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

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Platts

Energy: What to Watch in 2019

S&P Global Ratings

S&P Global Ratings' Global Outlook 2019

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.

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report

Energy: What to Watch in 2019


S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.

S&P Global Ratings' Global Outlook 2019

 A deep dive into S&P Global Ratings’ insights on the credit outlook for 2019 and what are the risks and vulnerabilities to look out for.

Access all the Global Outlook
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