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Global Trade At A Crossroads: U.S. Tariffs on $200 Billion Chinese Imports Will Further Dampen Investor Sentiment

Melbourne, Sep. 18 2018 — The U.S. has made good on its threat to impose tariffs on another $200 billion of Chinese imports. The tariff rate of 10% from Sept. 24, 2018 will rise to 25% on Jan. 1, 2019 unless the two countries come to a compromise. S&P Global Ratings believes this escalation will further dampen investor sentiment and possibly reduce future global growth.

Together with the previously announced trade penalties on $50 billion of Chinese imports, the total of $250 billion represents about half of the value of China's annual exports to the U.S. We expect China to respond by imposing tariffs of 5% to 25% on a further $60 billion worth of U.S. goods. This together with the $50 billion of goods for which tariffs have already announced, implies that about 85% of its American imports (totaling $130 billion in 2017) could be taxed.

For China, we continue to expect the great majority of our rated portfolio will absorb the direct impact arising from the trade dispute. Outside the rated pool, the more U.S.-reliant exporters of capital goods and consumer goods could be adversely impacted. In addition, should trade flows decrease as a consequence of the escalating tensions, players in transportation sector could come under some pressure. This includes the cyclical (e.g. shipping) and infrastructure (e.g. ports) segments.

For the U.S., global trade-data specialist Panjiva, our sister division, believes the impact of the new tariffs on American consumers and corporates 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%).

For the rest of the Asia-Pacific, the ripple effects will be felt in the supply-chain network (see "Global Trade At A Crossroads: It's Hard To See Any Winners In A U.S.-China Trade War", published on RatingsDirect on Sept. 5, 2018). Several trade-oriented Asian economies are integrated into the global supply chain for goods affected by the trade war. In particular, South Korea, Japan, and Taiwan are key trading partners for China and significant members of the regional goods supply chain, while China is now the biggest trading partner for most of Asia-Pacific. Another effect could come from reduced demand from the U.S. and China because lower growth in these two large economies would weigh on Asia-Pacific economies.

From a credit conditions perspective, we are concerned about the indirect impact on investor and consumer confidence, and the risk that China might retaliate with non-tariff actions. We note that trade tension is already weighing on the Chinese currency and stock market sentiment. With China running out of room to retaliate on goods (i.e. 85% versus 50% coverage), the country could opt to pursue non-tariff actions affecting services and investments from the U.S. The U.S. enjoys a net services surplus with China. Such retaliation would further exacerbate investor worries, damaging business and consumer confidence, and growth prospects.