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Global Trade At A Crossroads: U.S. Steel And Aluminum Tariffs Raise Risk Of Retaliatory Spiral

U.S. President Donald Trump's impending tariffs would have minimal direct macroeconomic impact but threatens global trade. S&P Global Ratings believes the U.S. tariffs of 25% on steel and 10% on aluminum from all countries except Canada and Mexico would have a mixed impact on U.S. corporate borrowers. Domestic steel and aluminum producers are likely to benefit while certain other sectors would suffer from higher input costs.

Posing a higher risk is the specter that some of the country's trade partners will match the tariffs with targeted retaliation. The retaliatory spiral could lead to a breakdown in the global rules-based trading system and raise the risk of an all-out trade war, eventually hurting exporters both in the U.S. and globally.

We believe the tariffs will encourage U.S. production of steel and aluminum, raise utilization rates, and keep domestic prices elevated over the next 2-3 years. Any gains could be temporary, though, should the U.S. return to a less-protectionist stance. As such, we could see positive rating actions in the next 12-24 months among U.S.-based metals and mining downstream borrowers most exposed to steel and aluminum prices—particularly those in the 'B' ratings category and other speculative-grade companies (see "Trump Tariffs Forge Better Credit Quality For U.S.-Based Steel And Aluminum Producers With A Protectionist Stance," published March 2, 2018).

On the downside, aerospace and defense companies use aluminum extensively in commercial and military aircraft, although we don't expect the effect on their margins to be significant. Meanwhile, the American auto manufacturers we rate buy most of their steel from U.S. producers under multiyear contracts with some degree of price protection, so we expect no immediate effects (see table 1). We believe that the "transplant" operations of overseas auto manufacturers in the U.S. could be more exposed to the proposed tariffs, however.

Table 1

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From a macroeconomic standpoint, the direct effects of the tariffs on U.S. GDP will likely be minimal. This is because the levies cover a small fraction of total goods imports--especially given that the tariffs exclude Canada and Mexico, the respective number 1 and 4 exporters of steel to the U.S. (see chart 1). Last year, the U.S. imported $29 billion of steel and $17 billion of aluminum--a small fraction of the $2.4 trillion of total goods imported (and total U.S. imports of $2.9 trillion). Not surprisingly, our economists estimate that the direct impact of the new tariffs is likely to be very small.

Chart 1

image

Some market participants see the proposed tariffs as a trade action against China. However, data from the U.S. Department of Commerce's section 232 report (titled "The Effect of Imports of Steel on The National Security", Jan. 11, 2018) indicates that only 2.1% of U.S. steel imports by metric ton (annualized 2017) is sourced from China (see chart 1). By tonnage, China ranks just eleventh among the sources of U.S. steel imports. Admittedly, the corresponding ratio for aluminum is higher, at 9.5% (see chart 2), but the tariff to be imposed is lower (10%).

Chart 2

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We note that U.S. steel imports in 2017 of 34 million tons accounted for less than 2% of the 1.7 billion tons of global steel production. Similarly, the U.S. aluminum import of 7.2 million tons is equivalent to less than 6% of 126 million tons of global primary production. Consequently, fears about surplus steel and aluminum, which otherwise would have been exported to the U.S., flooding global markets and pushing prices significantly down may not be well founded.

Besides the corporate sector, we see the imposition of tariffs potentially causing U.S. states and municipal borrowers to re-examine their recent budget forecasts. That's because a shift toward protectionist trade policies would have negative implications for most state economies.

Risk Of A Trade War

These tariffs raise the risk of retaliation from other countries that could come in several forms:

  • A trade case adjudicated by the World Trade Organization (WTO),
  • Credible threats on politically sensitive industries,
  • Tariff/nontariff trade restrictions by other countries, or
  • Some combination of the above outcomes.

All the outcomes would be negative given that the global business environment has just recently enjoyed a boost in confidence from tax cuts. WTO member countries could challenge the U.S. that its tariffs are not eligible under General Agreement on Tariffs and Trade (GATT) Article XXI ("essential security interest exception"). The WTO may rule that complainants can claim compensation or take other retaliatory steps. That said, the process could take years to conclude.

As of now, our base case does not factor in an all-out trade war. In that case, the U.S. Federal Reserve could choose to overlook the impact on overall inflation from higher tariff measures. Nevertheless, it would be hard to ignore the pressures on wages in the durable manufacturing sector that is already flirting with a 17-year low unemployment rate and upward price pressure on downstream businesses.

Naturally, in the event of significant retaliatory response by U.S. trading partners, we will be analyzing the impact of such actions on industry sectors, countries, and the global economy.

Sector Impact

We see near-term effects of the tariffs for the following sectors:

Aerospace And Defense

Christopher DeNicolo, CFA, Washington, DC (1) 202 383 2398 christopher.denicolo@ spglobal.com

Tariffs on steel and aluminum, particularly the latter, pose some risk for the U.S. aerospace and defense sector. Aluminum is used extensively in both commercial and military aircraft manufacturing (although the proportion has been declining as the use of composites increases). So, a large tariff could weigh on manufacturers' margins while also disrupting supply. However, the effect on margins will likely be muted by provisional clauses covering material cost escalation--which exist in many supplier and manufacturer arrangements, in addition to customer contracts.

Also, although aluminum is the primary structural material for aircraft, it represents a relatively small proportion of the overall aircraft value versus technology. This is particularly true for military aircraft, with their array of sensors, electronic countermeasures, and weapons systems. Furthermore, military contractors are generally required to use U.S. sourced materials to build weapons--hence the rationale for implementing these tariffs from a "National Security" perspective.

For commercial-aircraft makers, the bigger risk is the potential for retaliatory actions from major international customers, such as China, that could hurt sales to these countries. In turn, the Chinese government aviation regulator approves all aircraft imports for Chinese airlines, which are major customers of Boeing, and could conceivably choose to encourage more purchases from Airbus. We have already seen a similar reaction for defense purchases when the Canadian government cancelled an order for Boeing F18 fighters after the Trump Administration said it would levy a heavy tariff on Bombardier's C-Series commercial jet (it was subsequently determined the tariffs were not allowable under the relevant trade rules).

Auto Manufacturers And Suppliers

Nishit Madlani, New York, (1) 212 438 4070 nishit.madlani@ spglobal.com

Lawrence Orlowski, New York, (1) 212 438 7800 Lawrence.orlowski@ spglobal.com

Katsuyuki Nakai, Tokyo, (81) 3-4550-8748; Katsuyuki.nakai@spglobal.com

We don't expect that the tariffs alone will increase the likelihood of rating downgrades for U.S. automakers and suppliers over the next 2 years. Although the levies represent an additional headwind for automaker profitability over the next 2-3 years, we believe they will have a limited direct impact on credit quality for rated U.S. auto issuers for now.

American auto manufacturers source 80%-90% of their steel, and a majority of their aluminum from the U.S. Based on our preliminary estimates, if automakers pass on tariff-related cost increases entirely to consumers, it may not have a significant effect on the average transaction prices, and therefore, may only have a negligible impact on monthly loan or lease payments. Our estimates incorporate a tariff-related increase of about $240 on the average price of a vehicle because we assume about $700-$900 of steel and about $300-$500 of aluminum used on an average light vehicle produced in the U.S. Although negligible, it still represents an additional headwind to auto sales--along with rising interest rates and lower used prices that are likely to lead to a marginal decline in light vehicle sales in the U.S. in 2018 and 2019, in our view.

We still think automakers' increased focus on improved driver-assisted technologies and infotainment features to secure their competitive positions should support steady transaction prices despite the reduced affordability for customers. We incorporate modest declines in automakers' EBIT margins in our forecast for 2018 and 2019 to account for:

  • Higher expected commodity prices (mainly for steel),
  • Large engineering expenses for the development of autonomous and electrification-related technologies,
  • Increased regulatory costs, and
  • Elevated pricing pressure in several key markets (which may be partly offset by improved cost efficiencies).

We also anticipate that consumers may modestly shift their preferences toward somewhat less-profitable vehicles in certain sub-segments, especially as affordability shrinks. The erection of steeper international trade barriers could also increase vehicle costs and trim automakers' sales volumes and profit margins.

Nearly all rated automotive suppliers use index-based agreements and we believe most of them will continue to negotiate any pricing adjustments such that most of the steel and aluminum related costs are borne by the automakers. Furthermore, we see no direct impact in 2018 given that the companies we rate buy most of their steel from U.S. producers, with base prices predominantly set with suppliers via long-term contracts agreed to more than a year. Most automotive suppliers also have a fair amount of contractual pass-through mechanisms.

Still, a few suppliers will face near-term risk to cash flows, because there is often a lag (90 days, on an average) in recovery of commodity cost, between changes in spot prices. This could lead to incremental pressure for those that are currently increasing working capital to prepare for key product launches, especially for General Motors and Ford in 2018 and 2019.

For the European original equipment manufacturers (OEMs), we don't expect a material impact on the cost positions and margins, but there is a wider risk to imports into the U.S. from Europe if additional tariffs are added to cars. The U.S. is the number one destination of E.U. car exports both in terms of units (with a 20.4% share of E.U. exports in 2017) and of value (29.3% share). Also, the U.S. is the third-biggest exporter of cars to the E.U. in terms of value, representing a 15.4% share of E.U. imports in 2017, so there could be knock-on effects to U.S. car makers exporting to Europe.

Tariffs imposed on the imports of European cars in the context of tight pricing on the U.S. market, diminished consumer affordability, and a strong euro would hit the competitiveness of European vehicles. In addition some European OEMs, in particular the Germans, are investing in the development of autonomous vehicles for which they expect the U.S. market will be more receptive compared to Europe.

Many Asia-Pacific automakers have relatively large production bases in the U.S.; so, tariffs could add to their production costs as it pertains to imported steel. The negative effect on earnings has to be closely monitored, given that automakers are confronting strong price competition and have experienced a slowdown in demand in the American market.

Yet, we don't expect immediate rating impact on major Japanese or Korean OEMs, including Toyota, Honda, Nissan, and Hyundai. We believe U.S. production is generally around 10%-20% of total production for those automakers, and the cost increase will materialize over the next 1-2 years. Companies are also focusing on local procurement (Toyota said more than 90% of the steel and aluminum it purchases is from the U.S.). Therefore, the earnings impact from the tariff increase itself should not be significant in our view. However, earnings pressure could become severe if companies will face weaker demand or stronger price competition in U.S. auto market.

In addition, higher risk may come from a strong Japanese/Korean currency, which should drag down earnings of automakers in those countries. Also, any retaliation measures from China/Europe should have additional negative effect. A fierce trade war among U.S., China, and European countries would have significant impact for the auto industry since those regions and countries are the world's key important markets.

Building Materials

Thomas Nadramia, New York +1 212 438 3944 thomas.nadramia@ spglobal.com

The input costs of building material companies in the U.S. sector could be sensitive to prices of steel and aluminum imports if these metals are significant raw materials. This includes metal building producers; pipe producers/distributors; heating, ventilating, and airconditioning (HVAC) producers; and producers/distributors of metal fasteners and components.

Still, most of these rated issuers source at least a portion, if not a majority, of their steel and aluminum needs domestically. While we expect the tariffs will keep domestic prices high, to date companies have been able to mitigate the impact of higher metals costs because of their decent pricing power.

Capital Goods

Ana Lai, New York (1) 212 438 6895 ana.lai@spglobal.com

If trade disruptions spike commodity costs, rated U.S. borrowers could experience margin pressure. However, we expect they will largely be in a position to pass on raw-material inflation to their respective end customers via direct price increases. There may be a timing disparity between price and cost increases, though, which correspondingly will weigh on margins.

Chemicals

Paul Kurias, New York, (1) 212 438 3486, paul.kurias@spglobal.com

JunHong Park, Hong Kong, (852) 2533-3538, junhong.park@spglobal.com

The first-level impact on chemicals should be low. If the auto sector experiences a sustained negative impact, that could have a somewhat negative impact on chemicals. The negative impact on chemicals will likely be muted by the fact that only a portion of chemical output is sold to the auto sector. The chemical sector also is increasing its penetration into the auto industry. Therefore, chemical revenue from sales into the auto sector depends only partly on the number of autos sold.

Nevertheless, in the case of an escalating trade war with China, some commodities such as titanium dioxide and nitrogen fertilizers, of which the U.S. is a net importer, could have somewhat positive impact on the U.S. players. Separately, caustic soda is a product used to refine alumina into aluminum, and unless the global demand for aluminum materially shifts, we see limited impact on the chemicals sector at this stage.

Overall, we see limited exposures into these products on the issuers we follow.

Consumer Products

Diane Shand, New York (1) 212 438 7860 diane.shand@spglobal.com

Sophie Lin, Hong Kong, (852) 2533 3544, sophie.lin@spglobal.com

For U.S. consumer products, both durable and nondurables, we don't expect any material impact. Most consumer products companies outside the U.S. focus mainly on the domestic markets. That said, there is a potential risk of U.S. tariffs imposition on other products besides steel and aluminum, or disruption in global trade if other countries including China decided to respond with aggressive retaliatory trade measures. For example, the soy bean trade could be affected given that China is the largest soy importer in the world, although China has been sourcing less of its soy from the U.S., shifting to Brazil and Argentina.

In terms of steel, Campbell is the most exposed. Steel is 6% of its cost of goods sold (COGS). Steel is between 2% and 3% of the COGS of other packaged goods companies. We believe household and personal care companies are less exposed than packaged goods companies. With Campbell's pending acquisition of Snyder's-Lance, it will be less affected because soup will be a lower percentage of sales (to 26% from 34%).

For beverages, packaging is around 10% of total company COGS. Pepsi has indicated that cans are not a big part of its business and Coke has indicated its bottler system would absorb the impact. Bottlers could shift their packaging away from cans to bottles.

Constellation, Molson-Coors, and Whirlpool would be most affected by the tariffs because they may not be able to increase prices enough for offset the higher steel prices.

Overall, though, the tariffs will likely have a moderate impact on the sector.

Financial Institutions

Gavin Gunning, Melbourne, (61) 3-9631-2092; gavin.gunning@spglobal.com

Given the tariffs are only on two products, the immediate ratings impact on the global banking sector--including on global systemically important banks (G-SIBs) or more generally banks in the Top 200 globally--should not be significant. The medium- to longer-term impact on global banking sector, however, could be much more profound should a full-scale trade war escalate with related negative secondary impacts on macro- and microeconomic conditions and confidence.

As was the case when we lowered our ratings in 2016 on some U.S. regional banks with large energy exposures at the time when oil prices tanked, banks with more concentrated lending exposures to corporates affected by tariffs--both in the U.S. and elsewhere--are most likely to have some impact.

Forest Products

Donald Marleau, Toronto, (1) 416-507-2526; donald.marleau@spglobal.com

For the U.S., lumber continues to be a persistent trade irritant, which recently attracted a 27%-30% duty on imports from Canada. Softwood lumber has always been excluded from the Canada-U.S. Free Trade Agreement (FTA) and North American Free Trade Agreement (NAFTA). This factor is a key consideration in assessing the credit risks of these companies, and is not a growing risk.

Metals And Mining

William Ferara, New York, (1) 212 438 1776, bill.ferara@spglobal.com

Diego Ocampo, Buenos Aires, (5411) 4891 2116 diego.ocampo@spglobal.com

May Zhong, Melbourne (61) 3-9631-2164; may.zhong@spglobal.com

For U.S.-based steel and aluminum producers, the tariffs will be moderately positive because they would encourage domestic production, raise utilization rates, and keep domestic prices elevated in the next 2-3 years—with steel prices in the U.S. around $750-$850 per short ton (st) during this period (see "Trump Tariffs Forge Better Credit Quality For U.S.-Based Steel And Aluminum Producers With A Protectionist Stance," published March 2, 2018). At the same time, we assume aluminum prices will remain elevated but flat at $2,100 per metric ton (mt) through 2020 as production in China and elsewhere outside the U.S. increases.

We could see some positive ratings action in the next 12-24 months among U.S.-based metals and mining downstream issuers most exposed to steel and aluminum prices--particularly those in the 'B' category and for other speculative-grade borrowers. We could see a near-term jump in prices as a result of the tariffs, but potential gains could prove temporary if the U.S. returns to a less-protectionist stance, as it has maintained for the past 30 years or so.

Among U.S.-based metals and mining downstream issuers most exposed to steel and aluminum prices--particularly speculative-grade companies and those in the 'B' category (rather than some higher-rated investment-grade companies)--we expect to see the potential for positive rating actions over the next 12-24 months. These positive outlooks are due to stronger cash flows from higher prices, as well as debt-reduction and refinancing efforts. We have positive outlooks on U.S. Steel Corp., Steel Dynamics Inc., AK Steel Corp., Big River Steel LLC, Alcoa Corp., and Century Aluminum Co. However, we continue to stress that debt maturity walls in 2019 and 2021 are potential headwinds to near-term upgrades in the sector.

U.S.-based steel producers such as Nucor Corp., U.S. Steel, Steel Dynamics, Commercial Metals Co., AK Steel, and Big River Steel LLC will likely enjoy elevated steel prices and volumes if imports drop. This assumes overall demand remains robust (which we expect), with real GDP growth greater than 2%, healthy nonresidential construction, and recovering oil markets, while Chinese steel prices remain elevated.

In our view, the impact of a 25% tariff on all imports will likely widen the historical spread between domestic and foreign steel (particularly steel from China, which accounts for roughly 50% of global steel production). The spread could be pushed up to $250-$375/st due to the 25% tariff increase, up from a typical spread of $200-$300/st over the past five years.

Nevertheless, U.S. steel prices are still correlated with steel prices in China, which also remain elevated. Since the U.S. is not an economic island, any material decrease in Chinese steel prices (potentially due to slower economic growth and construction and investment in China) would increase the spread between domestically-produced steel and imported steel, likely causing U.S. steel prices to retreat.

For Latin America, we are not expecting a major impact of the U.S. tariffs. The two main players in the steel market in the region are Brazil and Mexico, ranking 9th and 13th in global production. While Brazil is a relevant global player in terms of production and to some extent exports, the relevance for its domestic economy is low. Brazil is the second highest exporter of steel into the U.S. Nevertheless, exports of steel and aluminum are very small compared to domestic GDP (approximately 0.1%). Total exports to GDP in Brazil are about 10% of GDP.

We rate three companies related to these industries, Usiminas Commercial LTD (B-/Positive), CSN (CCC+/Positive), and Gerdau (BBB-/Negative). In the first two cases, their exports of impacted metals are very small and both companies are rated very low. In the case of Gerdau, it might receive some benefit because it has relevant operations in the U.S.

In the case of aluminum, Brazil is a relatively small player, as it is the 11th largest producer but significantly smaller than China, Norway, and Canada, the largest three players. Similar to what happens with steel, Brazil's exports are very small when compared to its GDP and its total exports, about 0.02% and 0.004% of GDP.

Mexico is the 13th largest producer of steel but is much smaller than the largest players like China or Japan. Furthermore, according to the local steel producers association, Mexico is actually a net importer of steel and most steel produced in the country goes to the construction and automotive sectors. Steel production in Mexico represents 1.9% of GDP and steel exports represent 0.04% of GDP and 0.2% of total exports. Similarly, Mexico is not a relevant global player for aluminum and exports are negligible compared with domestic GDP and with total exports.

We still do not have full details of the final document that will set U.S. tariffs to steel and aluminum but U.S. authorities have suggested that Mexico and Canada might be exempt from such tariffs. Our initial view is that the indirect impact would be of higher concern, especially, if this is the start of additional protectionist measures from the U.S. that could extend to other goods, or if there is major retaliation from affected countries, which could hamper global trade.

For the Asia-Pacific, the credit impact from the U.S. tariff on steel and aluminum will be modest. In our view, the tariffs don't affect our base-case assumption for supply and demand fundamentals for these metals because U.S. imports only account for a small proportion of global trades in steel and aluminum. In addition, all of the rated steel mills/aluminum smelters in this region have a modest direct exposure to U.S. imports.

Out of all the steel making countries/regions, South Korea and Taiwan are more exposed to U.S. imports compared with the rest of the countries in Asia-Pacific (see chart 3). South Korea's export to U.S. amounted to 3.4 million tons in 2017, equivalent to 5% of the country's total steel production. Most of the exports are from nonrated smaller companies that specialize in steel pipes and tubes used for energy related projects. Meanwhile, Taiwan exported 1.7 million tons of steel to the U.S. last year, equivalent to 5 % of Taiwan's total steel production. China, India and Japan's exposure to U.S. imports are relatively small.

More importantly, all of the rated steel mills in this region have a modest direct exposure to U.S. imports. If the steel/aluminum originally exported to the U.S. are directed to other Asian countries, it could soften the currently strong prices for certain steel and aluminum products due to increasing competition. Even though the steel or aluminum margin may soften in this scenario, we don't expect it to be material enough to change these companies' credit quality, all other things being equal.

Chart 3

image

Midstream Energy And Oil & Gas

Mike Llanos, New York (1) 212-438-4849; mike.llanos@spglobal.com

Thomas Watters, New York (1) 212 438 7818, thomas.watters@spglobal.com

U.S. midstream and oil and gas companies rely on steel imports for their operations, such as drilling, and building refineries and terminals. The Commerce Department has said that roughly one-quarter of steel pipes and tubes bought by companies in the U.S. in 2016 was imported. We could envision a 25% increase in costs to build-out pipelines and energy infrastructure, particularly for the construction of liquefied natural gas.

Meanwhile, pipeline companies unable to pass on incremental input costs could ultimately be forced to reassess and cancel projects due to the steel tariff. If the cost of capital continues to remain pressured, it could also lead to joint ventures for large-scale projects. However, we believe that outside of any projects being canceled, the effects on credit will be negligible.

The biggest impact on U.S. midstream and oil and gas companies from NAFTA renegotiations would be if crude oil drilling in the Canadian oil sands would have a tariff imposed. It could affect volumes on pipelines in the U.S. However, Canada supplies the U.S. with about 11% of its total crude oil needs so this tactic seems self-defeating for U.S. policy makers.

Homebuilders

Ana Lai, CFA, New York (1) 212 438 6895 ana.lai@spglobal.com

Christopher Yip, Hong Kong, (852) 2533-3593, christopher.yip@spglobal.com

U.S. homebuilders are familiar with trade friction for lumber, a key input. That said, the industry has no direct trade exposure other than some margin exposure to volatile lumber price swings.

For Chinese property developers, we believe that the direct impact would not be significant, given that the developers source steel/aluminum mostly from domestic suppliers. Chinese developers' projects in the U.S. and other countries might be affected more, but the projects don't really account for a meaningful portion their overall portfolio. As such, risks will be mainly coming from further disruption in global trades that affect economic growth as a whole. Also, China's prices might be affected if global prices climb, but even then, construction material is not a large cost component.

Real Estate Investment Trusts

Ana Lai, CFA, New York (1) 212 438 6895 ana.lai@spglobal.com

Craig Parker, Melbourne, (61) 3 9631 2073, craig.parker@spglobal.com

Trade disruptions should have limited impact on REITs. The industrial REITS could feel some impact if global trade is disrupted, but this could be offset by the e-commerce tailwind.

Retail

Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@spglobal.com

Makiko Yoshimura, Tokyo, (813) 4550-8368, makiko.yoshimura@spglobal.com

For U.S. retail, given the high percentage of non-U.S. sourcing, tariffs could directly or indirectly raise input costs and transport rates.

In the Asia-Pacific, we do not expect any material direct impact from this issue on the retail sector. We do not expect the tariffs by themselves to turn consumer sentiments in exposed countries, Korea, Taiwan, Japan, etc. materially negative.

Technology

David Tsui, New York (1) 212 438 2138 david.tsui@ spglobal.com

Raymond Hsu, CFA, Taipei, (886) 2 8722-5827, raymond.hsu@spglobal.com

For the U.S., we do not view NAFTA re-negotiations would have a significant impact to the tech sector's credit quality. However, global trade wars, especially with China, would threaten tech companies that manufacture their products or procure components from suppliers in countries with protectionist policies. Many U.S. technology companies depend on the existing global trade and international supply chain framework. Over thee longer term, trade wars or tariffs could lead to foreign countries reducing their reliance on U.S. technology providers, leading to intensified competition.

The U.S. tariffs on steel and aluminum have no primary impact and minimal secondary impact on the technology sector in the Asia-Pacific because the tariffs are unlikely to cause supply interruption or significant production cost variations for technology hardware. However, if the trade war between China and the U.S. escalates to the technology sector that is the major source of the U.S. trade deficit, the technology supply chain in China, Korea, Taiwan, and Japan will be significantly affected. That's because Taiwan, Korea, and Japan are the key component suppliers in the global hardware supply chain, while China hosts the majority of the global assembling capacity.

Telecommunications

Allyn Arden, New York (1) 212 438 7832 allyn.arden@ spglobal.com

JunHong Park, Hong Kong, (852) 2533-3538, junhong.park@spglobal.com

For the U.S., we expect limited impact given that most telecom and cable companies are U.S. centric. The tariffs, therefore, are not a significant concern for telecom operators' credit quality. For other countries, given the domestic consumption-oriented nature of the telecom industry, the impact should be minimal for operators.

Transportation Cyclical

Graeme Ferguson, Melbourne, (61) 3 9631 2098, graeme.ferguson@spglobal.com

For the Asia-Pacific, the U.S. tariffs is likely to have only a marginal impact on Asia-Pacific shipping companies. Shipments of steel and aluminum products may suffer some displacement but overall volumes are likely to remain steady. U.S. steel production relies on scrap, which limits the impact on seaborne commodity trade. Of greater concern is a broader trade war, which could more seriously disrupt global container and freight volumes just as the sector's recovery starts to gain momentum. Asia-Pacific airlines are also likely to be negatively impacted by trade policies that disrupt the global trade in goods and services.

Transportation Infrastructure

Philip Baggaley, New York (1) 212 438 7683 philip.baggaley@ spglobal.com

Abhishek Dangra, Singapore, (65) 6216-1121, abhishek.dangra@spglobal.com

In the U.S., potentially reduced NAFTA trade would hurt certain railroads (notably Kansas City Southern) and trucking. Also, package express and logistics companies thrive on complex supply chains that might pull back. A Border-Adjustment Tax would have been worst but it is (for now) off the table.

For export-oriented Asia-Pacific, a trade war would also have direct impact on the performance of ports and other infrastructure. We believe overall impact of trade tariffs on steel and aluminum will be limited on most ports in South and South East Asia (SSEA) region. This is because container, crude, and coal account for majority of the traffic volume for most ports in the region.

In SSEA, India represents a modest importer to the U.S. for steel products. U.S. accounts for nearly 15% of India's total exports. However, India also imports specialty steel. Any significant retaliation/trade wars can affect the volumes for both origin and destination ports (like India, Indonesia) as well as transshipment hubs like Singapore.

U.S. Public Finance

Gabriel Petek, San Francisco (1) 415-371-5042 gabriel.petek@spglobal.com

In our 2018 sector outlook for U.S. states, we cited the potential for policy missteps as a leading risk to its baseline economic forecast for the year. President Trump's recent announcement to impose import tariffs of 25% on steel and 10% on aluminum presents an example of this type of risk. While the tariffs could help make the steel and aluminum produced by some U.S. firms more competitive relative to lower cost imports, on balance a shift toward protectionist trade policies has negative implications for most state economies. In the context of a slow-paced economic expansion, the consensus forecast that GDP is poised to accelerate in 2018, potentially offering a dose of fiscal relief to the states, was a welcome possibility. State revenue projections are sensitive to underlying economic forecast assumptions. And, in our view, the specter of a trade war triggered by the tariffs would likely lead to a near-term pickup in inflation.

The Federal Reserve may choose to view this inflationary response as transitory, but upward pressure on prices from a broader trade war will likely force them to reconsider the path they have sketched out for monetary policy normalization. Either way, we could witness slower economic growth than most states have assumed in their forecasts. Such an outcome could translate to lower rates of tax revenue growth, further squeezing state fiscal margins, which have already been under pressure in recent years.

Utilities

Todd A. Shipman, CFA; Boston +1 617 530 824, todd.shipman@ spglobal.com

Parvathy Iyer, Melbourne, +(61) 3 96312034, parvathy.iyer@spglobal.com

In the U.S., we expect very little impact from NAFTA or other trade risks. The industry is predominantly domestic, and higher costs would be passed through rates. In respect of unregulated merchant power, the industry is largely self-contained but relies on Europe and Asia for most of its equipment. As a result, we do not see NAFTA as a significant factor.

In the Asia-Pacific, we don't expect significant impact on utilities. Further, potential higher domestic availability of steel should also keep domestic price under check. U.S. tariffs on steel and aluminum products would have minimal impact on China's utilities and infrastructure sectors, unless the trade wars escalated between the U.S., China, EU, and other major countries. If a trade war were unfortunately triggered and ultimately affect China's economic growth, this would trickle down to weaken the demand for electricity, gas, and others.

Related Research

  • Global Trade At A Crossroads: U.S. Steel And Aluminum Tariffs Will Likely Have Small Direct Impact But Risk Larger Knock-On Effects, March 9, 2018
  • Trump Tariffs Forge Better Credit Quality For U.S.-Based Steel And Aluminum Producers With A Protectionist Stance, March 2, 2018
  • De-Globalization Could Disrupt U.S. Supply Chains, May 30, 2017

Only a rating committee may determine a rating action and this report does not constitute a rating action.

Primary Credit Analyst:David C Tesher, New York (1) 212-438-2618;
david.tesher@spglobal.com
Secondary Contacts:Terry E Chan, CFA, Melbourne (61) 3-9631-2174;
terry.chan@spglobal.com
Jose M Perez-Gorozpe, Mexico City (52) 55-5081-4442;
jose.perez-gorozpe@spglobal.com
Paul Watters, CFA, London (44) 20-7176-3542;
paul.watters@spglobal.com

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