Europe's chemical sector is caught in a precarious waiting game.  U.S. tariffs on imports from Canada and Mexico came into force on March 4, 2025, after they had been postponed for 30 days. Imports of oil and energy products are taxed at 10%, while an additional levy on Chinese goods has doubled to 20%. So far, tariffs on products from the eurozone are limited to steel and aluminum imports. However, President Trump hinted that he plans to impose 25% tariffs on EU imports soon, which increases the risks of a trade war.

Tit For Tat Can Backfire

U.S. chemical producers are vulnerable to retaliatory tariffs.  Due to its energy and feedstock cost advantages, the U.S. is a net exporter of chemicals, with petrochemicals and derivatives--including plastic resins--constituting more than half of the country's chemical exports. According to the American Chemistry Council, the U.S. chemical industry's trade surplus with Canada and Mexico in 2023 was $25.3 billion, while the trade surplus with China was $2.2 billion. The industry's total trade surplus in 2023 amounted to about $30 billion. In the same year, the U.S. ran a chemicals trade deficit of approximately €6.5 billion with the EU, which is small, compared with trade deficits in the machinery, vehicles, pharmaceuticals, and electronics sectors.

Europe relies on the U.S. as its largest export market for chemicals.  According to the European Chemical Industry Council (Cefic), the EU exported chemical products worth of €37.7 billion--16.7% of its total chemical exports--to the U.S. in 2023 (see chart 1). These products mainly included organic chemicals (active ingredients used for pharmaceutical production), plastics, and specialty chemicals. Yet chemicals account for only about 10% of EU exports to the U.S., surpassed by pharmaceuticals, machinery and equipment, automotive, and electronics. This limits the risks of severe direct short-term shocks to the sector.

Chart 1

For now, the direct effects of tariffs on our ratings appear contained.  Unlike smaller players, many large rated European chemical companies, for example BASF SE, follow a "local-for-local" strategy and operate production hubs in the U.S., which minimizes their exposure to tariffs. These production facilities cover local demand directly, meaning the respective companies' reliance on imports from China, Mexico, or Canada is limited. A weaker euro could cushion export margins further.

Proposed tariffs on fertilizers and crop protection products would destabilize trade and increase price volatility for U.S. farmers.  According to S&P Commodity Insights, U.S. fertilizer imports and exports depend on the nutrient (see chart 2):

• Potash: S&P Commodity Insights estimates that the U.S. imports 80%-85% from Canada. The rest comes from Russia and Belarus, with the latter currently subject to sanctions.
• Nitrogen: The U.S. is a net importer. Primary urea suppliers--such as Russia, Qatar, and Saudi Arabia--are currently not affected by tariffs. However, northern U.S. states--including Montana, Dakota, and Minnesota--fully rely on Canadian imports.
• Phosphate: U.S. trade is balanced. Tariffs on China will have minimal effects due to existing export restrictions in China. That said, trade between the U.S. and its traditional phosphate trading partners, Canada and Mexico, could change.

Chart 2

Indirect Risks Loom Large

Tariffs could increase supply chain risks.  Specialty chemical producers are particularly affected if their U.S. production relies on imports from countries that are exposed to higher tariffs. Companies that depend on Chinese critical raw materials, for example rare earths for catalysts or titanium dioxide for paints, or Canadian potash for fertilizers could experience significant cost increases if tariffs disrupt flows. Finding alternative routes or suppliers in Southeast Asia or the Middle East might ease bottlenecks but would come with additional costs. If companies do not pass these on to customers, pressure on margins could rise.

Indirect demand destruction for key end-use products would be substantial in the chemical industry.  According to Cefic, about 60% of chemical demand in Europe hinges on downstream industries, such as automotive, machinery, and electronics--in other words, sectors with high U.S. export exposure. We estimate that tariffs could put about 17% of affected European and U.S. carmakers' EBITDA at risk.

Lower economic growth, one of the secondary effects of higher tariffs, can have a larger effect on chemical companies than primary effects and might dampen their near-term recovery prospects.  Our high-level analysis reveals that tariffs will likely lead to slower GDP growth and higher inflation rates in Europe. The chemical sector's close linkage to macroeconomic cycles means slower GDP growth will translate into reduced end-market demand for chemical products. In our revised macroeconomic forecast, we project that GDP growth in the U.S. will be approximately 0.6% lower by early 2026 than we had previously estimated, while our GDP growth expectations for Canada and Mexico face downward revisions of 2%–3%.

We expect China's GDP growth will decelerate to about 4% over 2025-2026, mainly due to U.S. tariffs.  Additionally, we think tariffs will amplify downward pressure on prices in China and result in the depreciation of the renminbi. Our forecast of China's growth trajectory remains broadly unchanged, compared with our previous base-case scenario, as we had already incorporated the 10% tariffs in our assumptions.

Tariffs could increase trade flows between China and Europe.  This is because tariffs on China--the largest market for chemicals--could dampen the country's economic recovery prospects, limit demand for chemicals, and increase excess supply, given the sizeable capacity expansions in recent years. Additionally, Chinese chemical exports could become more price-competitive globally due to China's weaker currency.

This could result in a rising amount of low-cost products entering the European market.  Competitive pressure on European producers could therefore intensify, as was the case in 2024. The producers of petrochemicals--such as polyethylene terephthalate (PET), polypropylene, and other plastic resins--would be particularly affected. Conversely, some European chemical producers could benefit from gaining access to lower-cost raw materials--either by switching to cheaper Chinese products or by strengthening their negotiating positions with European suppliers.

European fertilizer producers could initially benefit from higher global benchmark prices, despite their relatively modest exposure to the U.S. market.  Over the short term, tariffs will likely increase fertilizer prices in the U.S. Since fertilizers are traded globally, benchmark prices would also rise. Despite negative volume effects due to pressure on the already challenging outlook on farm economics caused by soft commodity prices, an increase in benchmark prices would strengthen the revenues and profits of fertilizer producers that are exposed to export markets. Yet it would also increase price volatility. Demand for fertilizers, particularly more discretionary potash, could suffer. Over time, demand destruction could lead to a correction in prices, in turn strengthening affordability and fertilizer offtake.

Tariffs On Europe Could Have Far-Reaching Effects

Although we expect that many chemical companies can absorb additional costs or at least pass on part of the expenses to customers, tariffs could impair volumes and profitability.  This particularly affects small speculative-grade companies with limited diversification in their supplier and customer base because they are more vulnerable to disruptions in global trading flows. S&P Global Market Intelligence estimates that a blanket U.S. tariff of 10% would result in export losses of $43 billion for the EU over a five-year period. This corresponds to 7.5% of the EU's total nominal exports to the U.S. in 2023.

Potential retaliations from other countries could increase the risks of a trade war and weaken the global economy.  Chemical companies that mainly produce in the U.S. and that rely on large customer bases in China, Canada, and Mexico will suffer. Apart from anything else, higher tariffs would increase inflation in the U.S. and delay rate cuts, which could stifle global growth and chemical demand in 2025.

• China already reacted with an additional 15% tariff on U.S. coal and liquefied natural gas, and a 10% levy on U.S. crude imports from Feb. 10, 2025. This was followed by 15% tariffs on a wide range of U.S. agricultural products, including certain meats, grains, cotton, fruit, vegetables, and dairy products.
• Canada announced its plan to implement a 25% tariff on C$30 billion ($20.7 billion) of U.S. goods immediately, followed by an additional C$125 billion ($86.2 billion) in 21 days that will cover a very broad range of products.
• Mexico will announce retaliation measures soon.

Europe's agility and the Trump administration's next move will be critical.  Europe's chemical sector must prepare for a prolonged period of volatility and strategic adaptation to address supply chain changes and global competition. Some chemical companies are already pivoting to "tariff-proof" strategies that focus on:

• Recycled or bio-based products, which face fewer trade barriers due to sustainability mandates;
• Circular economy investments, for example recycled plastics; and
• Forming alliances with local players in key markets--such as China, the Middle East, and the U.S.--to share risks and gain access to regional markets.

Fertilizer companies will need to adjust to more volatile trading conditions.  Volatile prices and volumes could affect margins, working capital, and cash flows beyond typical cyclical patterns. Retaliatory tariffs--for example on U.S. export crops, such as soybeans and corn--could reduce affordability and farmers' confidence. Tariff-related effects on currencies will also play a role. While a strong U.S. dollar will reduce export competitiveness for crop products from the U.S., it could marginally offset the effects from tariffs on imported agricultural ingredients.

Related Research

• Asia-Pacific Economies Likely To Be Hit By U.S. Trade Tariffs, Feb. 23, 2025
• Macro Effects of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates? Feb. 6, 2025
• Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico? Jan. 30, 2025
• Asia-Pacific Chemical Sector Outlook: The Downturn Is Too Deep To Exit In 2025, Jan. 23, 2025
• Industry Credit Outlook 2025: Chemicals, Jan. 14, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024
• Europe's Chemical Sector: Spotting Signs Of Recovery, April 11, 2024