Trade Protectionism in 2018 and Its Impact on the Trade Credit Business

Brett Halsey, SVP, Credit & Surety and Mills Ramsay, VP Credit Risk Underwriting Manager
QBE North America

From the 2016 Brexit referendum to the US’s withdrawal from the Trans-Pacific Partnership (TPP) in January, the world has witnessed the weakening of multilateralism. The recent Trump tariffs point to a new global trade landscape shaped by protectionism, which will affect many aspects relevant to the trade credit business. The most prominent of these are the world economy, credit quality, supply chains and trading volumes. This article will discuss the affected aspects as well as opportunities for and threats against the trade credit business during this period of change. 

To the world economy, trade protectionism may be seen to stunt growth; however, the possibility of major distress can be ruled out. Currently, the percentage of goods subject to tariffs is still trivial compared to its overall trade volume. In a worst-case scenario stress test conducted by Fitch Ratings, it is estimated that 0.4% of world GDP growth would be hindered due to trade protectionism escalation. However, if this occurs, the world economy is expected to recover back to its baseline by 2020. 

Trade protectionism could also put downward pressure on credit quality. Even though economic data does not support the rule that tariffs will negatively impact credit quality on a macro level, they do have significant impact on specific sectors. The trade credit business still needs to be wary of credit quality deterioration for those sectors that are experiencing the disruption of supply chains. 

On one hand, non-US steel and aluminum companies, Chinese electronics manufacturers, US electronics retailers, agriculture and food-processing companies, and multinational automobile companies are all falling victims to tariffs as they strive to reshuffle supply chains while at the same time facing fierce market competition. On the other hand, steel manufacturers in the US, as well as agricultural producers in Brazil, Argentina and Australia, will emerge as the winners. 

In the long run, if trade protectionism escalates, south-south trade flow is likely to increase, and multinational companies may shift towards regional production (i.e., producing goods where they are sold). Both consequences may lead to an increase in cost and disruption of operations. 

Besides the supply chains, trading volumes are also going to be affected by tariffs. Economies with relatively diverse revenue sources and healthy fundamentals, such as in the US, China and Germany, are expected to recover more quickly from the negative impact of tariffs than smaller and more open economies, such as in Mexico and Malaysia.

In conclusion, the main threats for the trade credit business in light of trade protectionism are that: (1) the credit quality of buyers in industries targeted by tariffs is likely to deteriorate as they struggle to keep prices low when costs increase, and (2) since the existing supply chains are likely the most efficient ones available, economic efficiency would decrease for industries that build new supply chains or shift to regional production. However, new opportunities may emerge from the protected US industries, emerging markets that are integrated into the new supply chains, and multinational companies’ regional operations.