Unpredictable Protectionism: The Global Fallout of U.S. Trade Policy

Notwithstanding the 90-day pause on reciprocal tariffs, except for China, the large, broad-based, and rapid increase in U.S. tariffs to 10%, and to 25% on key manufacturing sectors, represents a disruption to global trade. Severe trade interruption between the U.S. and China has serious implications. Incorporating the tariffs announced on April 2 and based on recent trade flows, the effective tariff rate on U.S. imports would have jumped from 3% in 2024 to an estimated 23% should the pause not have taken place, the highest rate in over a century. Duties have been imposed on U.S. allies and rivals alike and have been implemented with virtually no time for firms to adjust. We maintain our view, that the disruptive effects of U.S. trade policy will lead to slower economic growth and higher inflation in the U.S. in 2025. Uncertainty remains on how things will play out in tariff setting and, therefore, on the implications for global sovereign credit ratings.

Key Highlights:
-- All regions of the world are being hit by U.S. tariffs, but Asia and Europe are the most directly impacted.
-- Although some countries are holding off on retaliatory measures, retaliation could yet lead to escalating protectionism.
-- There is still high uncertainty around how the shock will play out and on the sovereign credit rating implications.

"Bond market discipline once again has shown itself to be a powerful tool for governments to re-orient their approach," said Nichola James, Managing Director in the Global Sovereign Ratings Group. "What we are looking at now though is not an abandonment of fundamental U.S. policy, but an alternative pathway to achieve it, and in this environment, damaging uncertainty for companies continues."

"China could face even further protectionism if countries in Asia, Europe, and North America implement measures to stem the flow of re-directed Chinese exports to protect domestic industries", said Michel Heydt, Senior Vice President in the Global Sovereign Ratings Group.

"Overall, we expect European governments to provide fiscal support to cushion the economic impact on their manufacturing sectors but, this support-on top of higher defense spending-will likely lead to slower fiscal repair and more challenging debt-to-GDP ratio reductions", said Carlo Capuano, Senior Vice President in the Global Sovereign Ratings Group.

"Lower oil and gas prices will be the main channel through which the tariff shock will hit the oil-exporting countries in the Middle East. Global commodity prices could decline further," said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group.