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.