reason that they can be produced in China on the first place. And I think it’s really hard to say whether or not the American businesses will consider moving to production to the States just because of the amount of infrastructure and the cost of it to begin with is huge. And I think for something as temporary as tariffs can be, it might not be a safe investment. First, some American companies I think Ben now began hit the nail on the head that if there are other sources abroad or in the US that we can turn to, that’s probably what we’ll do rather than you know starting a new production.

EFFECTS OF NEW TARIFFS STILL UNCLEAR

DL: So the last piece I want to hit on is looking a little more ahead at the future of these tariffs. So we are seeing some finalized versions of the Section 301 tariffs. List 1 is final and in effect. List 2 will become effective in August, August 23rd I believe, and then List 3 will likely be effective in October. So there’s still some room here, the product exclusion request deadline for List 1 extends through October 9th. So there’s still some leeway here as to what is actually going to have that 10 to 25 percent tariff on it.

Looking towards the future, especially with List 3, since that’s not even in effect and there’s still the product exclusion request deadline for it, I mean that could extend for several months of unsuredness around what’s actually going to have a tariff on it. How do you think that might affect trade and business, just that mystery, that foggy cloud around everything? And do you think that will have an effect on it, that uncertainty, or will people charge ahead as if nothing has changed and then just sort of pray for the best?

MF: I think it’s incredibly hard to give across the board answer for things like that, but I think it does gives us kind of a sense of hope to industry still that they can obtain these products and not have to and god forbid drop a line or something like that which would be, you know, it could affect a business pretty greatly. And like you said, we’re waiting on a finalized version of List 3 and the three things that really can be affected on that final version are the lines to be included, so far it’s a success in the 31 lines and they’ve been 6,000 comments we might see reduction really, but the ball here is in President Trump and the US Trade Representative’s Court.

On an interview on Air Force One, President Trump said that he’s kind of waiting. If they see anything substantial come out of them that’s positive for the US, who knows there might be a large reduction. And if it is moved in the opposite direction such as more retaliatory tariffs on their part, then I’m guessing we’ll see a high tariff percentage as well as all of those lines being included. There’s also a talk of a potential List 4 that covers 267 billion dollars in products which is you know crazy. That’s huge.

BS: Yeah. I think on the business front too, we were just on a tradeshow last week in South Carolina and talked to a lot of companies mentioning if they had heard about it, if they’re thinking about it, and I think we’ve heard everything from companies that have some specific concise processes for how they’re going to handle it, “Hey, we’re going to add these three invoice tiers on there. It’s very clear what you’re getting charged because of the tariffs. If they don’t come in effect, we’ll refund you,” you know whatever that accounting function is all the way down to, “Yeah, we have no idea what’s going on. We’re just going to wait and see.”

So I think you’re seeing everything in between. I think some companies are better at monitoring it and preparing for and some companies are just kind of waiting and seeing, but I think there’s no being behind. I think everyone is kind of in the same boat. Everyone is just as confused or trying to figure out what’s actually going to happen or just trying to do the best they can with what we’re seeing and preparing for all situations anywhere from the maximum proposed tariff percentages all the way down to nothing happen and that’s just being kind of a crazy world when nothing came out of.

So obviously no one really knows what’s going to happen. That’s going to impact different businesses very differently. Some products might be included, some might not be, some companies could have everything included, some companies could have nothing included and it doesn’t even affect them. So I think we’re just kind of waiting and seeing for these last couple of weeks to see how things shake out and we’ll see some more formal processes from there.

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