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Global Trade At A Crossroads: China-U.S. Tariff Dispute Still A Skirmish, But Credit Risks Are Rising

(Editor's Note: On April 3, 2018, the Trump Administration announced details of its proposed 25% tariffs on $50 billion of Chinese imports. On April 4, 2018, the Chinese government countered with its proposed 25% tariffs on $50 billion of U.S. imports. This article supplements our "Global Trade At A Crossroads: If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer," March 24, 2018, publication.)

The tit-for-tat tariff dispute between the U.S. and China could draw the countries closer to an all-out trade war. The U.S. plans to impose 25% tariffs on imports of China's goods valued at $50 billion, and in turn, China has countered with equivalent tariffs on $50 billion of a range of U.S. imports. In particular, the Chinese proposal has a disproportionate impact--$50 billion represents about 38% of U.S. exports to China, while the same amount only represents 10% of China's exports to the U.S.

Even so, the proposed tariffs are unlikely to materially threaten the economies or overall corporate credit health of either country. That said, a breakdown in trade negotiations and policy missteps could lead to a full-blown trade war that would damage global business and consumer confidence, investment prospects, and growth.

On April 3, 2018, the Office of the U.S. Trade Representative (USTR) published a list of 1,333 product imports from China that could be subject to an additional 25% tariff. The import value is about $50 billion. This proposal follows the USTR's Section 301 (Trade Act of 1974) investigative report, which found China to be conducting unfair trade practices in respect of U.S. technology and intellectual property.

The tariffs are primarily meant to target aerospace, information, and communication technology, robotics, and machinery. The proposal would undergo further review in a public notice and comment process, including a hearing during late May 2018, before the USTR issues a final determination.

We do not expect the tariffs, if imposed, to come into effect before June 2018. In addition to the tariff proposal, the USTR has filed a request for consultations with China at the World Trade Organization (WTO) to address, what it argues, are China's discriminatory technology licensing requirements.

In retaliation, on April 4, 2018, the Customs Tariff Commission (CTC) of the State Council of China stated that it would impose a 25% tariff on 106 products imported from the U.S., such as soybeans, automobiles, and chemicals. The proposal will fall under the provisions of China's Foreign Trade Law and Regulations on Import and Export Tariffs. Although China has not announced the effective date of the tariffs, we expect that it could be timed with the imposition of the U.S. tariffs. The CTC argues that the proposed U.S. action violates WTO rules.

Chinese Machines Versus U.S. Soybeans

Charts 1 and 2 illustrate the differing magnitude to which the proposed tariffs could affect China's exports to the U.S. of $505 billion (2017) and U.S. exports to China of $130 billion (2017). As previously mentioned, $50 billion would represent about 10% of China-to-U.S. exports and 38% of U.S.-to-China exports.

Among the 1,333 product lines of Chinese exports to the U.S. covered by the possible U.S. tariffs, the three largest product groups are data processing equipment; compressors, engines, and heavy machinery; and electrical machinery and sound and visual equipment (see chart 3). These groups are not surprising given that the USTR had sought to identify products that benefit from Chinese industrial policies, such as the Made in China 2025 (MIC 2025) plan.

Chart 1

image

Chart 2

image

Chart 3

image

In MIC 2025, the Chinese government identified 10 strategic sectors that it intends to strengthen namely:

  • Next-generation information technology
  • High-end numerical control machinery and robotics
  • Aerospace and aviation equipment
  • Maritime engineering equipment and high-tech maritime vessel manufacturing
  • Advanced rail equipment
  • Energy saving and new energy vehicles
  • Electrical equipment
  • New materials
  • Biomedicine and high-performance medical devices
  • Agricultural machinery and equipment

There is significant overlap between the list of products shown in chart 3 and the 10 strategic sectors in the MIC 2025.

Chart 4

image

Panjiva, Inc., a unit of our sister division, S&P Global Market Intelligence, detailed the following characteristics of Chinese imports to the U.S.:

"The products covered have plenty of alternative suppliers outside of China in most instances. On average China accounts for 7.0% of total U.S. imports of the products concerned. There are only six products where Chinese suppliers represent over 50% of U.S. imports and 43 where it is over a third. Products over $100 million in imports where China is a major supplier include thermostats (44% of the total, worth $418 million), piezoelectric crystals (40.7%, or $168 million), cash registers (39.6%, $225 million) and radio transceivers (38.8% or $798 million) (see chart 4). U.S. buyers may face a particularly steep increase in prices for these products if alternative supplies cannot be readily found." (see article published by Panjiva titled, "Five Facts About Trump's New China Tariffs–Watch Out for Blowback", on www.panjiva.com, April 4, 2018).

Chart 5 shows the U.S. sectors that China's tariff response could affect. The larger (by dollar amount) sectors are soybeans; motor vehicle and parts; and plastic and rubber articles. The other sectors are chemicals; mineral fuels; other agricultural produce; cotton, woven fabric; soaps, glues; tobacco; and beverages. (Note: The aircraft sector does not show up because U.S. Census Bureau data shows no exports to China in 2017).

Chart 5

image

Near-Term Effects On Sectors Likely To Be Muted

While the near-term effects on corporate credit will likely be muted, there will be some impact for certain sectors. In a scenario where trade tensions further escalate beyond the current targeted product mix, the spillover could amplify and affect industries as follows (extracted from our article, titled, "Global Trade At A Crossroads: If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer" published March 24, 2018 on RatingsDirect):

  • Aerospace and defense: Boeing could lose long-term business to its key competitor, Airbus, if China sought to punish the aircraft maker as a form of retaliation.
  • Agricultural products: While retaliatory action by China through soybean tariffs would significantly affect the U.S. agricultural sector, it could hurt farmers more than rated agricultural companies like Archer Daniels Midland Co., Bunge Ltd., and Cargill Inc.
  • Auto: For U.S. automakers, we assume a limited direct impact on credit quality due to the tariffs. We estimate that Chinese vehicle imports make up a negligible proportion for General Motors and Ford currently, and that is unlikely to change over the foreseeable future.
  • Building materials: In the U.S. building materials sector, about 20% (eight to 10) of companies somewhat rely on Chinese imports, while two or three may rely on them even more.
  • Capital goods: U.S. capital goods companies have modest exposure to imports and investment from China.
  • Chemicals: A trade spat with China is at least a modest negative for the large petrochemical projects on the U.S. Gulf Coast, and for the sector overall, given that China is the largest chemical market in the world.
  • Consumer products: China and Hong Kong consumer product companies are among the most vulnerable to any rise in U.S. trade barriers. Some sector companies depend on U.S. exports for 10%-30% of revenues.
  • Financial institutions. The short-term impact--including on global systemically important banks and other banks in the Top 200 globally--should be manageable.
  • Leisure: The U.S. toy industry would be materially affected by the new tariffs given that the most toys are manufactured in China.
  • Media: For the U.S. media industry, the impact isn't from Chinese imports, but rather U.S. access to the Chinese market.
  • Metals and mining: We believe there could be an indirect moderate impact on China's metals and mining sector if there are constraints on the country's exports to the U.S. from reduced demand for raw materials.
  • Midstream energy oil and gas: The new tariffs are unlikely to have much of an effect on U.S. midstream and oil and gas companies.
  • Retail: The U.S. retail sector does have a material supply chain exposure to soft and hard retail imports from China. For the Asia-Pacific retail sector, the direct impact of the impending U.S. tariffs is negligible.
  • Technology: Chinese technology companies have material revenue exposure from exports to the U.S. That said, in the near-term, the new tariffs might not reduce sales because there are no immediate alternatives to the assembly capacity in China. Consequently, U.S. buyers may have to pay more. On the other side, retaliatory tariffs by China could affect the cost of U.S. imports, which for Chinese technology companies, we regard as material.
  • Telecommunications: We don't expect any ratings impact on U.S., Chinese and other Asia-Pacific telecom operators from the proposed tariffs, given the domestic consumption-oriented and relatively inelastic nature of the telecom industry.
  • Transportation: Reduced trade between the U.S. and China would reduce traffic for U.S. freight transportation companies, though we don't expect the effect to be substantial.
  • Transportation infrastructure: For U.S. and Asia-Pacific ports, we believe most of the direct effects from announced tariffs will be limited.
  • Utilities: For U.S. utilities, potential tariffs on industrial machinery wouldn't be significantly affected. The utilities industry imports much more from Japan and Korea, albeit Chinese firms do provide components like heat exchangers, air condensers, and even steam generators.

In summary, our base case is one of limited ratings impact. Obviously, it does not factor in a Sino-U.S. trade war. Should the trade dispute flare up, we would need to re-analyze the impact on industry sectors not just for both countries, but also others.

Related Research

  • Economic Research: The U.S. Economic Outlook Is Solid, But Will Trade Tensions Have The U.S. Trading Places Soon?, March 29, 2018
  • Global Trade At A Crossroads: If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer, March 24, 2018
  • Economic Research: What Will Be The Likely Impact Of U.S. Steel And Aluminum Tariffs On Latin America?, March 20, 2018
  • S&P Global Economists Release A "Field Guide" To A Potential Sino-U.S. Trade War, March 19, 2018
  • Credit Trends: Global Bond Upgrade Potential: Will Trump Tariffs Affect The Metals, Mining, And Steel Sector's Lead In Upgrade Potential?, March 15, 2018
  • Credit FAQ: Japan's Top Steelmakers Can Withstand U.S. Tariffs And Increasingly Aggressive Investments, March 12, 2018
  • Global Trade At A Crossroads: U.S. States And Localities May Take Another Look At Budget Forecasts, March 9, 2018
  • Global Trade At A Crossroads: U.S. Steel And Aluminum Tariffs Raise Risk Of Retaliatory Spiral, March 9, 2018
  • 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

Appendix

For questions on specific sectors, please contact:

Sector Contact
Aerospace and defense Philip Baggaley, New York (1) 212-438-7683; philip.baggaley@spglobal.com
Christopher DeNicolo, Washington DC (1) 202-383-2398; christopher.denicolo@spglobal.com
Agricultural products Christopher Johnson, New York, (1) 212-438-1433; chris.johnson@spglobal.com
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
Building materials Donald Marleau, Toronto, (416) 507-2526; donald.marleau@spglobal.com
Capital goods Ana Lai, New York (1) 212-438-6895 ana.lai@spglobal.com

Hiroki Shibata, Tokyo (83) 4550-8437 hiroki.shibata@spglobal.com

Chemicals Paul Kurias, New York (1) 212-438-4386 paul.kurias@spglobal.com
Consumer products Sophie Lin, Hong Kong, (852) 2533-3544; sophie.lin@spglobal.com
Diane Shand, New York (1) 212-438-7860; diane.shand@spglobal.com
Financial institutions Gavin Gunning, Melbourne (61) 3-9631-2092; gavin.gunning@spglobal.com
Liao Qiang, Beijing, (86) 10-6569-2915; qiang.liao@spglobal.com

Stuart Plesser Tsui, New York (1) 212-438-6870; stuart.plesser@spglobal.com

Leisure Emile Courtney, New York, (1) 212-438-7824, emile.courtney@spglobal.com
Metals and mining May Zhong, Melbourne (61) 3-9631-2164; may.zhong@spglobal.com
Donald Marleau, Toronto, (416) 507-2526; donald.marleau@spglobal.com
Midstream energy oil and 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
Retail Makiko Yoshimura, Tokyo, (813) 4550-8368; makiko.yoshimura@spglobal.com
Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@spglobal.com
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
Telecommunications Allyn Arden, New York (1) 212-438-7832; allyn.arden@ spglobal.com
JunHong Park, Hong Kong, (852) 2533-3538; junhong.park@spglobal.com
Transportation Graeme Ferguson, Melbourne, (61) 3-9631-2098; graeme.ferguson@spglobal.com
Philip Baggaley, New York (1) 212-438-7683; philip.baggaley@spglobal.com
Transportation infrastructure Kurt E Forsgren, Boston (1) 617-530-8308; kurt.forsgren@spglobal.com

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

Utilities

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

Gloria Lu, CFA, FRM; Hong Kong (852) 2533-3596; gloria.lu@spglobal.com

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

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Primary Credit Analysts:Terry E Chan, CFA, Melbourne (61) 3-9631-2174;
terry.chan@spglobal.com
David C Tesher, New York (1) 212-438-2618;
david.tesher@spglobal.com
Secondary Contacts:Paul R Draffin, Melbourne (61) 3-9631-2122;
paul.draffin@spglobal.com
Christopher Lee, Hong Kong (852) 2533-3562;
christopher.k.lee@spglobal.com
Lawrence Orlowski, CFA, New York (1) 212-438-7800;
lawrence.orlowski@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
Chief Global Economist:Paul F Gruenwald, Singapore (65) 6216-1084;
paul.gruenwald@spglobal.com

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