Dow Chemical Company

A chemical companies' chemical company, most of Dow Chemical's sales are intermediate products that other companies integrate into their own products rather than consumer goods. As a consequence, Dow Chemical has been able to effectively inoculate itself against the rising costs of industrial inputs.

Only BASF is a larger manufacturer of chemicals. But Dow Chemical is very heavily invested in hydrocarbons. Deriving approximately 50% of its sales from basic and performance plastics, the company needs access to enormous quantities of petroleum products even though its Hydrocarbons and Energy segment only accounts for 13% of sales.

Dow Chemical tends not to make large capital investments on its own. Rather, the company leverages its extensive intellectual capital to make joint projects work using someone else's capital. Dow Chemical is effectively moving from the restrictive operating environment in Western Europe and the United States and making increasing investments in the Middle East and Asia.

Dow Chemical faces significant downside risks coming from increasing environmental regulation, litigation relating to past environmental pollution, and geopolitical risk that its Middle Eastern and Asian operations could be either confiscated or otherwise rendered unprofitable by autocratic governments.

Dow Chemical's downside risks are more than balanced by the continuing strength of its core plastics business as well as a strong history of technological innovation. While Dow Chemical is more tightly integrated with the risk of petrochemical supply disruption, it is also better positioned to benefit from sustained higher prices. Dow Chemical is a strong buy, but its obvious dependence on the global oil industry needs to be considered when constructing any portfolio. Don't buy lots of energy industry stocks and expect Dow Chemical to provide any significant diversification.

NAFTA's Effects on the Environment

Proponents and opponents of NAFTA have so hardened views of the treaty that it can be hard to gain a balanced view of its overall effect. One of the the areas of disagreement has been the treaty's effects on the environment.

On one hand, NAFTA established a norm of cooperation and created new institutions that can deal with the environment. The treaty prompted the consolidation of environmental legislation in Mexico from its formerly piecemeal implementation. With enhanced public participation, the treaty championed new initiatives. While many of the new standards were voluntary and heavily dependent on self-regulation, citizens gained a complaint mechanism and tools for dealing with persistent non-enforcement.

On the other hand, NAFTA demonstrated the ineffectiveness of governments outside of their jurisdictions. Many of the new institutions were underfunded and budget cuts in Mexico caused enforcement to lag. The dispute resolution mechanism is so poorly designed that its use actually seems to have discouraged future progress. Incomplete compliance and lack of sanctions have reinforced the reality that outcomes will not be transformed anytime soon.

At the end of the day, NAFTA's greatest effect on the environment will come about through the wealth effect on Mexico. The treaty has driven the dramatic rise of the export industry in Mexico and created millions of jobs in spite of the Peso Crisis and intense Asian competition. Increased industrialization actually led to a sharp increase in pollution, but the long term trend is likely to be precisely the opposite. The world's wealthiest countries are also the world's cleanest, because people are unwilling to live in a dirty environment if they can afford to clean it up.

China's Growth Comes at Environmental Cost

Businessweek reports that China's state media released data that show the country's environment is deteriorating.

While "spring sandstorms" helped to reduce air pollution by blowing the problem away from the area it was produced, the country's water supply continues its downward spiral. According to China's own "watered down" standards, less than 70% of major Chinese cities have water that ranks as "qualified". This is a drop of 5% from just a year ago. But the truly frightening truth of China's rivers and streams is obscured by these figures.

There have been a series of industrial accidents that polluted Chinese rivers which the government ineffectually attempted to cover up. One of the accidents was so bad that no amount of government intervention could disguise. The northeastern city of Harbin, with well over one million people, lost its only source of water when an industrial plant upriver completely poisoned the river with a massive dumping of benzene, a toxic chemical that is known to cause cancer.

China's political leaders are absolutely correct when they say that their efforts to clean up the environment are being effectively hamstrung by the need to continue economic growth. China's economy has grown faster than 10% per year for the last five years, but the country's primary competitive advantage in the international arena continues to be the availability of hundreds of millions of workers willing to work for almost nothing. China has made admirable progress in the urban areas that export to consumers around the world, but the countryside remains a decided work in progress.

The cleanest countries in the world are also the richest. This is no accident, as wealthy people are far more likely to pay to clean up their environment than the poor. China's problem is that the country has so many citizens trying to make a better life that they will irreparably damage their environment before they have enough money to repair their mistakes.

The environment has gained tremendous cachet in the West, perhaps most notably with the super trendy cleantech industry. China's growth is going to happen. At this point, only significant technological progress is going to enable that process to occur with minimal environmental disruption.