As President-elect Donald Trump continues to work on building a cabinet, Fitch Ratings is sounding a warning about the uncertainty created by campaign rhetoric, which is weighing on the sovereign debt of Canada, Mexico and China.
Trump’s protectionist rhetoric and talk of a more unilateral foreign policy are particularly significant, the ratings agency said, given U.S. status as the world’s biggest economy and a key diplomatic and military power.
“These are areas where the executive has greater latitude than on domestic policy, and are the main sources of spillover to the rest of the world,” analysts led by James McCormack wrote in a note.
Trump’s policy proposals were light on detail during the campaign, and clarity is unlikely to emerge until he has completed his cabinet picks and set the tone for his future relationship with congressional Republicans, said the note.
But a major shift in trade policy, for example, would create risk for Canada, Mexico and Asian exporters, including China, Korea, Singapore, the Philippines and Thailand, and could end up hurting U.S. interests as well.
Trump has repeatedly accused China of manipulating its currency and has threatened to put tariffs on Chinese goods. That could backfire as China would likely retaliate with tariffs of its own. The U.S. is the biggest market for China, accepting about a fifth of its exports. A trade war would hurt growth and inflation in both countries, would weaken the yuan and create chaos in financial markets.
Other Asian exporters would also be hurt. Countries including Korea, Singapore, the Philippines and Thailand are major suppliers of intermediate goods such as electronic and automotive components to China.
However, “a sharp increase in protectionism would be resisted by U.S. corporate lobbyists and mainstream Republican legislators,” said McCormack. “We think it more likely that the new administration will pursue incremental measures, such as bringing more trade cases.”
Trump has said he would scrap the Trans-Pacific Partnership, which has not yet been ratified and which the Obama administration walked away from as the election results played out. That would have implications for Vietnam, which was set to be a beneficiary. Inaction in trade with other areas could help sub-Saharan African countries, as they are covered by the recently renewed African Growth and Opportunity Act, said Fitch.