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Global Trade at a Crossroads: If U.S. Tariffs Trigger a Trade War With China, Corporate Credit Will Suffer

United States President Donald Trump's long-threatened package of trade sanctions on China have landed, but a trade war isn't yet inevitable. S&P Global Ratings believes China's response will be the key determinant. The threatened tariffs and investment restrictions on China won't likely cause deep pain to the Chinese economy, nor, in our view, would they materially affect corporate borrowers in either country. A greater risk is that the situation escalates from here.

So far China's response has been relatively measured, indicating potential tariffs on about $3 billion of U.S. imports. The question now is whether China will take additional retaliatory action, including broader tariff and non-tariff restrictions on U.S. business or investment in China. Such moves could escalate into a full-blown trade war between the world's two largest economies--with spillover effects on global business confidence, investment, and growth.

Key Takeaways

  • The Trump administration intends to impose tariffs on $50 billion-$60 billion of Chinese imports, lodge a WTO dispute against China's technology licensing, and restrict Chinese investment in strategic industries and technologies.
  • Even assuming a high 25% tariff rate on the likely targeted imports, our calculations show the overall impact on Chinese corporates and banks will be contained.
  • The impact is limited because the U.S. represents only about 15% of China's goods exports, and China's domestic activity now drives its economic growth rather than exports as in earlier decades.
  • China's response so far has been measured, flagging potential tariffs on about $3 billion of U.S. imports. However, the situation remains dynamic, with the risk of further tariffs and restrictions on investments and market access.
  • A trade war between the world's two largest economies would hurt global confidence, economic growth, and credit.

The U.S. president announced on March 22 three separate actions the administration will take in response to what the U.S. believes are China's unfair trade practices. These practices are described in the U.S. Trade Representative's Section 301 (Trade Act of 1974) investigative report on China's acts, policies, and practices related to technology transfer, intellectual property, and innovation. The three actions are:

  • Tariffs. The Trade Representative will publish a proposed list of products and any tariff increases within 15 days of yesterday's announcement. After a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases.
  • WTO dispute. The Trade Representative will pursue dispute settlement in the World Trade Organization (WTO) to address China's discriminatory technology licensing practices.
  • Investment restrictions. The Secretary of the Treasury will address concerns about investment in the U.S. directed or facilitated by China in industries or technologies deemed important to the U.S.

Still, at the same press conference, President Trump also said he is open to negotiations with China. Indeed, the administration demonstrated its willingness to negotiate on trade with its retreat on the recently announced steel and aluminum tariffs. Earlier on March 22, the U.S. trade representative said the European Union, along with Argentina, Australia, Brazil, and South Korea, will be initially be exempted from the 25% steel and 10% aluminum tariffs scheduled to come into effect today (March 23). (Canada and Mexico had earlier been exempted.)

As of now, our base case for limited ratings impact doesn't factor in a Sino-U.S. trade war. China has so far flagged that it may impose tariffs on 128 U.S. products, including pork, recyclable aluminum, fruit/nuts, wine, and steel pipes. However, these products represent a relatively modest percentage of trade from the U.S. If China's response is more retaliatory, we would re-analyze the impact on industry sectors in both countries.

China-U.S. Exports And Imports

The $50 billion-$60 billion targeted by potential tariffs could affect up to 10%-12% of Chinese imports to the U.S. This is based on the major product categories for U.S. goods imported from China last year, which totaled $506 billion (see chart 1). As the trade dispute appears to be about technology and intellectual property, it stands to reason that the products subject to tariffs could well be drawn from the computers and semiconductors, cell phones, and industrial machinery categories. However, it is unclear whether the tariffs will focus on just one or two product categories or be more widespread; in the former, the impact could be more material for players in those sectors.


Chart 2 below helps put China's initial reaction into perspective. The major product categories for U.S. goods exported to China totaled $129 billion last year. The substantial trade deficit with China is one of the contributors (others being intellectual property, etc.) to the trade dispute. Based on the composition of U.S. exports to China, further retaliatory action will hurt the most if focused on the five major categories of industrial machinery (including farm equipment), metals, chemicals and minerals, agricultural produce (e.g. sorghum), commercial transport (e.g. aircraft), and auto.


Macroeconomic Impact On China*

Paul Gruenwald, +65 6216 1084,

  • China's trade openness and its reliance on trade for GDP growth both peaked over a decade ago. Its growth story now is mostly a domestic one.
  • The country's fast-growing services deficit has become the driver--though not the largest component--of its trade story. Recent capital controls have been partly responsible for a slowdown in services trade growth.
  • China's trade with the U.S. is an outlier in terms of the large surplus, but is also increasingly influenced by a services deficit.
  • China's external imbalances metrics compare favorably with its peer group.