Or so says Fitch ratings in a series of recently published reports that update several issues that could significantly impact corporate treasury. In “US Trade Protectionism Remains A Key Risk for the World Economy,” Fitch notes that despite recent signs of the Trump administration taking a more moderate approach to reforming trade relations, the risk of a sharp escalation remains high for the world economy. So far, no unilateral measures have been taken.
“However, given the strength of anti-globalization sentiment in the election and the continued focus of US policy makers on reducing bi-lateral trade deficits, the possibility of a more disruptive and unilateral US approach that is less compatible with the existing global trade governance framework—and much more likely to prompt retaliatory actions from US trade partners—remains a significant risk,” the report says.
Fitch structured a macro model-based simulation combining three hypothetical factors. One is the US imposing a 35% tariff on imports from Mexico, China, S. Korea and Taiwan that prompts retaliations of equivalent tariffs on US goods. The second is the US deporting one million immigrants, reducing the US labor force. And those factors result in business and household sentiment falling in the developed economies, the third factor.
“The US and the countries directly targeted by the imposition of punitive US import tariffs would see the largest losses of GDP but global repercussions would be significant as business and household confidence falls, asset prices weaken and trade flows are affected more widely, including through disruptions to multinational supply chains,” according to Brian Coulton, Fitch’s chief economist.
Were those tariffs to be imposed soon, Fitch estimates GDP growth in 2017 would be 1.9% in a shock scenario compared to 2.1% in the baseline, 2% in 2018 compared to 2.6% in the baseline, and just 1.3% in 2019 compared to a base line of 2.3%.
China and Mexico would be hit even harder, with the former’s GDP falling 2.8 percentage points below the baseline by 2019 and the latter’s coming in 2.3 percentage points lower. Mexico, however, could see some offsetting benefits, including the peso depreciating by 15% and faster domestic labor force growth as net migration to the US is reversed, Fitch says. India, Brazil and Russia would also be impacted and see losses in GDP growth, although much smaller.
Republicans have long wanted to repeal Dodd-Frank, or at least substantial portions of it. Fitch notes that the momentum for US bank deregulation continues to grow, but it will likely take the form of several smaller bills targeting relief for specific segments of the financial sector instead of one massive bill. The Financial Choice Act remains the benchmark for the full deregulation agenda given an upcoming House of Representative vote on a revised version that was passed by the House Financial Services committee earlier in May.
The updated version still calls for the full repeal of the Volcker Rule and the Orderly Liquidation Authority (OLA), as well as the Department of Labor’s Fiduciary Rule. A repeal of the Volcker Rule presumably would improve Wall Street firms’ ability to make markets in companies’ securities, increasing liquidity. The elimination of OLA could expose the banks, acting as counterparties to most corporate financial transactions, to significant systemic risk in the event of a crisis
Fitch notes that key differences between the latest version of the bill and the original include simplifying the threshold for banks to opt out of most regulations; changing operational risk weights for global systemically important banks, and replacing the Consumer Financial Protection Bureau (CFPB)
European Central Bank’s (ECB) leveraged lending guidelines are more flexible than earlier proposals but will still be a constraint on the European leveraged lending market, Fitch says. Published in mid-May, the guidelines effectively adopt the core features of the US tripartite leveraged lending guidelines (LLG) introduced in 2013, Fitch says, including a six-times-total debt-to-EBITDA leverage limit.
“The biggest change from the original proposals in November is that lenders will be able to base their leverage calculations on an adjusted EBITDA figure,” Fitch says, “This brings the ECB guidelines closer into line with the US LLG and allows arrangers and borrowers more flexibility than originally expected.”