Global Impacts of China’s Chemicals Buildout

Chemicals are key building blocks of nearly all manufacturing industries, making them a top priority in China’s broader drive for industrial competitiveness and supply chain self-sufficiency. This report explores the causes and ramifications of China’s expansive chemicals buildout.

China’s industrial self-sufficiency drive massively expanded its chemicals capacity but damaged the industry in the process. China’s chemicals output has grown 18-fold over the past 25 years and now represents over 45% of global capacity for basic chemicals and plastic resins.¹ But this dramatic growth harmed the industry’s own financial performance. China’s property sector collapse beginning in 2021 weakened demand for chemicals right as investment in production capacity accelerated. Supply growth became increasingly untethered from demand, pushing down prices, piling up inventories, and shrinking profits.

The rapid growth and distress in China’s chemicals sector have had major impacts on the global competitive landscape. The decline in China’s imports has thus far been most disruptive, resulting in lost sales for foreign producers in China, the world’s largest chemicals market. At the same time, China’s exports are rising, most of all to emerging markets, where China is making rapid market share gains displacing incumbent producers. Even where China is still a net importer, the size of China’s chemicals sector is so vast that its market dynamics can exert pressure on world prices and profit margins.

Beijing has acknowledged the supply-demand imbalance, but Chinese policymakers are reluctant to face the economic, social, and supply chain repercussions of large-scale closures. Instead, Beijing’s ongoing “anti-involution” campaign seeks to restore profitability by ending price wars, upgrading outdated facilities, and building more integrated industrial clusters. This may slow capacity additions on the margins, but the sector is unlikely to meaningfully consolidate in the near term. Instead, Chinese policymakers will push it to emerge more efficient, with greater economies of scale, more modern technology, and stronger linkages to upstream refineries and higher-value downstream products.

Global chemicals producers are unlikely to benefit from China’s efforts to stabilize its industry. New chemicals investment is slowing in China, but the degree of slack in the industry suggests that fundamentals would likely take years to resolve. The global market will not return to balance without stronger demand growth or capacity reductions somewhere. High-cost regions such as Europe and Northeast Asia are now bearing the brunt of those pressures. In the meantime, ongoing efficiency upgrades will likely lower China’s marginal production costs in commodity chemicals, better equipping it to sustain price competition. While the state’s fiscal and financial capacity has limits, chemicals are key to China’s overall industrial strategy, increasing Beijing’s tolerance for low investment returns in the sector and providing a safety net that makes firm exit less likely. The feedstock disruptions caused by the Iran war have shaken up the global price environment but have likely only further entrenched Beijing’s commitment to supply chain redundancy and resilience, making Chinese policymakers even more reluctant to cut domestic capacity.

Global producers also face increasing pressure as Chinese companies push into segments they have long dominated. China is pursuing a deliberate strategy to boost chemicals output and depress prices to strengthen its downstream industrial ecosystem. This means that competitive pressures originating in chemicals will likely spread to a wide range of industries that consume chemicals as a key input. In addition, Chinese producers are becoming more vertically integrated and innovative, so competition will likely continue migrating into high-end specialty chemicals, where profit margins generally remain higher for foreign producers.

The complex structure of the industry will make protection difficult with conventional trade tools. Individual countries using bilateral defenses to target China will struggle to prevent trade diversion or provide meaningful price relief for domestic producers in the timeframe needed to restore competitiveness. Safeguard tariffs that target all imports (such as those the EU is now debating) could be more effective at protecting domestic producers but would create trade frictions with other advanced economies (i.e. such as by potentially disrupting the supply of raw materials) and would do little to address major sources of pressure on the industry: China’s declining imports, third-market competition, and chemicals content embedded in end-products ranging from autos to appliances to toys.

Effective policy responses to this multidimensional challenge will require a broad range of countries to coordinate along full value chains. Robust international cooperation is necessary because chemicals supply chains can cross borders many times, and coordination across production nodes is needed to ensure that trade defenses to protect upstream inputs don’t put downstream producers at a disadvantage. Policy solutions will also have to balance each country’s reshoring goals against the complex interests of multinational chemical producers who operate and trade across many jurisdictions with competing priorities, including in China.