U.S., Canada Weigh Possibility of Petrochemical Free Trade - C&EN

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INTERNATIONAL BUSINESS

U.S., Canada Weigh Possibility of Petrochemical Free Trade Canada has initiated duty-free trade proposal and U.S. government is receptive, but U.S. industry has adopted wait-and-see attitude Earl V. Anderson, C&EN New York

Like Lazarus of biblical fame, the idea of freer, if not completely free, trade between the U.S. and Canada has been raised from the dead. In both countries, influential political and business leaders are now solidly in favor of negotiating duty-free trade in several industrial sectors. If the idea becomes a reality—and there is an excellent chance that it will—petrochemicals will be in the forefront of the strongest assault toward bilateral free trade between the two countries since they signed the duty-free a u t o m o t i v e trade agreement in 1965. Certainly chemical industry leaders on both sides of the border are taking the possibility very seriously. Already, two lengthy meetings on the subject have been held between the Chemical Manufacturers Association and its Canadian counterpart, the Canadian Chemical Producers Association (CCPA). Officials of both organizations emphasize that their meetings were only preliminary and exploratory. ' T h e y absolutely were not negotiations/' says one official; "only governments can negotiate." Nevertheless, CCPA has produced a "preliminary" list of 26 petrochemicals on which it would like to see twoway, duty-free trade between Canada and the U.S. This list very well could be accepted by the Canadian government as a starting point for sectoral trade

negotiations in petrochemicals if and when such negotiations get under way. And it's amost certain that, if petrochemical trade talks do take place, that list will be peppered with proposals to remove some products and to add others. So far, negotiations haven't been scheduled. But optimism that they will be held never has been higher. One reason for that optimism is that this time Canada initiated the proposal for sectoral free trade. Last fall, Ottawa issued a major report outlining a new approach to Canadian trade policies for the 1980s. And, in a major policy switch, it recommended sectoral free trade with the U.S. for selected industries. No longer is there so much worry about too much dependence on U.S. markets. Instead, the concern is how to retain, and even increase, market share in the U.S. As one Canadian businessman put it, "Ottawa has made a virtue out of necessity." Despite these changing attitudes in Canada, a completely free trade arrangement with the U.S., such as a free trade area or a customs union, still would be hard to sell north of the border. But duty-free trade limited to some specific industrial sectors could be more palatable. The Canadian initiative has received a warm welcome among U.S.

trade officials. William Brock, the U.S. Trade Representative, has had several talks about sectoral free trade with Canada's minister of international trade, Gerald Regan. As a result of these meetings, four sectors now are "under active consideration" by the Canadian and U.S. governments. These four sectors are agricultural equipment and inputs (which may include agricultural chemicals), steel (both carbon steel and specialty steel), computer services, and government procurement of mass transit equipment. These four are considered the priority sectors, presumably because officials anticipate fewer problems negotiating free trade with them than with other sectors. And officials on both sides want to start off with successes, not failures. Later, of course, other industrial sectors can be added to the sectoral free trade agenda. Petrochemicals rank high among them. The petrochemical industry was listed in Canada's original policy statement endorsing sectoral free trade. In fact, petrochemicals have been candidates for some form of liberalized trade between the two countries for some time. Immediately after the Tokyo round of multilateral trade negotiations in the late 1970s, proposals for duty-

26 products proposed for duty-free trade Styrene Cyclohexane Ethylbenzene Carbon tetrachloride Ethylene dlchlorlde Vinyl chloride Propanol Methanol Ethylene oxide

Ethylene glycol Phenol Acetic anhydride Acetic acid Adipic acid Hexamethylenediamine Acrylonitrile Alkylbenzene Polyethylene

Polyvinyl chloride Polystyrene Vinyl acetate Styrene-butadiene latex Acetaldehyde Adiponitrile Nylon 6 Nylon 66

June 25, 1984 C&EN

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Canada is a major supplier of many U.S. chemical imports $ Millions

U.S. chemical imports % Canada Total Canada

Organic chemicals $517.5 47.1 Benzene 55.8 Toluene Xylene, nee 48.2 8.6 Styrene Cyclic organics, nee 35.1 Vanillin 12.2 130.9 Butadiene, butylene, ethylene, propylene 3.9 Perchloroethylene 18.7 Halogenated hydrocarbons, nee Ethanol (nonbeverage) 13.0 14.6 Octanol 4.6 Ethylene glycol Alcohols, esters, ethers, nee 57.8 Ethylene oxide 2.6 13.2 Propylene oxide 7.7 Nitrogenous compounds, nee 559.4 Inorganic chemicals Sulfur 62.5 20.7 Chlorine Carbon black 11.3 15.4 Chemical elements & base metals, nee 7.8 Sulfuric acid Hydrofluoric acid 31.5 15.6 Zinc oxide (not containing lead) 27.4 Titanium dioxide Ammonia, anhydrous, liquid anhydrous & aqua 111.4 52.7 Aluminum oxide abrasives, crude Sodium hydroxide 41.3 12.7 Nickel oxide 34.7 Calcium cyanide & silicon carbide Sodium chlorate 35.0 7.6 Sodium sulfate, crude 14.5 Sodium sulfate, anhydrous 10.8 Inorganics, nee Radioactive & associated materials 201.2 2.0 Dyeing, tanning & coloring materials Pigments, paints & varnishes 19.0 Medicinals & pharmaceuticals 28.2 18.6 Flavors, perfumes, cosmetics & toiletries Cleaning & polishing materials 18.7 740.2 Fertilizers, manufactured Ammonium nitrate, all forms 52.6 112.1 Urea 18.0 Ammonium sulfate, all forms 12.5 Nitrogen solutions Potassium chloride (or muriate of potash) 485.1 6.8 Diammonium phosphate 22.7 Ammonium phosphates, nee 25.7 Fertilizer materials, nee 19.9 Explosives and pyrotechnics 184.1 Plastics and resins 11.6 Low-density polyethylene High-density polyethylene 6.6 0.8 Polypropylene 4.2 Rubber, synthetic 4.2 ABS 26.6 PVC Synthetic resins & plastic materials in primary form, nee 18.1 98.0 Plastics products 10.3 Pesticides & disinfectants 60.6 Miscellaneous chemical products nee = not elsewhere classified. Source: U.S. Bureau of the Census

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June 25, 1984 C&EN

$3476.6 206.1 99.6 57.0 25.4 571.8 14.5 345.3 8.0 65.1 102.0 21.4 9.8 139.6 2.7 13.2 383.9 1615.8 129.1 20.7 17.1 18.8 11.7 79.1 26.4 167.7 344.6 53.7 61.1 19.1 39.7 35.2 9.8 17.5 157.1 951.7 299.5 145.5 702.6 370.2 90.3 997.2 60.9 235.9 24.1 23.9 547.8 9.3 26.4 28.1 64.5 1097.6 29.2 12.7 5.1 19.6 24.2 53.7 120.0 594.2 251.2 716.8

14.9% 22.9 56.0 84.6 33.9 6.1 84.1 37.9 48.8 28.7 12.8 68.2 46.9 41.4 96.3 100.0 2.0 34.6 48.4 100.0 66.1 81.9 66.7 39.8 59.1 16.3 32.3 98.1 67.6 66.5 87.4 99.4 77.6 82.9 6.9 21.1 0.7 13.1 4.0 5.0 20.8 74.2 86.4 47.5 74.7 52.3 88.6 73.1 86.0 91.5 31.3 16.8 39.7 52.0 15.7 21.4 17.4 49.5 15.1 16.5 4.0 8.5

free shipment of Canadian petrochemicals to the U.S. began to surface. Most of the proposals came out of Alberta where a fledgling world-scale petrochemical industry was taking shape. Canadian petrochemical industry representatives suggested duty-free entrance for about a dozen Canadian petrochemicals, all of them "commodity" type products and most of them first or second e t h y l e n e derivatives. In exchange, the U.S. would receive favorable treatment on Canadian natural gas exports. This proposal died along with other proposals made at about the same time for some form of North American trade alliance encompassing the U.S., Canada, and Mexico (C&EN, July 14, 1980, page 12). But it resurfaced in the Canadian government's trade policy statement last year and again this year in a task force report on petrochemicals that industry prepared for Ottawa. It should not be surprising that chemicals in general, and petrochemicals in particular, should be considered for special trade treatment. A lot of chemical trade takes place between the two countries. And a lot of this trade already is duty-free. That trade represents a greater proportion of the total for Canada than it does for the U.S. For instance, last year Canada exported $2.4 billion in chemicals to the U.S. and imported $2.5 billion from it (U.S. data). For Canada those figures mean 65% of total chemical exports and a hefty 78% of total chemical imports. Canada's share of U.S. chemical trade isn't that overpowering, but it isn't small change, either. Last year, Canada took 12% of all U.S. chemical exports and provided 22% of all its chemical imports. For some petrochemicals, free trade already exists between Canada and the U.S. For instance, fertilizer materials such as ammonia and urea move duty-free. Tariffs have been negotiated away on such primary petrochemicals as benzene, toluene, xylene, ethylene, propylene, and butylene. Canada exports large volumes of these products to the U.S. However, tariffs still exist on

many first- and second-generation derivatives. And it is toward eliminating these tariffs that CCPA's list of 26 is aimed. But that list and the meetings between CCPA and CMA are only the first step along a long road to successful government negotiations in petrochemical free trade. Nobody in either the U.S. or Canadian petrochemical industries expects that list to survive the trip intact. In the U.S., most of the industry work concerning sectoral free trade with Canada is concentrated in CMA and the Office of the Chemical Industry Trade Adviser (OCITA). Right now, however, most of that effort involves collecting information and disseminating it to OCITA and CMA members. Myron T. Foveaux, CMA's assistant director of government relations and a leading industry trade expert, says that CMA can do only so much for its members on this issue. At the moment, CCPA's proposal is relatively simple—have twoway, duty-free trade on the products on its list. But if balanced benefits are to be achieved within each sector, achieving it with this narrowly defined list could prove difficult, if not impossible. When the Canadian government presents the list to the U.S. negotiators, U.S. chemical companies will be waiting in line to make their own counterproposals, striking some chemicals from the CCPA list and adding others. Don't expect a counter list from CMA, however. CMA, says Foveaux, is in no position to offer lists of products. First, it doesn't represent the entire chemical industry. And what it might propose to help one member could end up h a r m i n g another. "We want no part of that," says Foveaux. The opportunity for U.S. companies to make their own suggestions will come when the federal government holds its own investigations. Typically in such cases, these could include hearings before the International Trade Commission and/or the Trade Policy Staff Committee, a high-powered interagency group chaired by USTR. Industry input also could funnel into the trade representative's office through the

U.S. chemical trade with Canada returns to surplus $ Billions

U.S. chemical exports to Canada

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U.S. chemical imports from Canada nl

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1 I

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1970 71 72 73 74 75 76 77 78 79 80 81 82 83 Source: U.S. Bureau of the Census

industry sector advisory committee that handles chemicals. The outcome of such a process could be an industry-suggested list that would look quite a bit different from CCPA's list. Depending upon how "petrochemicals" are defined—and that hasn't been pinpointed yet—a list more to the appetite of some U.S. companies could go further toward downstream products than Canadian chemical leaders care to go. Rolland G. Frakes, senior vice president, Novacor Chemicals, Calgary, and chairman of CCPA's trade committee, says that he and his Canadian cohorts recognize that there will be some deletions and additions to the CCPA list. But they would like to keep future negotiations confined as much as possible to basic petrochemicals, without too many upgraded products involved. "We're not as far out of balance in petrochemicals as many think," says Frakes. He t h i n k s that the next step should be for "real professionals" to make a thorough economic evaluation of the proposals. But that may have to wait until the two governments give industry experts a target to shoot at. It is hard to say when that might happen, on the U.S. side at least. Petrochemicals still are " u n d e r consideration" by the U.S. trade representative's office. But, as William S. Merkin, deputy assistant U.S.

trade representative for the Americas, points out, there are four joint working groups working on the four priority sectors, and that does not represent a commitment to negotiate. The petrochemical sector has no working group yet, and one would not even be considered until the two countries' top trade officials meet again this fall. But there are hints that the U.S. trade office may not wait until then to at least get ITC involved in an economic impact analysis. Meanwhile, there remains the problem of reconciling any sectoral free trade arrangement with the international trade treaty already in effect, the General Agreement on Tariffs & Trade, or GATT. Under GATT rules, such agreements should cover essentially all trade. "We haven't resolved this issue yet," says Merkin. There really are only two ways to go, he says. One is a GATT article that provides for free trade areas; the other is to seek a waiver as the two countries did for the automotive agreement in 1965. The waiver was granted in 1965. Things are different now. Other trading partners may not be in any mood to grant waivers. Merkin notes, however, that of the 40 or so free trade arrangements r e p o r t e d to GATT, n o n e really encompass total free trade. Most are in the 50 to 60% range; some go as low as 10%. Certainly any sectoral free trade arrangements reached by Canada and the U.S., on top of the large volume of duty-free trade that already exists, could qualify under GATT by those standards. Despite the problems involved, chemical trade experts in the U.S. and Canada seem confident that some sort of sectoral trade arrangement will be completed for petrochemicals. CMA's Foveaux notes that "this is the farthest it has gone so far." CCPA's Frakes says that a free trade agreement should fly because both sides are concerned about the influx of new producers onto the world petrochemical scene. "We should be looking at what it would be like if North America were one chemical market instead of two," he says. D June 25, 1984 C&EN

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