May. 14 2019 — The trade dispute between China and the U.S. has reignited with an exchange of tariff impositions. On May 10, 2019, the U.S. raised the tariff rate to 25% from 10% on $200 billion of goods imported from China effective immediately, excluding goods-in-transit. On May 13, 2019, China responded by announcing four tiers of 25%, 20%, 10% and 5% tariff rates on $60 billion of goods imported from U.S. effective June 1, 2019. The same day the U.S. Trade Representative requested for public comments on a proposal to impose up to 25% duty on further imports from China valued around $300 billion.
We reiterate our view that the first-order impact on credit is generally low to moderate for issuers in both countries. We hold this view even in the scenario of both countries imposing 25% tariffs in all goods imported from each other. Both countries have diversified export markets. Their own domestic markets are very large and businesses still cater to them; and a large number of rated corporates still have some flexibility in managing their costs, including, in some cases, the option of passing on the additional expense from tariffs to customers.
However, while the short-term impact of higher tariffs is manageable for both countries, the longer-term effects on growth prospects may be underestimated. The impact on business confidence has been quite significant as reflected in the recent reaction in equity markets. This in turn could dampen the investment appetite and have a flow-on effect on upside credit prospects.