Sovereign Credit: US Policy Shifts Point to Tariff-light, Trade-war,

If implemented, the tariffs would represent the biggest peacetime trade shock to the global economy in more than 100 years. If sustained, this policy shift will have important credit implications for both the United States (rated AA by Scope with a Negative credit Outlook) and for sovereigns globally.

Conversely, even their full reversal, although unlikely, would not fully restore the confidence of previous alliances and supply chains, indicating a degree of durable economic loss.

Given such uncertainty, Scope has identified three scenarios to inform the forthcoming update of its growth and fiscal forecasts as well as other credit-relevant factors: i) a ‘tariff-light’ scenario, ii) a full-scale trade war, and iii) an economic and financial crisis.

US Trading Partners Face Multiple Options in Their Tariff Responses

The eventual impact on growth, inflation, public debt, external credit metrics and thus sovereign credit ratings, will ultimately depend on the macroeconomic environment that emerges from the polices the US adopts, the responses by trading partners, and the underlying credit strengths and vulnerabilities of countries before this trade shock.

Possible responses among the US’s trading partners range from appeasing the Trump administration through tariff negotiations to a mix of adopting countermeasures, striking free trade agreements and deepening domestic economic reforms to partially offset the adverse impacts of US tariffs.

Scope will evaluate both the scale of the trade shock as well as the adequacy and quality of regional and national monetary and fiscal policy responses, focusing on the fiscal adjustment capacity and underlying economic resilience of sovereigns to absorb and reverse the impact of the shock over the longer run.