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Credit Conditions North America: U.S.-China Trade Tensions Threaten Favorable Conditions

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Credit Conditions North America: U.S.-China Trade Tensions Threaten Favorable Conditions

Highlights

Credit conditions in North America remain broadly favorable, with the current credit cycle continuing its historic run. But the risk that the U.S.-China tariff dispute will devolve into an all-out trade war outweighs the threats posed by monetary policy normalization and the prospects for widening credit spreads for borrowers in the region.

The U.S. and China have escalated their tariff dispute, and the two sides show little sign of forging a compromise.

Beyond the possibility of a full-blown trade war with China and increased tensions with the U.S.’s other largest trade partners, we see rising corporate debt, the prospect that borrowing costs will rise faster than we forecast, and imbalances in Canada’s housing market as the biggest risks to North American credit conditions.

Through August, nearly all indicators of financing conditions remained favorable for corporate borrowers, and we expect the default rate to decline through the first half of next year.

With U.S. economic momentum remaining solid, S&P Global Ratings expects above-trend GDP growth this year and next—at 2.9% and 2.3%, respectively. The strong labor market, still-bullish consumer confidence, and favorable manufacturing sentiment all bolster this view.

While the direct effects of the U.S.-China trade dispute varies—and remain manageable for now—borrowers face some late-cycle dynamics, including the prospect of widening credit spreads and reduced liquidity

While credit conditions in North America remain broadly favorable—with the current credit cycle continuing its historic run—the risk that the U.S.-China tariff dispute will devolve into an all-out trade war outweighs the threats posed by monetary policy normalization and the prospects for widening credit spreads for borrowers in the region.

With the U.S. making good on its threat to impose tariffs on another $200 billion of Chinese imports—with tariffs of 10% starting Sept. 24 and rising to 25% in the New Year, unless the two countries compromise—China has again vowed to retaliate. This increases the likelihood that the White House will impose tariffs on another $250 billion-plus in goods from its largest trading partner. At that point, almost every Chinese product Americans buy would be subject to tariffs.

For China, a response of tariffs of 5%-10% on another $60 billion of U.S. goods—together with levies on the $50 billion of goods already announced—means that about 85% of the country’s American imports (which totaled $130 billion last year) would be taxed. S&P Global Ratings believes this escalation will further weigh on investor sentiment and global economic growth.

Global trade-data specialist Panjiva, part of S&P Global Market Intelligence, believes that the effect of the new tariffs on American consumers and companies will depend in part on whether there are alternative supplies to China. Among consumer products, the most exposed are home appliances (59% of imports come from China). For corporations, it’s components for PCs and related devices (70%).

From a credit conditions perspective, we are concerned about the indirect effects on investor and consumer confidence—as well as the risk that China will retaliate with non-tariff actions, given the Chinese government’s precedent of discouraging of citizens to buy foreign goods, as happened when sales of Japanese cars tumbled in late-2012 when the countries engaged in a territorial dispute, and again last year during the country’s unofficial boycott of South Korean consumer goods.

We estimate that an escalation to 25% tariffs on all nonfuel goods between the two largest economies, with a shock to confidence added in, could shave a cumulative 1.2 percentage points off U.S. GDP in 2019-2021.

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