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Global Trade At A Crossroads: Tariff Delay A Respite For U.S. Tech

A delay of some planned tariffs on Chinese goods defers a significant rise in U.S. technology-goods prices. However, S&P Global Ratings believes the respite will be short, given the policy uncertainty will continue to drag on business sentiment and economic growth.

On Aug. 13, 2019, the Office of the U.S. Trade Representative (USTR) announced a modification of its earlier plan to impose an additional 10% tariff on approximately US$300 billion of goods imported from China (the so-called "List 4"). The coverage now excludes certain goods related to health and safety. In addition, the remaining list of goods is divided in half: List 4A for goods where the tariffs will be imposed from Sept.1, 2019 as originally scheduled, and List 4B where tariffs will come into effect on Dec. 15, 2019 (see charts 1 and 2).

Technology.   Overall, we see this latest development as just a minor respite to the negative momentum on global business confidence due to the trade dispute. That said, the delay in tariffs on goods under list 4B (such as cells phones, laptop computers, video game consoles, toys, and computer monitors) defers a significant rise in costs for U.S. technology manufacturers, and prices for consumers.

S&P Global Market Intelligence (contact: Christopher Rogers, christopher.rogers@spglobal.com) estimates the mix of goods for Lists 4A and 4B in charts 1 and 2 as below:

Chart 1

image

Chart 2

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Other issuers.   We reiterate our view that the first-order impact on credit is generally low to moderate for issuers in both countries. We hold this view even in the scenario of both countries imposing tariffs of 25% on all goods imported from each other. Both countries have diversified export markets. Their own domestic markets are very large and businesses still cater to them; and a large number of rated corporates still have some flexibility in managing their costs, including, in some cases, the option of passing on the additional expense from tariffs to customers.

U.S. economy.   For the U.S., the direct economic impact from a full round of 10% tariff increases will likely shave another 10-15 basis points off U.S. GDP growth, if the penalties remain in place for a year. On their own, this is not enough to threaten the U.S. expansion. However, other protectionist policies are already in place and storms are brewing over the U.S.-EU trade dispute. The U.S. economy may begin to feel the pinch from these various trade clashes. Secondary effects from reduced business investment will further weaken U.S. economic conditions the longer these disputes last.

China economy.   For China, the direct economic impact through net exports is limited given value-added exports to the U.S. account for less than 3.5% of China's GDP. While this latest announcement may soften the direct impact for now, the broader effects of policy uncertainty are likely to persist. This is already dampening investment in the manufacturing sector and may put further downward pressure on growth and jeopardize the nascent stabilization of recent months.

Longer term.  While the short-term impact of higher tariffs is manageable for both countries, the longer-term effects on growth prospects, particularly through the rewiring of global supply chains, could be greater. The recent reaction in equity markets reflects such risks. This in turn could dampen investment appetite and have a flow-on effect to credit markets.

A timeline of the trade dispute between the two countries is shown below in chart 3.

image

Related Research

  • Global Trade At A Crossroads: Latest Tariff Threat Would Be An Even Bigger Blow To The U.S. Tech Sector, Aug. 6, 2019
  • Global Trade At A Crossroads: Tariff Tweet Adds Heat To U.S.-Sino Dispute, Aug. 2, 2019

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:David T Tsui, CFA, CPA, New York (1) 212-438-2138;
david.tsui@spglobal.com
Terry E Chan, CFA, Melbourne (61) 3-9631-2174;
terry.chan@spglobal.com
U.S. Chief Economist:Beth Ann Bovino, New York (1) 212-438-1652;
bethann.bovino@spglobal.com
Asia-Pacific Chief Economist:Shaun Roache, Singapore (65) 6597-6137;
shaun.roache@spglobal.com

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