GPS 2018: Trade and sustainability worry plastics industry

05:12 AM | November 7, 2018 | Clay Boswell

Global economic uncertainty, aggressive US trade policy, and the growing furor surrounding the sustainability of plastics were frequent themes of discussion at the Global Plastics Summit (GPS 2018), hosted in Chicago during 29 October–1 November by IHS Markit and the Plastics Industry Association (Plastics).

Nariman Behravesh, chief economist at IHS Markit, summarized the current economic environment in three words: unsynchronized, peaking, and vulnerable. Growth continues to accelerate in the United States, he explained, but it will soon peak, and it is already declining abroad.

"We repaired our economy fairly well, so we're ahead of the game," said Behravesh. The US economy expanded by 2.2% in 2017, set to grow another 2.9% in 2018, and it is likely to grow 2.8–2.9% in 2019, he said. "But very importantly, it's because we received a massive amount of fiscal stimulus over the past year in the form of tax cuts and spending increases," he noted. "In 2020, the fiscal stimulus wears off, and we're back down to 2%."

Growth has, however, slowed in Europe, Japan, China, and emerging nations. "Political uncertainty in Europe, even in the most stable economies such as Germany, is very high now, and I think that's weighing on investors and businesses," said Behravesh. "Japan [had] a bit of a spurt last year, but it's slowing as well," he added. "China had growth of almost 7% for the last couple of years, slowing to 6.5% this year, probably low 6s next year, down to 6% by 2020, and it's just heading down," Behravesh added. Emerging economies with large amounts of foreign-denominated debt such as turkey, Argentina, Indonesia, South Africa, Ukraine, and Egypt are struggling.

Trade war threatens economy

This combination of slowing growth, high levels of debt, and volatile energy prices have made the global economy vulnerable to shocks, with policy—especially around trade—"probably the single biggest threat," Behravesh said in a clear nod to the Trump administration's efforts to reshape US trade relations. Although the successful negotiation of the US-Mexico-Canada Agreement (USMCA) as a NAFTA-replacement has removed one source of uncertainty, trade relations between the United States and China are an open and increasingly urgent question.

"The US is threatening to raise tariffs to 25% on all of China's imports to the US—that's a little over $450 billion. When you put that together, that increase in tariffs, once it goes through, is in effect a huge tax increase," Behravesh noted. "You basically wipe out all the stimulus from the personal tax cuts [of early 2017], and in the process reduce US growth by 0.5%." The tariffs would also reduce growth in China by 0.5%, depending on what the Chinese government does in offsetting stimulus, he added.

Perc Pineda, chief economist at Plastics, likewise questioned the Trump administration's use of tariffs while suggesting that the USMCA would be a net positive, at least for the US plastics industry. He highlighted three potentially beneficial elements of the agreement.

"One is the 75% North American content requirement for autos. That's an increase from 62.5% under NAFTA for light trucks, engine and transmission, and 60% for all other vehicles and auto parts," he said. "Considering that Mexico and Canada are our largest markets, you can imagine that this is a step in the right direction for all three countries under the new rules of origin."

Pineda also pointed to the provision requiring that 40–45% of autos be made by workers earning at least $16 per hour. "That is a step in right direction," he said. "I strongly believe that the benefits of free trade should be felt by everyone, including the hourly workers in the factory. It has been shown that economic growth has to be both profit-led and wage-led."

The agreement's sunset clause, which requires renewal every six years and expiration after 16, does create some uncertainty, Pineda noted. "But this does not mean that we need to keep all of our trade agreements without renewing them [in line with] changes in the economy, changes in how people consume, [and] changes in how technology affect global trade. So there is value in looking at trade agreements over time."

Looking ahead, Pineda warned the plastics industry to expect additional disruptions to trade, higher costs for both labor and capital assets, and, several quarters away, slower growth. "It is probably not a bad idea to start looking at your pricing strategy," he said.

A crisis point for plastics?

Pineda also drew attention to the growing enthusiasm for bans on the use of plastics. "Bans are not the best solution," he said. "They reduce consumer choices, they reduce business choices, and they stifle the economy." Sustainability is not an issue only for plastics, it is an issue for all materials, he noted.

Plastics are drawing the most attention, however. "I've never seen such a level of concern," said Dewey Johnson, vice president/base chemicals and plastics at IHS Markit. "The visibility of the issue is higher than ever, and we see governments taking actions on regulation and policy, we see brand owners taking action, and we see trade associations setting goals. But all of these initiatives are happening with, frankly, very little understanding of the situation."

The result is potentially more waste, rather than less. In California, for example, many materials recycling facilities are being shut down because the economics do not support the collection and sorting process, Johnson noted.

"The industry needs an independent, unbiased third party to capture the metrics of where we are and where we're going, what are the best options in terms of solutions and what's the best practice," Johnson said. "So I think we're at the very beginning. We're at a crisis point, in my opinion, because the regulations and policies are being set detached from the reality of what's achievable."

David Morgan, vice president/polymers and specialties at Chevron Phillips Chemical (CPChem), argued for an energetic response by the plastics industry that would include both the development of technological solutions and greater education of stakeholders to the full costs and benefits of all materials, so that plastics will continue to be used when they are the best option. "Everybody in this room believes we have a responsibility to be part of the solution, and we are an industry of problem-solvers," he observed. "Over the years, as challenges have come up, we have been able to overcome them, and this one will be no different."

Bob Maughon, R&D vice president/packaging and specialty plastics and hydrocarbons at Dow Chemical, described the company's four-track approach to the problem of plastics sustainability. For the first track, No plastics in the environment, Dow is supporting clean-up and prevention efforts such as the Ocean Conservancy's Global Waterway Cleanup Initiative. On the second track, Drive a circular economy, the company has established dedicated commercial and R&D teams to improve end-of-life management of plastics waste and to advance recyclable product and package design. For example, Dow worked with Reynolds Consumer Products and First Star Recycling to create the Hefty EnergyBag program, which keeps unrecyclable plastics out of landfills.

On the third track, Communication and advocacy, Dow works with industry, governments, and NGOs to change public perception of plastics. And on the fourth track, Industry leadership, the company engages in cross-industry signature projects that provide scale and maximize impact. Maughon offered the example of Dow's $15-million investment in The Ocean Fund, which is aimed at addressing the problem of plastics pollution in South and Southeast Asia.