INDUSTRY INSIGHT

Unlocking the Potential of the Chemical Industry through a Global Sector Agreement

By Arnoud Willems and Dr. Jenya Grigorova

To prosper, the chemical industry needs an enabling legal framework, and free access to global markets, which means the removal of tariff and non-tariff barriers. Currently however, the chemical industry still faces costly tariffs, unclear rules of origin, discrepancies between national legislations, multiple standards, limited protection of trade secrets, and trade defense measures.

With globalization and the WTO under pressure, bilateral Trade Agreements (TAs) are becoming increasingly important for global markets access.  However, bilateral TAs are insufficient, because they address only part of the needs of the chemical industry and are difficult to negotiate.

Therefore, the chemical industry should take its future in its own hands and actively work towards the negotiation of a multi-stakeholder global sector agreement.  In this initiative, the Gulf Petrochemicals and Chemicals Association (GPCA) could play a key role, together with the Gulf Cooperation Council (GCC).  Riding the wave of Plurilateral Agreements, the GPCA could support an initiative of negotiating a new, comprehensive global chemical sector agreement.

The first challenge: The global chemical industry faces different national rules

With the rise of global value chains, trade in chemicals is more global than ever. According to UNCTAD’s most recent statistics, international trade in chemicals amounts to USD 2 trillion per year, making it the largest sector in goods trade.[1] The GCC makes up an important part of the global chemical sector. The GPCA estimates that in 2017, the GCC exported around 80% of its chemicals and petrochemicals, worth USD 55.6 billion.

However, current trends show grey clouds for the global chemicals market. As a recent study by PwC puts it: “uncertainty is certainly the new normal in the chemicals industry.” The main explanation for this uncertainty lies in the discrepancies in national legislations and the lack of harmonized international rules for the sector. Governments around the world are responding to national developments and sentiments, and as a result develop new, complicated, and contradictory rules covering the environment, standards, technology, and digitalization. This requires chemical companies to adapt to different national markets, which is inefficient, costly, and complicated from a compliance perspective.

The second challenge: The chemical sector faces serious tariff and non-tariff barriers

Exports of chemical products, especially from GCC countries, are frequently subjected to high tariff barriers. An average import duty of 3 to 4% results in about EUR 1.5 billion additional input costs for the chemical industry per year.In addition there are anti-dumping and anti-subsidy duties. In a globally competitive industry, it is difficult to pass on these costs to customers. As a result, most of the burden falls on the industry, resulting in reduced profitability, lower investments, and slower growth.Non-tariff barriers, such as import procedures, licensing requirements, lack of intellectual property rights and trade secret protection, complex rules of origin, export restrictions, regulatory requirements e.g. re. testing, labelling and packaging further hinder international trade, and result in higher costs and compliance risks.

Bilateral TAs do not address these challenges. They are notoriously difficult to negotiate, and the negotiations take time. Moreover, TAs are not sector-specific, and chemical sector interests often falls victim of the negotiations in search of compromise across different sectors and topical issues.

The GPCA could take the lead for sector-specific cooperation

While there are limits to what bilateral TAs can accomplish, alternatives exist, and the GPCA could take the lead in promoting them.

Since the chemical industry relies on a global supply chain, there is convergence in the interests of most countries to work towards the progressive elimination of trade barriers in the chemical sector. During the Uruguay Round, several WTO Members agreed to harmonize tariffs on a broad range of chemical goods; precisely to promote liberalization in the sector and to ‘develop a more predictable and transparent global tariff structure for a growing industry’.The result was the Chemical Tariff Harmonization Agreement (“CTHA”), which led to a substantial reduction and harmonization of chemical tariffs in the signatory countries. Parties to this Plurilateral Agreement committed to harmonizing tariffs at three levels: 0% (for pharmaceutical products in Chapter 30 and some primary petrochemicals in Chapter 29), 5.5% (for basic organic and inorganic chemicals), and 6.5% (for more highly processed goods such as cosmetics and plastics). Since the Uruguay Round, 14 WTO Members have participated in the CTHA as part of their accession to the WTO, including GCC Members (Oman and Saudi Arabia). As a first step towards promoting international cooperation in the chemical sector, GPCA could promote the global application of the CTHA.  However, the needs of the chemical industry go beyond the harmonization, and progressive elimination of tariffs and touch upon complex issues such as rules of origin, intellectual property (including the protection of trade secrets), and regulatory cooperation, in particular with respect to standard setting.

Another innovative possibility would be to develop a global chemical sector agreement (“GCSA”).  The negotiation of such an agreement could build upon the success of the CTHA, and suggest the “multilateralization” of successful plurilateral cooperation, with the addition of disciplines that go beyond tariff harmonization.

A GCSA would require the participation of both government and industry. Governments would provide for enforcement mechanisms, while industry participation would ensure that the actual needs of the private sector are met.

Following the CTHA, the GCSA could be negotiated under the auspices of the WTO. For instance, nine WTO Members proposed a ‘chemical sector initiative’ in the Doha Development Round in 2006.[1] It is also possible to negotiate an agreement outside of the WTO. It is important though to obtain “critical mass”.

The initiative for such an agreement needs to come from the industry, since the industry knows best its own needs and how a global level playing field would look like. The GPCA could take the initiative in promoting the idea, within the regional context of the GCC, as a first step. The next step would be to lift the debate to a global level, e.g. by using the relationships of the GPCA and its members. The GPCA initiative would allow its members to take their future in their own hands and take the lead in designing the global legal framework, including an action plan to realize this framework.

At a time when policymakers at the national level are developing an increasing number of laws and regulations for the industry, and with limited prospects for the negotiation of comprehensive, global trade-liberalization agreements, the chemical industry in the GCC could step forward, and insist upon the negotiation of a multi-stakeholder Global Chemical Sector Agreement.

About the authors:

Arnoud Willems and Dr. Jenya Grigorova are attorneys at Sidley Austin LLP in Brussels. This piece is based on a recent article; “The Limits of FTAs in the Chemical Sector: Is a Sector Agreement the Solution”, Global Trade and Customs Journal, 2019, vol. 14(3), pp. 117-134. The views expressed in this article are exclusively those of the authors. The article has been prepared for academic purposes only and does not constitute legal advice.