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Global Trade At A Crossroads: Key Takeaways From Our Articles

Since the election of the Trump Administration in the U.S., global trade has been at the forefront of material risks (and opportunities) facing investors and issuers. S&P Global Ratings' "Global Trade At A Crossroads" series examines the impact that global trade disputes may have on ratings and market conditions. This article, which will be periodically updated, is an edited compilation of the key takeaways from our series.

Key Takeaways

China

As the U.S.-China trade spat drags on, it's become clear that a prolonged period of iciness between the countries, or an escalation of the dispute, could have notable effects on the world's two biggest economies.

How The Trade Deal Will Reshape Chinese Financial Services, Jan. 22, 2020

  • The "phase one" trade deal between the U.S. and China opens the financial services markets of both countries to Chinese and American institutions.
  • U.S. entrants may find opportunities in China's brokerage and electronic payments segments, but will likely find it difficult to break into Chinese banking and insurance.
  • U.S. insurers' presence in China will likely remain small.

U.S.-China "Phase One" Deal Is Mildly Positive As Bulk Of Tariffs Remain, Jan. 16, 2020

  • The U.S.-China "Phase One" trade agreement is mildly positive for global trade, GDP growth, and corporate credit, as it marks a de-escalation of tensions.
  • Fundamental issues over trade, technology, intellectual property, and market access haven't been fully addressed, and the bulk of tariffs imposed by both sides remain.
  • We expect the next round of negotiations to be drawn out over several years.

Deep-Seated U.S.-China Tensions Could Threaten Global Sovereign Ratings, Nov. 12, 2019

  • Growing U.S.-China tensions could pose a systemic threat to the world economy beyond their immediate impact on the two countries.
  • Slower GDP growth in the U.S. and China, which have accounted for nearly 45% of world GDP growth in the past five years, would dampen global growth.
  • Some other countries might gain from the first-order impact of the dispute, potentially receiving more investment, but the negative second-order impact (stemming from lower global investment, trade, and GDP growth) is likely to be bigger.
  • The economic and political fallout from U.S.-China tensions could lead to lower sovereign ratings in other countries, absent timely and adequate policy responses.

China’s African Swine Fever May Warm Agribusiness Elsewhere, Oct. 25, 2019

  • Several global agribusiness sectors are reeling from the U.S.-China trade war, particularly in their North American operations. Key U.S. agricultural exports to China have ground to a halt, and farmer profits are under pressure.
  • Other sectors are also caught in the crosshairs, most notably U.S. pork producers as exports to China and Mexico face stiff tariffs while facility expansion has increased domestic competition.
  • While this backdrop appears daunting, the frozen trade negotiations between the U.S. and China may be thawing. The U.S. may pause future tariff hikes, and China has signaled it may reduce pork and soybean tariffs.
  • Irrespective of a trade agreement, a brighter future for global agribusiness players is emerging. Ironically, it comes from China, where domestic pork supplies are dwindling as farmers cull their herds in response to an unprecedented epidemic of African swine fever. The impact is expected to reverberate globally for years to come, most of which should be positive for much of the industry outside China.

Global Auto Industry Faces Long-Term Fallout If U.S.-China Detente Dissolves, Oct. 17, 2019

  • Global automakers and parts suppliers face substantial risk during a prolonged U.S.-China trade dispute, given potential disruptions to supply chains.
  • China represents a huge opportunity for automakers, and Western manufacturers--such as Ford, GM, and Tesla--could experience tariff pressures and also suffer from anti-American sentiment.
  • Smaller aftermarket auto suppliers could suffer because they import a substantial percentage of their products from China and are more susceptible to reassessments of credit risk than larger Tier 1 suppliers.

Prospects For U.S.-China Deal Fade, Aug. 26, 2019

  • A near-term resolution of the U.S.-China trade dispute seems less likely.
  • Both sides plan fresh increases in tariffs.
  • These developments further undermine investor confidence and incrementally worsen global business and economic prospects.

Tariff Tweet Adds Heat To U.S.-Sino Dispute, Aug. 2, 2019

  • A tweet announcing new, unexpected U.S. tariffs on China has shaken global business confidence.
  • The direct impact still remains low to moderate for U.S. issuers; while rated Chinese issuers should be able to absorb the extended tariffs, given their domestic market focus.
  • That said, the negative impact on business and consumer sentiment could further depress revenue trajectories against a backdrop of decelerating global GDP growth.

As Tensions Escalate, U.S. Companies Try To Diversify Supply Chains Away From China

  • Further U.S.-China escalation will put more pressure on profits and supply chain costs and raise even more uncertainty.
  • In response, supply chains are diversifying away from China--which is more difficult for some sectors than others--and we expect this to continue even if U.S.-China tensions subside.
  • Further escalation could worsen economic and financing conditions, which is especially damaging for credit quality.

U.S. And China Exchange Tariff Blows, May 14, 2019

  • Credit impact: While the tariffs compound the economic slowdown challenges currently facing issuers, its impact should be limited.
  • U.S. issuers: Even if all Chinese goods imports were tariffed, we expect the effect on our issuers would be low to moderate.
  • Chinese issuers: Similarly, we believe rated issuers in China could absorb an all-goods hike, given their focus on domestic markets.

Pause In U.S.-China Trade Dispute Is Confidence Positive, Dec. 2, 2018

  • The U.S. White House announced that the U.S. and China have agreed to begin negotiations on structural changes regarding several issues--a positive for business confidence.
  • The discussion will encompass forced technology transfer, intellectual property protection, nontariff barriers, cyber intrusions and cyber theft, services, and agriculture. The announcement noted that both parties will endeavor to complete negotiations within the next 90 days.
  • While the direct impact of trade tariffs (added cost) on issuers that S&P Global Ratings rates is limited, the indirect impact on investor confidence and, in turn, business growth potential has been significant. The negotiation outcomes are uncertain, but the willingness to negotiate is the first good news on the matter for many months.

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China's Latest Tariffs On U.S. Goods In Line With Expectations, Raise Risk Of Lower Growth, Sept. 18, 2018

  • China has retaliated against the U.S. announcement of tariffs on $200 billion of Chinese imports by imposing 5%-10% tariffs on U.S. imports valued at $60 billion effective Sept. 24, 2018. We believe that the "shock" arising from this escalation by both sides could eventually have a larger proportionate impact on the U.S. economy than China's.
  • In the event of a trade war that sees the escalation of the current U.S.-China trade dispute to one where 25% tariffs are imposed on all nonfuel goods between the two largest economies, with a shock to confidence added in, roughly 1.2 percentage point cumulatively could be shaved off U.S. GDP over 2019-2021.
  • Even if such a trade war doesn't materialize, the mere perception of the heighted risk of one could be sufficient to depress business and market confidence to an extent that it has a significant impact on the real economy.

U.S. Tariffs On $200 Billion Chinese Imports Will Further Dampen Investor Sentiment, Sept. 18, 2018

  • The U.S. has made good on its threat to impose tariffs on another $200 billion of Chinese imports, further dampening investor sentiment and possibly reducing future global growth.
  • For China, 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.
  • 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 Asia-Pacific, the ripple effects will be felt in the supply-chain network. 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.

Economic Research: It's Hard To See Any Winners In A U.S.-China Trade War, Sept. 5, 2018

  • An escalation of the current U.S.-China trade dispute to a trade war that adds a 25% tariff on all nonfuel goods between the two largest economies could shave roughly one percentage point off U.S. GDP by 2021; for China, the loss to GDP would be around six-tenths of one percent.
  • Moreover, in a calibrated scenario with an extra confidence shock such that global GDP growth is one percentage point lower than it would normally be, an additional two-tenths and four-tenths of one percentage point could be shaved off the American and Chinese economies, respectively, by 2021.
  • Attempts to help those hurt by globalization via higher tariffs or other forms of protectionism, even if well meaning, will raise prices and hurt all consumers, especially poor and middle-class families--not to mention damage the competitiveness of companies that import raw materials and components from other countries and folks who work in export industries.
  • Seeing trade deficits as invariably bad is off base. In fact, a trade deficit associated with larger volumes of both imports and exports could be more effective in raising living standards than a trade surplus in which trade volumes are low.
  • The U.S. focus on trade imbalances with China detracts from the resolution of pressing multilateral issues, including market access and investment restrictions in China, which would be more beneficial for all sides.

China Is Running Out Of Room To Impose Tariffs On U.S. Goods, Aug. 7, 2018

  • The U.S.-China trade battle could spill over into services. This is because China is running out of room to retaliate on goods.
  • With China running out of room to retaliate on goods, China could opt to pursue nontariff actions affecting services and investments from the U.S.
  • A retaliation that spilled over into services could hurt U.S. sectors that rely on China's expanding import market for growth. This step-up in tensions could also exacerbate investor worries about China, damaging business and consumer confidence and growth prospects.

Trade Risk Treads Water As China Holds Back Response To U.S.' $200 Billion Tariff Threat, July 13, 2018

  • The Trump Administration has announced the list of Chinese imports valued at about $200 billion on which the U.S. may impose 10% tariffs as early as September.
  • However, the Chinese government, after initially reacting angrily, appears to be calmly considering its options. The absence of an immediate tit-for-tat response lends hope to the belief that China-U.S. trade negotiations aren't completely off the table.
  • We are not sanguine about the risk. Our current base-case assumption is that the tariffs, if imposed, will not likely greatly affect either economy. However, they would affect some industries and individual corporations.

What U.S.-China Trade Tensions Mean For Cross-Border M&A, June 22, 2018

  • Some recent mergers and acquisitions (M&A) between the U.S. and China have been stopped at the border due to national security concerns.
  • Tariffs may grab the headlines, but restrictions on foreign investment and cross-border deals could have a more direct and immediate credit impact.
  • Although Chinese buyers are not behind the majority of U.S. cross-border M&A, they have had the highest number of transactions come under federal scrutiny in recent years.
  • While there are concerns that global trade tensions would slow cross-border M&A, the U.S. dealmaking landscape has improved.

U.S. Quadruples Down In China Dispute, Sparking Wider Fears Of An All-Out Trade War, June 19, 2018

  • The Trump Administration announced that the U.S. may impose tariffs on another $200 billion of unspecified Chinese imports--on top of last week's announced $34 billion--raising the stakes of a trade dispute with China even higher.
  • The recent moves by the U.S. are generally aimed at industrial sectors that coincide with China's "Made in China 2025" policy, which lays out a strategy for the country to dominate high-tech industries, while China's include tariffs on farm goods, automobiles, and seafood products.
  • This could have a significant effect on the U.S. farming sector because China is the largest destination for American agricultural exports.

The Risk Of An All-Out China-U.S. Trade War Moves Up A Notch, June 18, 2018

  • In a tit-for-tat action, the U.S. and China are imposing 25% tariffs on $34 billion of goods imported from one another. Both governments are reserving the right to impose similar tariffs on another $16 billion of goods.
  • The impact of China's tariffs on U.S. exports would be greater than that of U.S. tariffs on China's exports because $50 billion represents 38% of U.S. exports to China but only 10% of China's exports to the U.S.
  • Our base case is that the tariffs, if imposed, are unlikely to greatly affect either economy or the credit profiles of their corporates and banks.
  • While we expect the U.S. and China to restart negotiations, the risk of an all-out trade war is rising and would hurt global confidence, economic growth, and credit.

Economic Research: Will The U.S.-China Trade Tempest Make Landfall Or Blow Out To Sea?, May 4, 2018

  • While we estimate that U.S. tariffs of 25% on $50 billion worth of Chinese goods would shave a modest 0.1 percentage point from GDP annually this year and next, the dispute has ramification for supply chains, employment, and inflation.
  • The proposed U.S. tariffs would likely translate to an overall increase in consumer price inflation of 0.1-0.2 points above our current forecast. While that level alone isn't enough to spur the Federal Reserve to raise rates any faster, it does add to inflationary pressures that have been building in the supply chain.
  • A number of industries could see their input prices rise. And states with the most significant exposure to trade are vulnerable to the U.S.-China tug-of-war.
  • Add to this the potential job losses in certain industries--with more than 2 million American workers exposed to Chinese retaliatory tariffs on the export side, according to one estimate--and it's clear that an escalation in tensions between the two countries would have noteworthy, real-world ramifications.

How The U.S.-China Spat May Hurt The Tech Sector, And The Latest On Qualcomm And Broadcom, April 25, 2018

  • We believe the U.S.' proposed 25% tariffs on up to about $50 billion of Chinese imports will have a subdued impact on the global technology sector.
  • The Committee on Foreign Investment in the U.S. (CFIUS), a U.S. government interagency committee that reviews national security implications of foreign investments in U.S. companies and operations, has recommended the blocking of two recent takeover proposals involving U.S.- and China-based companies.

As China Threatens Retaliatory Tariffs On U.S. Agricultural Products, Which Ratings Are Most At Risk?, April 6, 2018

  • Grain companies would face near-term profit pressure, but the markets don't seem to be betting on weaker margin.
  • Pork and beef processors could face margin pressure from weaker pricing, but broader trends, lower input costs, and limited export market exposure should keep margins from bleeding.
  • We believe the risk to ratings is more pronounced for grain originators and processors than for the protein producers, primarily because their earnings have already been under pressure.

U.S. Doubles Down In China Tariff Dispute, Worsening Credit Conditions, April 6, 2018

  • The U.S. announcement that it may impose tariffs on another $100 billion of unspecified Chinese imports further raises the stakes in the China-U.S. trade dispute.
  • We still hold the view that the potential near-term effects on corporate credit are likely to be muted. Admittedly, though, some industries could be more affected.
  • A greater threat is the dispute expanding beyond tariffs on goods.

China-U.S. Tariff Dispute Still A Skirmish, But Credit Risks Are Rising, April 5, 2018

  • The U.S. and China have each proposed to impose 25% tariffs on $50 billion of goods imported from the other.
  • The impact of China's tariffs on U.S. exports would be greater than that of U.S. tariffs on China's exports. That's because $50 billion represents 38% of U.S. exports to China, but only 10% of China's exports to the U.S.
  • Our base case is that the tariffs, if imposed, are unlikely to greatly affect either economy or the credit profiles of their corporates and banks.
  • While we expect the U.S. and China to agree to negotiate, the risk of an all-out trade war is rising. Such an event would hurt global confidence, economic growth, and credit.

If U.S. Tariffs Trigger A Trade War With China, Corporate Credit Will Suffer, March 23, 2018

  • The Trump Administration intends to impose tariffs on $50 billion-$60 billion of Chinese imports, lodge a WTO dispute against China's technology licensing, and restrict Chinese investment in strategic industries and technologies.
  • Even assuming a high 25% tariff rate on the likely targeted imports, our calculations show the overall impact on Chinese corporates and banks will be contained.
  • The impact is limited because the U.S. represents only about 15% of China's goods exports, and China's domestic activity now drives its economic growth, rather than exports as in earlier decades.
  • China's response so far has been measured, flagging potential tariffs on about $3 billion of U.S. imports. However, the situation remains dynamic, with the risk of further tariffs and restrictions on investments and market access.
  • A trade war between the world's two largest economies would hurt global confidence, economic growth, and credit.
U.S.

Phase One Tariff Deal Doesn't Go Far Enough For Retail, Jan. 16, 2020

  • The U.S. agreed to a trade deal that eases some tariffs on Chinese goods but leaves the bulk of levies in place.
  • The deal is expected to make good on the announcement to defer the 15% tariffs on $160 billion worth of consumer goods scheduled to take effect Dec. 15, 2019 (list 4B), but the ultimate reduction to the Sept. 1 tariffs on $120 billion of goods (list 4A) at this juncture remains unclear.
  • In our view, the deal does little to relieve stress in the retail sector. We had expected the list 4 tariffs--which largely targeted consumer goods--to result in sales and earnings pressure, particularly for cash-strapped, smaller retailers without the financial power to effectively manage tariff-related cost increases.

Will Tariffs Drive More U.S. Retailers Off The Cliff?, Oct. 7, 2019

  • The effects of new tariffs will only add to the difficulty retailers have been facing as promotions become more common and consumers continue migrating to online shopping.
  • The impact from tariffs is likely to evolve into a survival of the fittest for U.S. retailers, as we see an increasing divergence between weak retailers and strong ones, whose operating performance and credit metrics will likely hold up better during the U.S. trade war with China.
  • The most resilient larger retailers are the ones that can move supply chains out of China, successfully negotiate with a diverse group of suppliers and vendors, cut operational costs, and raise retail prices.
  • Higher tariffs are likely to result in more distressed credits in the retail sector, with downgrades significantly outpacing upgrades this year (so far 1.7 to 1), and an elevated-level of 'CCC' category ratings (currently at 16%).

Tariff Delay A Respite For U.S. Tech, Aug. 14, 2019

  • The U.S. delay in tariffs on US$150 billion of imports from China is a minor respite from the trade-dispute fallout.
  • The partial delay defers a significant rise in cost for the U.S. technology sector (particularly manufacturers) and flow-on prices to consumers.

Latest Tariff Threat Would Be An Even Bigger Blow To The U.S. Tech Sector, Aug. 5, 2019

  • New 10% U.S. tariffs on $300 billion of China imports, if passed, will include a list of major tech products.
  • This round of tariffs will be more damaging to the U.S. tech sector than the prior three rounds due to the wider scope of tech products affected, and because it includes more finished goods that are more expensive than intermediary goods.
  • Potential non-tariff-related retaliatory actions and deteriorating business and consumer sentiment could further depress revenue trajectories against a backdrop of decelerating global GDP growth, which is correlated to global IT spending growth.
  • While we have not made any rating changes to U.S. tech companies arising from the proposed new tariffs, we will continue to assess the potential impact on our rated U.S. tech issuers and whether rating actions are appropriate.

Section 232 Tariffs Leave Dents In U.S. Aluminum Credit Quality, April 1, 2019

  • So far, Section 232 tariffs have not driven upgrades for U.S. aluminum producers rated by S&P Global Ratings.
  • Tariffs probably won't increase U.S. primary metal output much, because of limited low-cost electricity to spark production.
  • U.S aluminum buyers--makers of everything from beverage cans to auto parts to jet engines--are trying to pass along higher costs to their customers.
  • Downstream aluminum rolling companies continue investing in the U.S. despite higher costs from tariffs, because of growing demand for the lightweight metal.
  • The U.S. Aluminum Association has called for "full exemptions from the Section 232 remedy--no tariffs or quotas--for aluminum products within the North American market."

As Stresses Eat At Profits For U.S. And Brazilian Meat Producers, Most Will Survive The Cut, Dec. 3, 2018

  • Healthy beef U.S. margins are likely to continue, but trade disruption could pinch margins.
  • U.S. pork producers keep leverage in check by selling down excess domestic stock to avoid inventory oversupply, while the poultry industry faces growing inventories and margin pressure.
  • Brazil meat producers' balance sheets are stretched but earnings should see a rebound this year.
  • With a modest economic rebound in the works, Brazil's meat industry should right size production capacity, maintaining high cattle reserves and increasing meat exports with a depreciated Brazilian real.
  • Brazilian meat producers' margins will likely continue improving next year, which will result in companies' reducing leverage.

U.S. States And Localities May Take Another Look At Budget Forecasts, March 9, 2018

  • On balance, a shift toward protectionist trade policies has negative implications for most state economies.
  • The direct rise in import prices from the tariffs should be closer to zero. Nevertheless, in our view, it's possible that the specter of a trade war triggered by the tariffs could lead to a small pickup in inflation.
  • Any slowdown in U.S. economic growth stemming from shifts in trade policy could have a similar dampening effect on local governments, and trade-related changes would only exacerbate this for local economies heavily dependent on exports.

U.S. Steel And Aluminum Tariffs Raise Risk Of Retaliatory Spiral, March 9, 2018

  • On March 8, 2018, U.S. President Donald Trump approved the imposition of two new tariffs: 25% on steel and 10% on aluminum imports, with Canada and Mexico exempted, effective March 23.
  • The net impact on the U.S. economy is likely to be very small. While steel and aluminum producers may benefit, aerospace and defense, capital goods, and midstream energy could suffer from higher input costs.
  • U.S. steel imports represent just 2% of global production. While aluminum represents a larger percentage (6%), its tariff is lower. Consequently, we do not see steel and aluminum that would have otherwise been bound for the U.S. flooding global markets.
  • Posing a greater threat is the risk of retaliatory action by major U.S. trade partners (e.g., the EU and China) triggering a trade war and hurting American exporters, global trade, and global economic growth.

Economic Research: U.S. Steel And Aluminum Tariffs Will Likely Have Small Direct Impact But Risk Larger Knock-On Effects, March 9, 2018

  • The direct impact of the new tariffs is likely going to be very small. It will likely boost U.S.-based steel and aluminum producers at the risk of downstream manufacturers.
  • The impact on consumer price inflation will be less than one-tenth of a percentage point.
  • The fear is that these tariffs are just a start to a longer game of tit-for-tat tariff retaliations and pose a fundamental threat to the rules-based trading system.
  • To the extent trade helps cut down inefficiencies and increase total factor productivity, loss in potential trade points to further deterioration in the longer-run trend of productivity growth.

Trump Tariffs Forge Better Credit Quality For U.S.-Based Steel And Aluminum Producers With A Protectionist Stance, March 3, 2018

  • Trade actions could underpin positive rating actions among U.S.-based steel and aluminum producers.
  • Low-speculative-grade rated issuers have the best prospects for higher ratings in the next 12-24 months.
  • Trade barriers will likely widen spreads with global prices and increase margins.
  • Elevated prices could support stronger profits and cash flow, and boost refinancing of looming maturities.
Europe

In The Firing Line: Trump, Trade, And EU Corporate Credit, May 1, 2018

  • The U.S. has given the EU a "final" 30-day reprieve from steel and aluminum tariffs. Should this lapse, EU tariff retaliation is likely. The risk of trade conflict is growing.
  • The EU's large trade surplus with the U.S. (dominated by Germany and its car industry) is likely to be targeted for concessions even if U.S.-based production makes this complex.
  • The stakes for the European rated sector are high, with some 23% of nonfinancial investment-grade revenues coming from the U.S.
Canada and Mexico

USMCA, NAFTA's Successor--It Could Have Been Worse, Oct. 8, 2018

  • The effects of the United States Mexico Canada Agreement (USMCA), intended to replace the North American Free Trade Agreement (NAFTA), will be modest in most cases.
  • The treaty tightens existing restrictions on North American vehicle content necessary to qualify for tariff-free movements within the trade bloc, and introduces new requirements for manufacturing in high-wage factories, which will raise manufacturing costs and vehicle prices modestly over time.
  • The effect in other potentially affected sectors, such as agriculture and transportation, is rather less, largely maintaining the status quo and, in a few cases such as dairy exports to Canada, opening up new trade opportunities.

Economic Research: What Will Be The Likely Impact Of U.S. Steel And Aluminum Tariffs On Latin America?, March 20, 2018

  • The announced U.S. tariffs on steel and aluminum are a legitimate source of concern among some Latin American economies, particularly Brazil and Argentina.
  • The U.S. exempted Mexico and Canada from the tariffs contingent on the outcome of the NAFTA renegotiation. However, Mexico runs a roughly balanced trade with the U.S. in steel, which means that Mexico's steel industry has little to gain from the continuation of the tariff exemptions.
  • Assuming the tariff exemptions on Mexico and Canada remain in place, for U.S. steel capacity utilization to reach the 80% objective, the tariff on third countries, such as Brazil, would have to be raised significantly above the 25% rate. Given that Canada and Mexico account for 25% of total steel imports to the U.S., we estimate that the tariff on non-NAFTA exporters will have to be 42%.

This report does not constitute a rating action.

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

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