The scope of potential retaliation is evolving as the trade war focus shifts to China. This raises the risk for other sectors like technology, agriculture, gaming and autos as some casinos and original equipment manufacturers have licenses or joint ventures in China, added Fitch.
Chicago/Toronto: Retaliation by trade partners remains a risk for U.S. corporate sectors despite some near-term reprieve, said Fitch Ratings.
Near-term risk of retaliation by most trading partners has receded with the 90-day pause on reciprocal tariffs, but trade tensions with China remains high, even after the temporary tariff exemptions for phones, computers and popular consumer electronics.
Trade tensions with China sharply escalated after President Trump increased tariffs on Chinese imports to 145% while announcing a 90-day pause on reciprocal tariffs for other countries. China responded by raising tariffs on U.S. goods to 125%.
The country had already restricted exports of certain metals to some U.S. companies, launched an antitrust investigation of DuPont China and the added U.S. defense firms to its unreliable entity list.
“We viewed aerospace and defense, alcoholic beverages, chemicals, protein and pharmaceuticals as moderately exposed to potential retaliation during our earlier heat map exercise on the impact of tariffs,” stated Fitch.
However, the scope of potential retaliation is evolving as the trade war focus shifts to China. This raises the risk for other sectors like technology, agriculture, gaming and autos as some casinos and original equipment manufacturers have licenses or joint ventures in China, added Fitch.
Issuer-level exposure will depend on numerous factors including geographic mix of revenue, supply chains, and the extent of retaliation by a given country. Ratings risk would exist for multi-national companies with low leverage headroom and limited ability to mitigate retaliatory actions, said Fitch.
Exports to China only represented 7% of the $2.23 trillion of U.S. goods exported in 2023, with machinery and electricals, oil & gas, chemicals and vegetables as the largest categories. However, total revenue exposure for some sectors and issuers is significant due to foreign production facilities and sales within the country, which increases vulnerability to retaliation.
The gaming and technology sectors have the largest revenue exposure to China. Among U.S. gaming operators, Las Vegas Sands (BBB-/Stable) has the largest exposure to Macau, which contributes more than 60% of its revenues. U.S. technology companies’ sales in China mainly consists of inputs, including components for system/sub-system assembly and further export. KLA Corporation (A/Stable), Marvell Technology (BBB/Stable), Western Digital (BB+/Stable) and Synaptics Incorporated (BB/Stable) all generated more than 40% of their revenue from China in 2024, based on SEC filings.
China is an important market for healthcare, serving as a major research hub, a key supplier of active ingredients for the pharmaceutical industry and components for medical devices, and is a sizable customer. Pharmaceuticals were exempted from the now paused tariffs.
However, this exemption could be short-lived, and the Secretary of Commerce just initiated an investigation to determine the effects of pharmaceutical imports on national security.
While agricultural products are a large export category from the U.S. to China, risk is mainly at the farm level as direct corporate exposure is relatively limited.
Fitch-rated corporates in the agricultural processing sector are well positioned to navigate trade dislocations because of geographically diverse operations and global trading capabilities.
The EU, Canada and Mexico are the three largest destinations for U.S. exports, representing roughly 40% combined.
Fitch-rated U.S. Corporates have the highest revenue exposure to Europe, followed by China, while revenue exposure to Canada and Mexico is more limited.
Over 100 Fitch-rated U.S. firms earn more than 15% of their revenues from Europe, while around 30 do so from China (including Hong Kong and Macau).