The U.S. / China Trade Relationship

By V.M. (Jim) DeLisi

Is history repeating itself? Here is a lesson learned from the colorant industry to give some context to where we are now in agrochemicals.

From the mid-1980s, I was heavily involved in the sale of dyestuff intermediates. One of our key customers in the U.S. had just returned from his first official visit to China. Several Chinese manufacturers of intermediates, that they purchased from, disclosed the fact that they were prepared to price such materials at raw material costs plus 5%.

While he doubted that they would follow-through, samples were ordered, and upon delivery were found to be acceptable substitutes for materials that he had been procuring mostly from Europe (primarily Germany), Japan, and other competitors in the U.S. that were more backward integrated than his company.

Trial shipments were ordered. While some adjustments needed to be made in some of the processes, suitable colorants were produced from these intermediates. The Chinese producers did follow-through on their pricing commitment and so began the shutdown of the dyestuffs industry in the Western world.  In combination with environmental, labor, tax and trade policies (free trade) in the West worked to discourage the production of these materials.

This story is relevant because the history of the organic chemical industry shows that it originated to satisfy the demand for color. Most of the current Western companies involved in agrochemicals can trace their roots back to colorants.

This discussion is pertinent because most agrochemicals and their intermediates were produced in large multi-purpose factories in places like Leverkusen (Bayer), Ludwigshafen (BASF), Frankfurt (Hoechst – now part of BASF), Huddersfield, UK (ICI – now Syngenta), Basel, Switzerland (Syngenta), as well as in the U.S. including but not limited to Deepwater, NJ (DuPont), Bound Brook, NJ (American Cyanamid now BASF), etc.

The erosion of the ability to profitably produced colorants began the downward spiral of the economics of running these enormous, fully integrated facilities, as well as the many other factories that were necessary to produce sophisticated batch organic chemicals in the West.

The same policies that so significantly impacted the colorant industry also heavily impacted the production of all organic chemicals in the West and led to where we are now.

Except for a very few AIs still produced from “air, fire & water” in the West, we are reliant on Chinese producers for most AIs.

In many other instances where the AIs are still produced in the West, including proprietary products, such production is highly dependent on intermediates sourced from China. It is likely that in many instances, this is also true for AIs produced in India.

In short, the West has largely shut down its capacity to convert base raw materials such as benzene, naphthalene, and anthracene into the highly upgraded aromatic chemicals required to produce today’s agrochemicals.

The below chart details imports of key herbicides, insecticides, and fungicides into the U.S. for the period 2018 through 2024. The 2018 numbers pre-date the imposition of the section 301 duties on the crop protection industry. Included in Column 1 (“China”) is the current status of the “China surtax,” Column 3 (“U.S. Production”) notes if there is U.S. active ingredient production. The last two columns (“2024 key source countries” and “2018 key source countries”) detail the key country sourcing patterns. As you will quickly see, there has been very little movement in the sourcing patterns over this time period outside of the normal ebb and flow of business. In some instances, the percentage sourced from China has actually gone up significantly (2,4 D, glufosinate, paraquat, and azoxystrobin), while in others it has gone down significantly (clomazone, dicamba, metribuzin, sulfentrazone, bifenthrin, imidacloprid, and captan). Each of these instances would need to be studied very carefully to understand the dynamics involved since some of the movers are subject to the surtax, while others are not. In some instances, the changes in the supply chain may be that sophisticated, upgraded intermediates have been shipped from China to the expanding source country to make the manufacturing process easier.

Key Herbicide imports in MT AI basis

* includes some combination products
Notes
Pendemethalin – it would appear that BASF stopped production in Hannible, MO late in 2021 or early in 2022.
Syngenta: Most imports from EU & UK are from Syngenta owned facilities in these countries.
Paraquat: Parquat “technical” does not pay a surtax. Until recently, Paraquat “formulated” was exempt from the surtax.
China Surtax – all formulated pesticides are subject to the 25% China surtax.
Note 1 – produced in the U.S. with “air, fire and water” sourced in the U.S.
Note 2 – produced in the U.S. with some imported components.
Note 3 – Glufosinate production ended in the U.S. in mid-2020
Note 4 – Tebuconazole – not included – BCS imports very large quantities of an intermediate from China that is “finished” in the U.S.
Where products are imported as both technical and formulated, this table should reduce all the quantities to “AI” values.
However, no effort is made to reduce the volume on “Amine Salts”, etc. to “Acid basis”

It is likely that part of the reason that the sourcing patterns have not changed is that since these tariffs were put into place with the stroke of a pen, they could have been removed in a similar manner. Therefore, it is hard to decide on a new chemical facility based on a short-term outlook.  In addition, since no other country instituted similar duties, it is hard to justify the construction of a new facility based solely on requirements in the U.S.

There has been talk that several Chinese companies have been looking to set up production of AIs in friendly eastern countries, most especially Indonesia and Malaysia. It is likely that such efforts would be based on highly upgraded intermediates sourced from the parent organization.

However, as long as a chemical reaction is performed in the country, the AI would be considered as being manufactured in that country for tariff purposes. While these efforts show the determination of Chinese companies to react to worldwide concerns about the concentration of AI production in a single country, regulatory hurdles likely mean that any new investments will not come on stream for at least a couple of years. Further, the world needs to determine if these actions truly represent diversification if the new facilities are not fully backward integrated.

Lastly, if China takes aggressive action to re-unite with Taiwan, it will surely result in a total embargo on any imports from China into the U.S. It is likely that at a minimum the EU and Japan would follow suit, ending world trade as we know it, and significantly negatively impacting the world’s future well-being for several generations.

Trump and the U.S. China Trade Relationship

The question on everyone’s mind is: What will the U.S./China trade relationship look like in 2025 and beyond, assuming that China does not invade Taiwan?

There is no doubt that U.S. President Donald Trump will have a profound impact on U.S. international trade policy. No president in the last 50 years had so aggressively used tariffs as a weapon to accomplish his objectives as did President Trump.

The key sticking point for the U.S. China trading relationship is the 301 tariffs, that are also referred to in this article as the China surtaxes. It is also important to remember that China has instituted significant barriers to U.S. imports in retaliation for these levies.

The official line is that President Trump will immediately hit China with additional tariffs, more punishing than what was done in his first term. Frankly, we don’t think that this will happen.  The more likely scenario will be the following:

Phase Two Agreement

The first approach is for China to negotiate a phase two agreement. As many will remember, the U.S. and China signed a phase one agreement in 2018 that held off the imposition of even higher 301 tariffs in exchange for a commitment to purchase significant amounts of U.S. exports and make changes in China’s domestic policies. China did not follow through as it became clear that Trump would lose the election, COVID was at its height, and it was thought that President Biden would be more accommodating to China.

• If there is hope for such an agreement, the tariffs that are currently in place will remain until there is proof of a change in China’s practices.

• If there is no such agreement, then the “tranche 3” tariffs will likely be increased from 25% to 30%, the “tranche 4a” tariffs will increase from 7.5% to 15% and the “tranche 4b” tariffs that were never implemented, will be set at 15%.

Hopefully, as was done in his first administration, in recognition that some products are only available from China, there will be a fair and open process for requesting exceptions.

• It has been widely reported that China’s economy is struggling. The banking sector has serious issues. Further, China has made a serious effort to export its goods all over the world as it became more difficult to export to the U.S. In many instances, those markets have also reacted to this push, making it much more difficult to again make up for lost sales in the U.S. by increasing sales in other markets. Therefore, it is hoped that once the U.S. and China sit down, there will be room for compromise. (Please request a list of agrochemicals that we prepared at the time showing where individual products fit into these tranches.)

Across the Board Tariffs – Professed to be 10% or More

It is unlikely that this will happen in this manner. In his first term, President Trump scrupulously avoided adding tariffs to any line item that would increase the cost of health care. A 10% across the board tariff on all U.S. imports would sink Medicare and Medicaid as the prices for pharmaceuticals, both OTC (over the counter) and prescriptions reacted to these increases.

Corteva, 2,4 D Dumping Effect

Individual company reactions to the very low prices on AIs out of China will likely continue, if Corteva realizes a reasonable outcome to the current case on 2,4 D.

In this instance, since there is viable production in third countries, it is especially likely that imports from China to the U.S. will be hampered by this action. Similarly, Australia has already imposed dumping margins on 2,4 D imports, and India has such margins on glufosinate imports.  Interestingly, BASF has announced that they will shutter their German production of glufosinate rather than take a similar stand.

A similar action could be undertaken wherever there is domestic U.S. production of an AI, even if it starts with an upgraded imported intermediate. While the Trump Administration could encourage such actions, individual companies must make the ultimate decision to proceed. If a company takes this step, they can expect to spend a minimum of $1 million on legal fees in addition to a significant amount of upper management time and resources. There is also a time elapse of about a year, from start to finish. Lastly, there can be a significant hit to the company’s perception in the marketplace.

It needs to also be noted that defending such an action is very expensive and time-consuming.

Defenders can expect to spend a minimum of $750,000 on legal fees and expenses. In addition, there will be numerous hours spent by upper management preparing for the case. Defenders have the right to completely ignore an action, but taking such a position makes it highly unlikely that they will be able to maintain their U.S. business if the action is successful.

It is important to note that China also has provisions for prosecuting dumping and has many margins in place against U.S. and other western economies.

What’s the Outlook?

The U.S. has no choice but to import many key AIs from China, the key driving force, regardless of the tariffs, will be U.S. demands in 2025 by farmers and ranchers. While 2024 was a tough year for suppliers and their customers, 2025 does not look much better.

AI imports for many products were very high in the 4^th Q, as companies anticipated higher tariffs in 2025. This implies that there may be a significant amount of inventory in the channel.

In addition, the price for many of these imports was very depressed. The reason for falling prices remains excess capacity for many molecules and also excess inventory levels that needed to be turned into cash. Therefore, there could be a major re-alignment in demand for many AIs as consumers reevaluate their purchasing decisions based on new cost/acre calculations.

Therefore, 2025 looks like it might be a very difficult year for trade with China (and everywhere else) for agrochemicals.  •

V.M. (Jim) DeLisi: Fanwood Chemical
rrice Adobe.stock.com
Andrew Adobe.stock.com
gguy Adobe.stock.com