(The Center Square) – A top credit-rating agency said the short-term deal the U.S. struck with China on trade is a positive sign, but only temporary.
“The U.S.-China tariff reduction improves our macroeconomic outlook,” said Paul Gruenwald, global chief economist at S&P Global Ratings. “This reflects a combination of factors including the direct effects of lower bilateral tariffs on the world’s two largest economies, a reduction – though not elimination – of policy uncertainty, more buoyant asset prices, and some reopening of previously frozen markets.”
China and the U.S. released details Monday of a trade pact reached over the weekend after talks in Geneva. The two global superpowers agreed to slash tariffs so high that nearly all trade between the two nations stopped. The U.S. reduced its tariffs on China from 145% to 30% while the two nations continue to talk. China cut its levies on U.S. imports from 125% to 10%. The deal will be in place for 90 days.
S&P said the de-escalation “brings only temporary relief.” It noted that if the world’s two largest economies can’t reach a broader, more permanent trade deal in the next three months, tariffs are likely to increase again, perhaps sharply.
S&P also noted that the U.S. has only secured two bilateral trade deals so far (one with China and one the U.K.). That means the administration has until July to make deals with 16 other major U.S. trading partners.
“A template for scaling these agreements has yet to appear, although the minimum tariff appears to be the 10% flat rate,” S&P noted.
That could continue to affect trade around the world.
“We believe that the global trade environment will continue to weigh on credit conditions and our rating outlook, but tail risks have eased somewhat,” said Alexandre Birry, global head of credit research and insights. “The possible impact continues to be uneven across sectors and countries.”
Businesses are likely to remain cautious about hiring in the meantime, according to the S&P report. It further said that consumer spending could remain subdued.
“Given their global supply chain exposure and a weakening consumer environment, we believe there could still be negative implications for U.S. consumer and retail sectors,” according to the report.
Walmart, the world’s largest retailer, said Thursday that it plans to raise prices because of tariffs. Walmart CEO Doug McMillan said that tariffs will increase consumer costs no matter how hard the giant retailer tries to keep them down. He also said the company plans to move production to the U.S., where possible, building on a years-long effort to bolster supply chains. Given its size and reach, Walmart has more price flexibility and is better positioned to move supply chains than small businesses.
S&P said that while trade progress was a win, the rating agency wasn’t yet ready to update its economic forecasts.
“While this turn of events is positive for economies, we are not providing updated growth forecasts at this juncture,” S&P noted. “This decision takes into account the unpredictability of policy developments, particularly out of the U.S., and our approaching regular quarterly forecasting round.”
