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New US tariffs on China imports to signal prolonged corporate headwind: Fitch

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Although credit implications are limited, mitigation via actions, supply chain adjustments, localised production and end-market could increase in importance due to the need to manage ongoing trade uncertainty, it said.

Earlier this week, the accused of reneging on prior concessions and confirmed tariffs on 200 billion dollars of Chinese imports could increase to 25 per cent from 10 per cent on Friday. The possibility the tariff could be extended to another 325 billion dollars of imports not already taxed was also raised.

Tit-for-tat tariffs began in early 2018. Major sticking points in trade negotiations include and intellectual property.

-- one of the Big Three credit rating agencies globally -- said the state of US-trading relationship is an important issue for American corporations due to the size of Chinese market, intricate global supply chains and potential knock-on effects on the global

The recent turn of events should not translate into broad-based near-term credit but shocks linked to widening protectionism could have negative credit implications for individual corporates across multiple sectors.

"We view the industrials and as most vulnerable to retaliatory actions due to a higher relative dependence on for revenue," said a post on the Fitch Wire credit market commentary page.

Aircraft, engines, equipment, parts and soybeans top the list of US products exported to China, according to the Boeing, and receive more than 20 per cent of revenue from China.

However, a potential increase in the existing 10 per cent tariff and an expanded list of goods subject to US tariffs could raise for other sectors, like retail, which rely heavily on imported merchandise.

The stated a sudden tariff increase will severely disrupt US business, especially small companies with limited resources to mitigate the effects, and American consumers will face higher prices and US jobs will be lost if the government's threat becomes a reality.

Some US corporations have tariff mitigating strategies, like long-term contracts, diversified end-markets and localised production already in place. China-based and other non-US production facilities allow American companies to sell into China tariff free, helping to circumvent retaliatory actions.

Most vehicles sold in China by and are produced locally by their China joint ventures, which improves their ability to navigate trade issues with China. The Asian nation is a key market for US auto manufacturers because new vehicle sales in China represent about 30 per cent of global auto sales.

Other companies are adjusting supply chains and raising prices to neutralise the margin effect of tariffs already in place in addition to higher material, freight and labour costs but could choose to absorb higher tariffs.

"We believe flexibility will be preserved to some extent by low inflation and a strong job market, providing at least a partial offset to higher tariffs," said Fitch.

"However, additional tariffs could negatively affect margins of some US corporations, at least initially, even if the incremental cost is passed on to customers due to the lagged benefit of price increases.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Sun, May 12 2019. 10:27 IST
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