Fri January 5, 2018

At the PLASTICS webinar in December where President & CEO Bill Carteaux and I released the 2017 Size & Impact Report, a question was raised on how Brexit will affect U.S. plastics trade moving forward. The vote for Brexit in the June 16, 2016 referendum came with a tedious uncoupling process, the outcome of which remains uncertain. Still, for all the ink that’s been spilled about Brexit’s potential economic impact both in and out of the UK, U.S. plastics trade with Britain is likely to mirror aggregate trade movements of the two countries as they’ve flowed in the past.

In gauging Brexit’s impact on plastics trade, the three issues that need to be considered are:

  • market access,
  • the U.S./UK foreign exchange rate and
  • the regulatory environment in the UK once Brexit is finalized.

With regard to market access, membership in the EU includes access to a single market. It is in the best interests of the UK to maintain single-market access to the EU through the European Free Trade Association, rather than revert to World Trade Organization (WTO) rules governing how trade is conducted with the EU. It is unclear if the UK will succeed in this, but if it fails to do so, the WTO rules would create trade barriers for EU member countries exporting to and importing from the UK. This could harm the UK, but non-EU countries with long-standing trade relations with the UK would be less affected. Instead, such an outcome would necessitate the negotiation of new bilateral trade agreements. For its part, the Trump Administration has indicated a willingness to explore a free trade agreement with the UK, which could eventually have a positive impact on trade numbers for both countries.

Additionally, due to Brexit, UK exports will lose their price competitiveness in the EU once import tariffs are imposed on imports from the UK. In theory, this will have a positive spillover effect on trade between the U.S. and the EU—U.S. imports into the EU will become as price competitive as those from the UK. For example, the EU imposes a 6.5-percent tariff on imported polyethylene (PE) having a specific gravity of less than 0.94 (HS 3901.10) from non-EU countries. Imports from the UK into the EU for the same product will face this same tariff, making U.S. product more competitive in the EU.

Fluctuations in the exchange rates between the U.S. dollar and the British pound will also continue to impact U.S.-UK, but this has always been the case, and it’s unlikely that there will be any sudden, drastic shifts in the current relationship between the two currencies. A weaker pound means U.S. imports to the UK would cost more and therefore reduce U.S. exports. While the pound sterling has been on the decline from 1.6 at the close of 2013 to 1.5 in 2015, last year’s data does not show a dramatically weakening pound sterling. In fact the U.S./UK foreign exchange rate rose from 1.2 in January to 1.3 in December. All things being equal, it is unlikely that the U.S. dollar and pound sterling will be at parity, meaning the U.S./UK foreign exchange dynamics will not automatically point to a strengthening U.S. dollar causing U.S. exports to be priced out of the UK market any time soon. Political stability and economic performance are key factors affecting exchange rates. For all that it will change, it is unlikely that Brexit will lead to political instability or economic turmoil of a magnitude that would cause a major shift in the value of the pound against the dollar.

On the regulatory side, since trade in plastics covers the whole plastics supply chain, regulatory changes in the UK that come as a result of Brexit—particularly those that will affect our industry’s end markets—have the greatest potential of any of the three aforementioned factors to impact U.S. plastics exports. Concerns have been raised previously about whether regulatory changes after Brexit will be pro- or anti-growth. For example, positive changes in regulations governing housing that reverse the steady decline in new construction in the UK would boost plastics trade, beginning with plastics used as home construction materials to captive products that are contained in finished products like household appliances. Other, less friendly changes to regulations in the UK could have the opposite effect.

While the ongoing Brexit negotiations continue to raise uncertain outcomes with regard to regulations and other economic factors, in 2017 through October (the latest available trade data) the U.S. had a $282.4 million trade surplus in plastics with the U.K.—exports were $962.5 million and imports $680.1 million. We can expect that at the end of 2018, U.S. plastics trade numbers with the UK for the full year would look much the same as they do today.