Friday, July 13 2018 /10:20 AM / Fitch Ratings
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, according to Fitch Ratings. 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.
Trade tensions are rising with the US planning a 10% tariff on an additional $200 billion of Chinese imports after China announced equal and comparable retaliatory measures following the US levying tariffs on $34 billion of Chinese imports last week. Tariffs on another $16 billion of imports were already expected for both countries. However, China could apply tariffs to all US imports or retaliate in other ways. A numerical estimate of financial implications on a cross-sector basis is uncertain due to the untested nature of a trade war between the world's two largest economies.
We have screened rated US and Chinese corporations to identify susceptibility to announced and potential future tariffs. Our analysis considered large trade categories, companies operating in these sectors, trade dependency and, if available, supply chain data. Issuers with adequate rating headroom to absorb trade-driven shocks should be less likely to experience negative rating actions. Due to global supply/demand dynamics, and the homogeneous nature of commodities, oil, chemicals, steel, aluminum and agricultural trading sectors were excluded from our analysis.
According to the US Census Bureau, cell phones, household goods, and telecommunication equipment are the most imported product categories. The first round of US tariffs mainly targets intermediate goods used in the capital goods and technology sectors but the most recent announcement includes more consumer products. Aircraft, engines, equipment, parts and soybeans top the list of US products exported to China. Reciprocal actions from China on 500 plus US products are mainly in agriculture and food sectors.
US sectors facing the largest trade-related revenue risk are technology, aerospace, diversified manufacturing, capital goods and autos. Large multinational companies in these sectors often generate material, 10% or more, revenue from China. However, this tends to overstate exposure since many of these issuers have substantial production capacity in China, enabling them to serve Chinese customers via these facilities and avoiding tariffs.
Manufacturers may also be exposed to rising costs if suppliers are procuring inputs from China subject to a tariff. These impacts are unpredictable, with many large manufacturers, particularly in the technology sector, using China as one step in a complex supply chain. The imposition of tariffs on a range of manufacturing inputs could have a negative effect on cost structures and margins. However, company disclosure rarely gives detail to assess direct exposure and there are often ways for companies to mitigate effects.
Our analysis suggests, against a backdrop of overall limited exposure, escalating trade protectionism and cascading supply-chain effects could have an outsized effect on US corporations such as Boeing, Intel, Deere, Texas Instruments and GE. This is even though the direct, first-order effects from retaliatory tariffs are expected to be relatively small for most companies. With the exception of Deere and GE, most of these issuers report more than 20% of revenue from China but have moderate to high rating headroom, limiting near-term credit risk.
Most Fitch-rated Chinese corporations are domestically focused, limiting the direct effects of US tariffs. Hangzhou Hikvision Digital, Hilong Holding, STATS ChipPac, Fufeng Group (Fufeng), Shandong STON Group and Zoomlion Heavy Industry Science and Technology (Zoomlion) were identified as having higher exposure although still limited in absolute terms.