[ET Net News Agency, 18 October 2019] President Donald Trump's statement last week that
the U.S. had agreed to a partial trade deal with China that would postpone a hike in
certain tariffs on Chinese goods in exchange for China's increased purchases of American
agricultural products, among other things, offered a bright spot in what has been a
protracted dispute.
As the countries resume trade talks, few industries will be keener for signs of progress
than the automotive sector, according to S&P Global Ratings.
Given China's role as a key link in the global supply chain--with the country accounting
for roughly one-fifth of the world's manufacturing output--the tariff dispute between the
White House and Beijing poses a stumbling block to automakers and suppliers.
S&P said, while there's as yet been a little direct effect on creditworthiness for these
companies, tariff-related disruption in the supply chain is raising manufacturing costs,
slowing production, and, potentially, weighing on the quality of goods.
"Earlier this year, financial market consensus was that the U.S. and China would come to
an agreement--or at least a detente," said S&P's analyst Lawrence Orlowski. "While recent
negotiations will allay trade tensions for now, the question is whether both sides can put
a long-term deal in place."
The rise of protectionism and national security as factors in trade policy suggest that
existing supply chain configurations will need to be reassessed. Companies could look to
hire workers and source materials within a regional bloc. While many auto companies
already have, for example, regional manufacturing strategies, S&P thinks these efforts
will intensify to minimize disruptions in trade.
According to "Global Trade At A Crossroads: Global Auto Industry Faces Long-Term Fallout
If U.S.-China Detente Dissolves," the potential credit implications of a new regionalism
are numerous.
First off, compared to a less restricted global trade environment, input costs would
become more expensive. In response, firms might need to relocate and incur the costs of
reconfiguring their sourcing, manufacturing, and distribution footprint.
Additionally, there are higher-order effects that need to be considered. For instance,
Beijing could put U.S. firms that operate in China at a disadvantage in order to favor
local firms. (This can also work in the reverse. For example, the White House has already
floated the idea of delisting Chinese companies from U.S. stock exchanges.)
Also, escalating trade tensions can arouse nationalism and lead to falling demand for
U.S. goods and services. Declining export demand can hurt the overall GDP of the exporting
county, and trade barriers limit the choice of imported goods. Consequently, industries
that are more global in nature would be subject to greater credit stresses and will face
challenges in repositioning their supply chains. (KL)