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Global Trade At A Crossroads: The Risk Of An All-Out China-U.S. Trade War Moves Up A Notch

(Editor's Note: On June 15, the Trump Administration announced details on its 25% tariff on $34 billion of Chinese imports effective July 6 and deferred its decision on another $16 billion of imports. On June 16, the Chinese government countered with 25% tariffs on $34 billion of U.S. imports and reserved its decision on another $16 billion of imports. This article is an update to "Global Trade At A Crossroads: China-U.S. Tariff Dispute Still A Skirmish, But Credit Risks Are Rising," published April 5, 2018.)

The tariff dispute between the U.S. and China continues to escalate, with the two countries announcing they will impose 25% tariffs on $34 billion of the other's imports effective July 6, and threatening levies on another $16 billion of products. Depending on how the situation plays out, the U.S. would take a bigger hit, given that $50 billion ($34 billion plus the additional $16 billion) represents about 38% of U.S. exports to China, while the same dollar amount represents only 10% of Chinese exports to the U.S. While the tariffs are unlikely to materially threaten either of the world's two biggest economies or overall corporate credit health within them, the imposition of tariffs heightens the risk of an all-out trade war. A breakdown in negotiations or policy missteps could lead to a full-blown dispute that could damage global business and consumer confidence, investment prospects, and growth.

On June 15, President Trump approved tariffs on 1,102 Chinese products worth approximately $50 billion. The move originally targeted 1,333 products, but the list was trimmed after a public comment period. The tariffs are generally aimed at industrial sectors that coincide with China's "Made in China 2025" industrial policy, which lays out a strategy for the country to dominate high-tech industries (e.g. aerospace, automobiles, industrial machinery, information technology, and robotics) excluding consumer goods such as cell phones or televisions.

The U.S. tariffs will be implemented in two rounds on two product lists. The first contains 818 products (a subset of the original list announced in April) worth about $34 billion, and the U.S. government will begin collecting additional levies on them on July 6. The second list proposes new levies on 284 products identified by the Section 301 Committee as benefiting from China's industrial policies. This list covers approximately $16 billion of imports and will undergo further review in a public notice and comment process.

In response, China announced that it will impose an initial set of levies on 545 American products, also beginning July 6, including farm goods, automobiles, and seafood products. China also plans to impose levies on an additional 114 American goods at a later date, including chemicals, medical devices, and energy products. China's response to implement and subsequently consider additional tariffs could ultimately escalate the situation further, as President Trump has threatened levies on an additional $100 billion of Chinese products if China "retaliates."

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., which were $505 billion in 2017, and U.S. exports to China, which were $130 billion in 2017. As previously mentioned, $50 billion would represent about 10% of China-to-U.S. exports and 38% of U.S.-to-China exports.

Chart 1


Chart 2


The U.S. tariffs focus on products that the Trump Administration deems important to China's industrial policy, particularly those contributing to the Made in China 2025 initiative. In this initiative, 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

The revised U.S. list focuses more on high-tech industries and is more in line with the administration's Section 301 objective to protect U.S. technology and intellectual property. Panjiva research shows that of the 284 newly proposed tariff lines, the largest lines by value are semiconductors, including processors and memory chips (see chart 3). Panjiva analysis also shows that 515 products from the original list now won't be subject to duties--the largest being flat-panel televisions--to minimize the impact on the consumer.

Chart 3


Meanwhile, China's first set of tariffs are skewed toward agricultural products and automobiles. This strategy could have a significant effect on the U.S. farming sector because China is the largest destination for American agricultural exports. The second set of goods that would be subject to Chinese tariffs are dominated by energy and healthcare products (see chart 4).

Chart 4


Near-Term Effects On Most Sectors Likely To Be Muted

While the near-term effects on corporate credit will likely be minimal, certain sectors will see some impact. We summarized the near-term effects if tariffs are imposed on the following industries below (extracted from "Global Trade At A Crossroads: If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer," published March 24, 2018, and "Global Trade At A Crossroads: China-U.S. Tariff Dispute Still A Skirmish, But Credit Risks Are Rising," published April 5, 2018):

  • Aerospace and defense: China removed aircraft from its list of U.S. exports subject to tariffs, which is not surprising given that Airbus cannot realistically expand production fast enough to replace scheduled Boeing deliveries. However, Boeing could be at a disadvantage in future competitions to sell additional planes to Chinese airlines.
  • 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 believe Chinese vehicle imports currently make up a negligible proportion for General Motors and Ford, and that is unlikely to change over the foreseeable future (but longer-term the volume of Chinese electric vehicles could be more significant). We also see little impact on our portfolio of Chinese auto credits, as there are limited import-export activities between China and U.S. in the auto sector and most cars and auto parts are assembled locally.
  • 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 companies depend on U.S. exports for 10%-30% of revenues.
  • Infrastructure: Credit concerns could escalate should a protracted trade war between the U.S. and China materialize. In this scenario, trade volumes could decline, hurting port revenues and ultimately credit quality. It is estimated that $50 billion in tariffs the U.S. is threatening against China--and China's list of commodities it would target in retaliation--would affect roughly 887,000 20-ft. equivalent units (TEUs), or 6.6% of the total U.S. container trade with China. When the combination of U.S. tariffs on steel and aluminum imports are considered, coupled with the Chinese import tariffs on pork, fruit, and other goods, the impact grows to 1.1 million TEUs or 7.8% of the total U.S.-China container trade (as estimated by the Journal of Commerce).
  • Leisure: The U.S. toy industry would be materially affected by the new tariffs given 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. We will continue to monitor implementation of any specific tariffs on retail finished goods. We think higher input costs from tariffs, if they occurred, would pressure retail margins, absent full pass through of higher costs. For the Asia-Pacific retail sector, the direct impact of the impending U.S. tariffs is negligible.
  • Technology: Semiconductors, which were previously excluded from the U.S. tariffs list, are now on the June 15 list of approved tariffs on Chinese products. Meanwhile, flat-panel televisions and printer parts, which were both on the previous list of products subject to tariffs, have now been excluded, mainly to avoid a negative impact on U.S. consumers. We believe if President Trump and U.S. trade representatives target more semiconductor components, it will raise the input costs for U.S. technology firms and, consequently, the final prices for global consumers, as there are no immediate alternatives to the semiconductor manufacturing and assembly capacities in China. More importantly, we believe the decision discourages U.S. firms from having (manufacturing) operations in China. We're also paying close attention to President Trump's decision to impose investment restrictions and enhanced export controls for Chinese companies related to the acquisition of industrially significant technology, for which we expect measures to be forthcoming by June 30, 2018, and implemented shortly thereafter. We're also closely surveilling Beijing's actions, which could include delaying or rejecting applications for large mergers and acquisitions transactions involving U.S. entities, or even potentially boycotting U.S. consumer goods or technology hardware and software products supplied by U.S. firms.
  • 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 and passenger airlines, 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. U.S. trade with Asia rose 3.8% in the first quarter, with import more than doubling to 8.9% to 3.9 million TEUs.
  • 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, although Chinese firms do provide components like heat exchangers, air condensers, and steam generators.

Our base case is one of limited ratings impact, but 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 for others.

Related Research

  • Economic Research: U.S. Biweekly Economic Roundup: Growth Is On The rise; Tariffs Are Not Too Far Behind, June 15, 2018
  • China's Major Wind Power Operators Can Absorb Tariff Cuts, June 4, 2018
  • Economic Research: Twin Deficits: Mind The Gap(s), May 18, 2018
  • Economic Research: Global Trade At A Crossroads: Will The U.S.-China Trade Tempest Make Landfall Or Blow Out To Sea?, May 4, 2018
  • In the firing line: Trump, trade and EU corporate credit, May 1, 2018
  • Global Trade At A Crossroads: How The U.S.-China Spat May Hurt The Tech Sector, And The Latest On Qualcomm And Broadcom, April 25, 2018
  • Global Trade At A Crossroads: As China Threatens Retaliatory Tariffs On U.S. Agricultural Products, Which Ratings Are Most At Risk?, April 6, 2018
  • Economic Research: U.S. Biweekly Economic Roundup: Jobs Hiccup In The Middle Of A Trade Spat, April 6, 2018
  • Global Trade At A Crossroads: U.S. Doubles Down In China Tariff Dispute, Worsening Credit Conditions, April 6, 2018
  • China-U.S. Tariff Dispute Turns Up A Notch, Raising Credit Risks, April 5, 2018
  • Economic Research: The U.S. Economic Outlook Is Solid, But Will Trade Tensions Have The U.S. Trading Places Soon?, March 28, 2018
  • Credit Conditions: North America March 2018--Trade Tensions, Market Swings Pose Risks To Benign Conditions, March 28, 2018
  • Global Trade At A Crossroads: If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer, March 23, 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 14, 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. 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

For questions on specific sectors, please contact:

Sector Contact
Chief Economists Global: Paul F Gruenwald, Singapore, (65) 6216-1084;

U.S.: Beth Ann Bovino, New York, (1) 212-438-1652;

Aerospace And Defense Philip Baggaley, New York +1 212 438 7683; philip.baggaley@

Christopher DeNicolo, Washington DC + 202 383 2398;

Agricultural Products Christopher Johnson, New York, +1 212 438 1433;
Auto Manufacturers And Suppliers Nishit Madlani, New York, +1 212 438 4070; nishit.madlani@

Lawrence Orlowski, New York, +1 212 438 7800; Lawrence.orlowski@

Katsuyuki Nakai, Tokyo, (81) 3-4550-8748;

Building Materials Donald Marleau, Toronto, +416-507-2526;
Capital Goods Ana Lai, New York +1 212 438 6895

Hiroki Shibata, Tokyo +83 4550-8437

Chemicals Paul Kurias, New York (1) 212 438 4386
Consumer Products Sophie Lin, Hong Kong, (852) 2533 3544;

Diane Shand, New York (1) 212 438 7860;

Financial Institutions Gavin Gunning, Melbourne (61) 3-9631-2092;

Liao Qiang, Beijing, (86) 10-6569-2915;

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

Leisure Emile Courtney, New York, +1 212 438 7824,
Metals And Mining May Zhong, Melbourne (61) 3-9631-2164;

Donald Marleau, Toronto, +416-507-2526;

Midstream Energy Oil And Gas Mike Llanos, New York (1) 212-438-4849;

Thomas Watters, New York (1) 212 438 7818;

Retail Makiko Yoshimura, Tokyo, (813) 4550-8368;

Robert E Schulz, CFA, New York (1) 212-438-7808;

Technology David Tsui, New York (1) 212 438 2138; david.tsui@

Raymond Hsu, CFA, Taipei, (886) 2 8722-5827;

Telecommunications Allyn Arden, New York (1) 212 438 7832; allyn.arden@

JunHong Park, Hong Kong, (852) 2533-3538;

Transportation Graeme Ferguson, Melbourne, (61) 3 9631 2098;

Philip Baggaley, New York +1 212 438 7683;

Transportation Infrastructure Kurt E Forsgren, Boston (1) 617-530-8308;

Abhishek Dangra, Singapore, (65) 6216-1121;

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

Gloria Lu, CFA, FRM; Hong Kong + 852 2533 3596;

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

Primary Credit Analysts:Terry E Chan, CFA, Melbourne (61) 3-9631-2174;
David C Tesher, New York (1) 212-438-2618;

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