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Free trade and the chemicals industry.

Free Trade and The Chemicals Industry

The Free Trade Agreement has been in effect since January 1 of this year and the ink was barely dry before the submissions started. About 500 companies and trade associations on both sides of the border decided they weren't receiving enough benefits quickly enough. In proposals to both governments they're asking for speeded up reductions on customs tariffs currently slated for five-or 10-year phase-outs.

There is nothing new about the concept of free trade. During the late 1800s it was called reciprocity and at least one federal political campaign was fought using it as a basis. The concerns raised then were not that different from those expressed during the last political campaign.

The chemicals industry in North America has been undergoing an exceptional period of growth and profitability. Plants are operating at or above capacity and producers are selling everything they can make. Demand frequently has been outstripping supply and chemical manufacturers are looking at black ink on their balance sheets instead of the red that figured prominently during the late 1970s and early 1980s.

Canada's Position In the world chemical industry, worth $675-billion in 1986, Canada is a small player, accounting for 2.5% of world sales during the year. In comparison, the US had 41% and Japan 17% of the market.

One-quarter of all Canadian chemical production is exported with two-thirds of that going to the US. Ontario and Quebec make up the majority of chemical production here; Ontario has the lion's share, 59%. Figures from the Canadian Chemical Producers' Association show in 1987 Canada exported about $3.4-billion worth of chemicals to the US and imported $4.6-billion from there, a trade deficit of $1.2-billion. There was a slight surplus in basic chemicals and a deficit in specialties. The CCPA's definition of chemicals includes petrochemicals, inorganics, organics and specialties. Excluded are pharmaceuticals, paints, fertilizers and explosives.

The Canadian chemicals manufacturing sector, in terms of output growth, is considered to be about average. Statistics Canada figures show the industry has undergone an increase of 21.4% between 1981 and 1987. In comparison plastics production, considered to be one of the strongest sectors, had a growth rate during the same period of 51.2%. One of the weakest sectors was tobacco products with a growth rate of --38.9%.

Canada's competitive strengths, vis-a-vis the US, lie in lower energy costs and wage rates. However, Canada is at a disadvantage to the US with respect to capital costs, plant scale, transportation costs and the level of proprietary requirements.

The advantages of easy access to the larger American chemicals market, for Canadian producers, is so clear as to be almost self-evident. As a strong proponent of improved trade, the CCPA drew up five major policy principles in 1985:

1) Broad removal of duties, rather than partial duty reduction. This provides balanced benefits to the chemicals industries in Canada and the US.

2) All chemical products and inputs for their manufacture are included.

3) Gradual phasing-out of tariffs to allow Canadian manufacturers time to adapt to the new competitive environment.

4) Rules of origin to prevent people from bringing goods in from outside Canada and the US and then shipping them across the border free of duty.

5) Provision for a joint bilateral trade practices tribunal.

In the opinion of the CCPA, the FTA satisfies all of these conditions.

The American Point of View The Financial Post summed up the two countries' differing views on free trade with the following quote. "We are seemingly trapped between Canada's touchiness and America's indifference to the average person on Main Street in America, this free trade agreement is a big yawn. In Canada it can bring down a government."

What is the American view of free trade? Many Canadians have been more than a little concerned about the Americans' seeming lack of concern. Why would it be interested in access to a market 90% smaller than its own.

Bill Cornelius, director of trade policy at Dow Chemical, Midland, MI, says one of the reasons behind the US decision is Canada as an assured supplier of raw materials. "You (Canada) have a lot of things up there that we want access to," he says, "and a lot of them are things like raw materials and natural resources, things like gas and oil. The real advantage to the US chemical industry is the assurance of available feedstocks at a competitive price."

Over the last six years, Cornelius says, chemical trade between Canada and the US has been about equal, with the trade balance shifting from one country to the other. Using figures from the US Department of Commerce, he says in 1988 the US shipped US$3.8-billion worth of chemicals to Canada and Canada shipped US$3.6-billion to the US, a favourable trade balance of some US$260,000. During 1987, he says the trade balance showed the US exporting about US$441,000 more to Canada then it imported. He notes the trade balance has come down considerably.

Which Companies Will Benefit? "What each of us expects," says Cornelius, "and I have spoken with the president of Dow Chemical Canada (David Buzzelli) about this, is an improvement in the amount of chemicals that should flow from Canada to the United States, with a similar increase in the amount of chemicals that should flow from the United States to Canada. I have seen numbers that say, on an average, it could be as much as 10% per year." He does point out people have to remember all duties didn't expire on January 1.

He also says the companies most benefiting from free trade may not be the large companies like Dow. "We don't see our trade accelerating as much as probably the small-to medium-sized companies. With the elimination of a lot of duties, the small to medium-sized companies, who have never exported before, are going to find it easier to export. This is true on both sides of the border. These companies often are customers of Dow and we expect to gain because our customers will have found ways to move product across the border more easily."

The US government, under former President Ronald Reagan, recently began a programme to help companies export their goods and services. The program is called `Export Now' and Cornelius thinks it could be of considerable benefit to American companies and could improve that country's exporting figures.

The FTA and Dow's Marketing Strategies According to Cornelius, Free Trade is still too early to have had an effect on where Dow will build new plants. He does point out that Dow usually takes a global look at this question since most of its plants are world-scale. What he does think is that, with availability of petroleum feedstocks in Canada, Dow will look more seriously at major petrochemical plants, the kind of plants built closer to the source of raw materials. The plants built to make specialty chemicals or consumers products would still continue to be built closer to the marketplace.

The Real Winner under FTA According to Cornelius, and most other proponents of free trade, the ultimate beneficiary of this arrangement will be the consumer. He says, "commercial enterprises are going to gain (under the Free Trade Agreement), but who really is going to gain is the consumer because goods are going to be more available to them, probably at a lower cost." The elimination or reduction of duties between Canada and the US, he says, could mean that North American goods have a cost advantage over those coming from outside the continent.
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Title Annotation:1988 US-Canada Free Trade Agreement
Author:Hollingshead, Sandra
Publication:Canadian Chemical News
Article Type:editorial
Date:Jun 1, 1989
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