Issue Date: March 13, 2006
'Lost Chemistry' Hurts U.S. Industry
"Lost chemistry" is not the latest movie thriller. It is the amount of chemical business that the U.S. loses each year as a result of the trade deficit in the chemical industry and in downstream industries that use chemicals to manufacture their products.
An analysis by the American Chemistry Council shows just how significant this lost chemistry is. In 2005, the chemical industry had a trade deficit of $8.95 billion, while downstream industries "lost" $52.9 billion worth of chemistry. Kevin Swift, ACC's managing director for economics and statistics and the author of the study, says the analysis was done not as a policy statement but rather to help people understand industry dynamics.
A trade surplus was long the darling of the U.S. chemical industry. The surplus peaked in 1997 at $19.1 billion, but it came to an end in 2002, when the industry posted its first trade deficit in recorded history. Since that initial shortfall of $4.92 billion, the trade deficit rose to $9.63 billion in 2003, fell to $3.62 billion in 2004, and increased again to $8.95 billion in 2005.
The ACC analysis attributes the smaller trade deficit in 2004 to several factors: a global economy growing at its fastest pace in three decades, the effects of a cheaper dollar, renewed U.S. competitiveness, and tightening global supply/demand balances in many industries. The deepening deficit in 2005 was a result of record-priced natural gas and the disruptions from hurricanes, which adversely affected U.S. chemical production and exports while providing a window for higher imports.
But the negative trade balance in chemicals per se is not the chief reason for the loss in chemical business over the years. The real culprit is the chemical component of the exports of downstream industries.
Using input-output tables from the Bureau of Economic Analysis, ACC has been able to estimate just how much chemistry has been lost by downstream industries. The input-output tables show how much of the output of a particular industry, in this case chemicals, is used as an input in the manufacture of downstream products, such as apparel. This ratio is then applied to the trade balance of the various industries to determine the lost chemistry. Swift says it is the "only type of analysis that allows us to show the impact of a change in one industry on all other industries."
The study shows that the lost chemistry from industries downstream from chemicals in 2005 more than tripled to $52.9 billion since the Asian financial crisis, which began in 1997. In other words, between 1997 and 2005, the loss of chemistry rose at an average annual rate of 15.5%. The net change between 1997 and 2005 was $36.2 billion.
Last year, the study shows, the $9.26 billion in lost apparel-related chemistry represented the largest deficit among downstream industries. Apparel is followed by transportation equipment, computers and electronics, oil and gas, textile mill products, leather and allied products, and plastic and rubber products.
The analysis notes that the deterioration in the trade balance for plastic and rubber products has been especially pronounced: "This involved a swing from a positive $271 million net export of chemistry in 1997 to a large deficit, or lost chemistry position, of $3.1 billion in 2005."
The plastics and rubber industry is noteworthy, according to the analysis, as it is the largest direct purchaser of the U.S. chemical industry's goods and services. The products it buys include plastic resins, synthetic rubber, plasticizers, flame retardants, other plastic additives, carbon black, and various rubber-processing chemicals.
The study also includes an analysis of lost chemistry as it applies to China and Hong Kong, where the U.S. chemical industry, unlike many other industries, enjoyed a positive trade surplus between 1997 and 2005. In 1997, the chemical trade surplus was $2.0 billion. After hitting a high of $2.4 billion in 2004, it fell to $1.7 billion in 2005.
It's a different story, though, when the chemical component of products of other U.S. industries is considered. The lost chemistry in the combined trade deficit with China and Hong Kong for the industries in the global analysis was $5.1 billion in 1997. By 2005, it had risen 237% to $17.1 billion, 32% of the total $52.9 billion in lost chemistry last year.
The study concludes that the combination of lost chemical trade together with lost downstream industry chemistry amounted to $64.3 billion-the difference between 1997 and 2005-in lost business for the U.S. The study puts this figure in the context of overall industry output. Instead of having $549 billion in U.S. chemical industry shipments in 2005, export and domestic demand would have been $613 billion if 1997 conditions had continued.
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