WILLIAM STORCK
For as long as anyone can remember, the trade surplus in U.S. chemicals has justifiably been a boasting point for those in the industry.
Chemicals is one of the few industry classifications used by the Commerce Department in assessing foreign trade to consistently show a surplus. Only two other categories were in surplus last year--crude materials, excluding fuel, and food and live animals--but chemicals, as it has for many years, showed the largest.
The trade situation for chemicals is changing rapidly, though. After setting a record $20.5 billion trade surplus in 1997, the industry in the U.S. has seen declines since then. By last year, the surplus had fallen by more than half to $8.9 billion. And 2001 will be much worse: Through August, the chemical trade surplus totaled $1.35 billion, off more than 70% from what it was in the same period last year, and forecasts are that it might just end the year between $1.25 billion and $1.50 billion.
Within the industry, all but three of the eight chemical segments still show a trade surplus, although that for fertilizers is in danger, having dropped to just $20 million in the first eight months of this year from $448 million in the same period last year. The same five chemical segments had a surplus in 2000.
The biggest drag on the surplus this year comes from two segments that were already on the minus side. The deficit in pharmaceuticals has increased to $8.59 billion from $6.43 billion and that for organic chemicals has risen to $2.30 billion from $949 million. The deficit in inorganic chemicals, which was the third segment to run in the red last year, has actually been cut to $283 million through August from $467 million in the same period a year earlier.
Many reasons have been given for the decline in the surplus, including, most prominently, the strength of the dollar against foreign currencies, which make imports into the U.S. cheaper and exports from the U.S. more expensive. Also, the global economy has been declining, making more products available on the world market. Both are valid reasons, but in the long run, does it matter?
With the U.S. trade balance in chemicals rapidly heading toward equilibrium and perhaps deficit--an event that until recently was not expected by chemical economists for at least 20 years--one might become concerned, but probably shouldn't. Since 1985, there has only been one year, 1998, in which exports declined, indicating a continuing growing overseas market for U.S. chemicals. Last year, while the surplus was falling 9.2%, exports were increasing almost 15%. It's just that imports rose faster.
But perhaps the most important reason not to be terribly concerned is the changing structure of the global chemical industry. It can easily be said that for years the chemical industry has been replacing foreign trade by building plants abroad to serve overseas markets. And, to a great extent, foreign trade now supplements plants that are built abroad or goes to countries where markets are too small to justify a production facility.
This phenomenon itself has caused a problem when looking at the gross trade data. Economists at the American Chemistry Council estimate that as much as 40% of trade is intracompany. For example, U.S. chemical producers are sending products from U.S. plants to their overseas plants to be used to make other products, or from overseas plants back to the U.S. The same is true for foreign companies. Despite the captive use of these chemicals, they are still counted as exports or imports, depending on which way they go.
But the most important result of overseas chemical investment by U.S. companies is that they are making good money abroad. U.S. investment in foreign chemical operations, according to government data, increased 15% between 1996 and 2000 to $86.1 billion. Direct chemical investment accounts for 25% of all U.S. investment in manufacturing abroad, and chemicals account for the largest single-industry investment overseas. According to the Commerce Department, direct investment is when a resident (or company) of one country acquires a lasting interest in and a degree of influence over the management of a business enterprise in another country.
These overseas investments in chemicals in 2000 produced income, including dividends and other income, of some $10 billion. At the same time, foreign direct investments in U.S. chemicals, which are 42% greater than U.S. investments overseas, produced income of $6.3 billion, according to the Commerce Department data. Treating these the same as foreign trade, therefore, gives a positive foreign investment income balance for U.S. investment in foreign chemical operations of $3.7 billion in income.
To try to put the figures on the same basis as trade, convert income back to sales, using a modest 5% profit margin. This gives a hypothetical $200 billion in sales for U.S. investments abroad, compared with $130 billion for foreign investors in U.S. chemicals. The result: a positive balance for the U.S. of $70 billion, almost eight times higher than last year's trade balance.
