The scope of US tariffs on EU goods announced this week following the US' victory in a World Trade Organization (WTO) case is narrower than initially proposed. It includes a 10% duty on aircraft and a 25% duty on a range of consumer products, including alcohol, dairy, olives and clothes. While the immediate credit impact on rated issuers is unlikely to be significant, further trade tensions increase the risk of broader tariffs being imposed by both jurisdictions.
New U.S. tariffs on Chinese imports represent an escalation of U.S. trade protectionism beyond our baseline forecasts. As part of a broader trend that includes increased tariffs and greater trade policy uncertainty, the move highlights a significant threat to global growth. On their own, the tariffs may have a limited direct impact on near-term growth and policy responses could mitigate these effects.
China's recently announced embargo on US agricultural imports escalates trade-related risks to the US farm sector, which is experiencing falling sales, prices and land values from previous tariffs. Effects of this downturn are felt in state revenues, agricultural loan performance and corporate earnings.
A sense of optimism has returned to global financial markets, as they take in the expectation of continued accommodation by central banks and the resumption of trade talks between China and the US. While President Trump’s capacity to surprise and his tendency to interject directly make the eventual outcome of the trade negotiations difficult to predict, there are four developments investors should be prepared to encounter. This edition of Global Perspectives was published exclusively first by The Straits Times.
The financial implications of increased tariffs would vary across auto manufacturers according to their differing mix of domestic and foreign manufacturing, ability to flex production lines, and use of imported parts. European and Asian carmakers that import a high percentage of the vehicles sold in the US are most vulnerable, while those that domestically produce most of the vehicles they sell in the US are more insulated from tariff risk.
The increase in tariffs on Chinese imports could negatively affect margins for US building product manufacturers by up to 200bps, absent pricing and other mitigating actions. The ability to offset the incremental cost with additional pricing will depend in part on the product category, distribution channel and strength of the US housing market.
The imposition of broad-based tariffs on US imports of Mexican goods could have a direct negative revenue effect on 20% of Fitch Ratings' Mexican-rated corporates. However, depending on the duration and level of tariffs levied, there would also likely be indirect effects on Mexican companies linked to the broader macroeconomic repercussions of heightened trade tensions.
US tariffs on Mexican imports would increase uncertainty regarding ratification of the US-Mexico-Canada (USMCA) trade agreement and negatively affect cash flow for corporations, particularly in the global automotive industry, which exports Mexican-manufactured products into the US. Near-term credit implications of potential tariffs are limited but cash flow effects will depend on the ability to pass on the cost or flex manufacturing footprints.
Increasing trade tensions with the US will undermine Mexico's already-weak economic activity. Recent growth has been led by sectors closely tied to the US manufacturing sector. The value of manufacturing exports had grown 9.1% in 2018, the strongest since 2011. Mexico is particularly exposed to the auto industry, which accounts for around 3.5% of GDP.
Brian Coulton, Chief Economist, Fitch Ratings, joined Rishaad Salamat and Doug Krizner on Daybreak Asia. He says we are firmly in escalation mode on trade. He goes onto the potential impact for his forecast on China’s growth and how China may respond.
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.
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'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.
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.