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Wednesday,
December 18, 2019 / 11:10 AM / By Fitch Ratings / Header Image Credit: nytimes
A signed and mutually honored 'Phase One' US-China
trade deal would lessen near-term tariff risk for US Corporates and ease trade
tensions, at least temporarily, says Fitch Ratings. However, the 'Phase One'
deal alone is not likely to eliminate trade-related uncertainty or restore business
confidence, given potentially prolonged 'Phase Two' negotiations on structural
issues. The US-China trade relationship is a major watch item for US corporate
credit in 2020, given the size of the Chinese market, intricate global supply
chains and implications for world growth.
Renewed escalation of US-China tensions remains a
significant risk. Trade tensions and tit-for-tat retaliatory actions have
caused uncertainty for US companies, resulting in reduced business confidence,
a pullback in investments and in some cases lower profitability. The
Organization for Economic Co-operation and Development's (OECD) business
confidence index has been below 100 for five consecutive months, reflecting
pessimism toward future business performance. A focus on long-term risk
mitigation strategies including supply chain adjustments, increased localized
production, and end-market diversification to manage ongoing trade uncertainty
will likely continue.
Official statements suggest the effective US tariff
rate on imports from China could fall to about 16% under the plan, compared
with earlier plans where the rate would rise to about 25%. This is due in part
to the US agreeing to forego a 15% tariff on an additional $156 billion of
Chinese consumer goods scheduled to take effect on December 15.
China also cancelled retaliatory tariffs due to take
effect on December 15, according to news reports. As part of the trade deal,
China committed to importing US goods and services over the next two years in a
total amount exceeding China's import level in 2017 by at least $200 billion,
according to the office of the US Trade Representative. The agency indicates
changes to China's policies on intellectual property (IP) and technology
transfer, historical sticking points in trade negotiations, and an arrangement
to resolve disputes are also included in the 'Phase One' deal.
Reduced tariff rates might improve US relative price
competitiveness but China's domestic demand trends may complicate efforts to
meaningfully increase imports. A sharp acceleration in China's imports of US products
seems unlikely, unless diverted from other sources, given Fitch's assumptions
of mild Chinese renminbi depreciation and a slight moderation of Chinese
economic growth. Even so, China's protein needs have risen due to the effects
of the African Swine Flu virus on Chinese pork production and herd size.
Increased agricultural purchases by China could help
support a material earnings improvement across the agricultural sector. An
easing of trade tensions would also be an important development for the industrial
sector, given aircraft, engines, equipment and parts top the list of US
products exported to China, according to the US Census Bureau. Trade-related
concerns, including tariffs and disrupted supply chains, are dampening economic
activity and corporate investment, contributing to slower sales growth among US
diversified industrials and capital goods companies. China is an important
market for Ford and GM, and several US auto suppliers, with the trade dispute
being an indirect factor leading to lower Chinese auto sales.
A 'Phase One' deal may only provide limited benefit
for US technology companies, given the emphasis on structural longer-term
considerations around fair market access and IP protection. Some technology
companies took steps, including greater distribution from foreign manufacturing
facilities and shifting orders to rivals, to mitigate the effects of tariffs
over the past two years.
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