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Credit Hotspot: Trade Protectionism

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Fitch Ratings Exclusive Interview with South Korean Deputy Prime Minister

Fitch Ratings’ Head of APAC Sovereigns Stephen Schwartz speaks with South Korean Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki in a three part interview which includes South Korea’s economic prospects and challenges; relations with North Korea and China; and the commitment to improve corporate governance such as the reform the country’s powerful industrial conglomerates or Chaebol.

Part 1: South Korean Deputy Prime Minister on the Economy
Part 2: South Korean Deputy Prime Minister on North Korea and China
Part 3: South Korean Deputy Prime Minister on Labour and Governance Policy
Korea Grapples with Trade Tensions, Risks to Growth

Further Tariff Escalation Would Hamper Global Growth

The U.S. decision to increase tariffs to 25% on an additional USD200 billion of imports from China had been assumed under Fitch Ratings' 2019 base case and does not alter our Chinese or global growth forecasts. However, the decision marks a significant escalation in U.S.-China trade tensions, and highlights the risk of a protracted trade war beyond our current assumptions. This could have spill-over effects to countries other than China and the U.S. 

BMW, Daimler Most at Risk of US Tariff Rise, China Reprisal

BMW's and Daimler's sales are likely to be most affected in the automotive sector were China to increase import tariffs in retaliation for expected higher US tariffs. This could put pressure on earnings and spur the manufacturers to adjust their production bases to align with their end-markets, weighing further on the groups' capex and cash generation in the medium term.

New Tariffs Would Signal Prolonged US Corporate Headwind

China trade tension may become a longer than expected headwind for US corporations as the prospect of additional US tariffs, retaliation from China, and prolonged negotiations rise. Although credit implications are limited, risk mitigation via pricing actions, supply chain adjustments, localized production, and end-market diversification could increase in importance due to the need to manage ongoing trade uncertainty. 

USMCA Mitigates Risk for Mexico’s Financial Institutions

The tentative new US-Mexico-Canada Agreement, which updates NAFTA, should reduce broad macro and financial uncertainties related to trade protectionism for Mexican banks.

NAFTA Replacement USMCA Settles Key Trade Uncertainties

A deal between the Canadian, Mexican and U.S. governments for a revised trilateral free trade agreement should reduce uncertainties for U.S.-Canada and U.S.-Mexico trade. In particular, the tentative deal potentially removes the threat of auto tariffs for both Canada and Mexico under Article 232, which gives the U.S. government the right to impose tariffs on national security grounds. 

No-Deal Brexit Rating Impact

The automotive, aerospace, retail, real estate and airline sectors are all exposed to a "no-deal" Brexit, Fitch Ratings says. The risk to individual issuers varies with their size, diversification and financial strength.

USMCA to Reduce North American Corporates' Trade Risk

Ratification of the new US-Mexico-Canada (USMCA) trade agreement would reduce the trade uncertainty for numerous North American corporate sectors that resulted from protracted renegotiations of NAFTA. Given intricate cross-border supply chains and the high cost of relocating production facilities, many sectors stand to benefit but the USMCA would be most effective for mitigating NAFTA-related uncertainties for the auto industry.

Ports and Airports Would Be Exposed in 'No Deal' Brexit

Ports and airports would be most vulnerable in a "no deal" Brexit scenario in the infrastructure and whole business securitisation sector, with traffic declines and increased costs putting pressure on cash flows. Furthermore, less-liquid capital markets could increase refinancing costs.

global economic outlook

World Growth Forecast Cut on US-China Trade Battle

Protectionist US trade policies have now reached the point where they are materially affecting what remains a strong global growth outlook, with the US-China trade battle prompting us to downgrade our 2019 global GDP forecast.

Preliminary Trade Agreement Positive for Mexican Corporates

The preliminary bilateral agreement announced by the US and Mexico is positive for Mexican corporates, according to Fitch Ratings. We believe the announcement reduces uncertainty about the final outcome of negotiations and establishes a framework for future long-term investment decisions.

Trade Finance Banks - Navigating EM Risks, Trade Wars

Fitch Ratings views that the potential escalation of global trade tensions could be negative for the operating environments of its five rated EMEA trade finance banks, given their high reliance on trade flows between Europe and emerging markets. However, there is no immediate pressure on the ratings, as reflected by the Stable Outlooks, given the banks' niche focuses and reasonable financial buffers, and therefore ability to withstand near-term shocks.

Global Trade Tensions Add to APAC Bank Challenges

An escalation in global trade tensions could weaken the operating environment for banks in APAC by reducing demand for export finance, adding to credit risks for affected companies, and dragging on broader economic growth. 

Global Mining Half-Year Update

Clouded Outlook for Global Mining Due to Trade Tensions

The outlook for the mining sector has become more clouded in recent months due to trade tensions between the US and China, Fitch Ratings says. Prices for several commodities, including copper, nickel and zinc, fell sharply in July due to investor concerns about global growth.

Trade War Escalation Would Knock 0.4% off World Growth

An escalation of global trade tensions that results in new tariffs on USD2 trillion in global trade flows would reduce world growth by 0.4% in 2019 to 2.8%. The US, Canada, and Mexico would be the most affected countries.

Tariff Risk to US, Chinese Corporates Limited But Rising

The vulnerability of rated corporates in the US and China to initial rounds of tariffs by those countries is limited, due to either low direct exposure or the relatively strong global economy. However, tit-for-tat retaliatory actions could raise credit risk and in rare cases cause rating actions where issuers are already under pressure. A prolonged trade dispute resulting in weaker GDP growth, higher inflation, increased currency volatility or rapid changes in commodity prices could have wider rating implications. 

Election, NAFTA Raise Mexico Bank/NBFI Uncertainties

Uncertainties over potential economic policy changes after Mexico's general election and protracted North American Free Trade Agreement (NAFTA) re-negotiations could have a low to moderately negative effect on loan growth, asset quality and profitability for Mexican banks and non-bank financial institutions (NBFIs). 

Tariffs Credit Negative for Carmakers, Effects Would Vary

US tariffs of up to 25% on all imported automobiles and parts would have a negative effect on the cash flow and credit profiles of the global auto manufacturers, but financial implications would vary significantly. 

Risks to Global Growth Rise as Trade Tensions Escalate

The US investigation into auto tariffs, possible additional US tariffs on Chinese imports, and the likely reactions of other countries and blocs, point to a potential serious escalation, albeit with an impact that falls short of across-the-board tariffs imposed on all major trade flows.

Economic Protectionism and Global Markets

James McCormack, Global Head of Sovereign Ratings, joins panelists at the 2018 St. Petersburg International Economic Forum to discuss economic protectionism and global markets.

Mixed Global Credit Impact of US Metal Tariffs, Reprisals

Corporate credit implications from the US's expansion of steel and aluminum tariffs on imports from the EU, Canada, and Mexico will be mixed. Retaliatory actions could escalate trade tensions but the situation would need to deteriorate severely to have major ramifications for world GDP. 

China Trade Risk Is Manageable for US Ag Traders, Protein

Details regarding a potential US-China trade agreement and tariffs on soybeans and other agricultural products, including beef and sorghum exports, remain ambiguous. However, trade risk for US agricultural processors and protein companies is manageable.

US's China Tariffs May Create Risks for Some APAC Corps

The announced tariffs cover around USD50 billion of Chinese exports, which we estimate would not have a significant effect on the Chinese or global economy. Subsequent and escalating tariff proposals by the Chinese and US governments have increased the risk of a full-blown trade war.

TLCAN y Elecciones: Visión en Tiempos de Incertidumbre

16 de Mayo de 2018,
Hyatt Regency Ciudad de México

Shipping Can Manage US-China Tariffs, But Risks Rising

The immediate impact of potential tariffs may be manageable for both container and dry-bulk shipping. Some of the goods under the proposed tariffs are likely to continue to be imported by the US or China due to the limited substitutes.

US-China Tariff Threats Raise Global Trade Risks

Escalating tariff proposals by the US and Chinese governments are increasing the risks of a full-blown trade war. The most likely outcome remains a negotiated solution to US-China trade tensions that has limited effect on the near-term growth outlook in both countries and leaves our base case global macroeconomic forecasts intact. However, the risk of a more material impact is growing. 

US Transportation Growth Steady as Focus Turns to Interest Rates, Trade

Recent trade friction between the United States and China and the prospects for higher interest rates are not likely to affect growth for the major transportation segments for the foreseeable future.

China Can Cope With US Tariffs, But Trade Risks Rising

The US government's proposal to impose tariffs on USD50 billion-USD60 billion worth of imports from China is unlikely to have a significant impact on the Chinese or global economy.

Mexican Corporates Maintain Adequate Liquidity Despite Political and NAFTA Uncertainty

"Fitch considers a potential liquidity crunch for Mexican corporates unlikely even if NAFTA is cancelled. The local credit market remains robust with high levels of competitive bank lending, while international capital markets are expected to remain open for established Mexican cross-border issuers," said Jay Djemal, Director.

NAFTA Exit Would Impact US Midwest and Border States Most

Withdrawal would negatively impact employment and growth in these states, which would mean lower tax revenue, likely leading to constrained budgetary flexibility and higher unemployment. The entire US economy would be less affected by withdrawal as exports of goods and services accounted for only 12% of US GDP in 2016. 

US Steel Tariffs Up Trade Risks but Sector Impact Limited

The US government's plan to impose tariffs on steel and aluminum imports could heighten risks to global growth should it result in retaliatory measures that lead to broader trade disruption and higher consumer goods prices.

Proposed US Tariffs to Have Limited Impact on China Metals Producers

Plans by the US to impose import tariffs of 25% on steel and 10% on aluminium will have limited impact on the Chinese producers of these metals as the US is not a significant market for them.

Volume Growth Steady for US Ports as NAFTA Decision Looms

US ports are positioned for another solid year of growth, though the Trump administration's evolving stance on both domestic and international trade is a long-term development worth a close watch.

Mexican Economic, Fiscal Resilience To Be Tested In 2018

The base case remains for continued overall macroeconomic and fiscal resilience, although downside risks remain, given uncertainties associated with NAFTA negotiations and the Mexican 2018 election cycle.

Risks to Watch 2018: Trade Protectionism

Chief Economist Brian Coulton and North America Sovereigns Head Charles Seville discuss Brexit, NAFTA and the implications of trade protectionism on the global economy.

Mexican Corporate Issuers' Exposure to NAFTA Repeal

The Mexican sectors at highest risk to negative credit pressure in a post-NAFTA framework would include auto parts, diversified manufacturing, real estate and retail companies.

NAFTA Risk Prolongs Trade Uncertainty For Canada

The risks have risen that NAFTA negotiations may result in an unfavorable economic outcome for Canada, although this is not Fitch’s base case.

Domestic Politics the Biggest Threat to NAFTA

Positions on some issues are broadly aligned, while others appear further apart, diminishing the prospect of a deal being reached within the allotted - and recently extended - timeframe.

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