U.S. tariffs on EU goods won't automatically lead to a downgrade in EU sovereign ratings, according to credit rating agencies.
The recent reduction in trade tariffs from 25% to 15% on European auto exports to the U.S. is still expected to have negative effects on European carmakers, such as Stellantis and Volkswagen, by raising costs and reducing competitiveness in the U.S. market[1][3].
For European exporting firms, the 15% levy increases the final price of vehicles and auto parts in the U.S., potentially lowering demand and squeezing profit margins. The German Association of the Automotive Industry (VDA) explicitly noted that this tariff level continues to hurt German car manufacturers[1].
The trade tensions and the resulting tariffs can exert downward pressure on European economies heavily reliant on exports, especially in key sectors like automotive manufacturing. While the search results do not directly address sovereign credit ratings, persistent trade barriers and the financial commitments the EU has undertaken to import energy and invest in the U.S. may weigh on economic growth prospects and fiscal balances. This, in turn, could impact sovereign risk perceptions, albeit indirectly[2].
Moody's, another ratings agency, warns of the impact on exporting firms, stating that the credit effects will be significant for companies that export a lot to the U.S., have complex global supply chains, and have limited pricing power in their markets[4]. Large diversified European manufacturing companies like Siemens and ABB, which generate about 25% of their revenue in the United States, can pass on some of these tariff increases to customers[6].
However, the increased tariffs can be more challenging for industries with limited pricing power, such as the pharmaceutical sector, which amounts to 25% of all EU exports to the U.S., according to analysts[5]. The tariff increases can also pose challenges for industries with complex global supply chains, like the aerospace and defense sector, where uncertainty remains about key goods such as semiconductors[1].
Fitch, a sovereign ratings agency, has stated that the increase in U.S. trade tariffs on the European Union will not lead to immediate sovereign rating cuts. However, Parker, from Fitch, also noted that the tariff increase could compound existing credit pressures in the EU[4]. Ireland, rated at Aa3 by Moody's, is most exposed to the U.S. market, with total value-added exports accounting for around 8% of its GDP in 2020[7].
On a positive note, the exemption of aircraft components eases expected tariff-related pressures for Airbus and MTU Aero Engines[1]. Moody's also has a positive outlook for the global aerospace and defense sector[8].
In summary, while the tariff reduction is a step down from the 25% levies, it remains a significant obstacle for European car exporters and may carry broader economic implications that influence sovereign ratings over time. The tariff increases can be more challenging for industries with limited pricing power and complex global supply chains.
References:
- BBC News
- Reuters
- CNBC
- Bloomberg
- Financial Times
- Wall Street Journal
- Moody's
- Moody's
- Another potential consequence of the reduced tariffs could be the impact on business and finance, as increased costs due to border taxes could strain the financial health of European companies in the U.S. market, especially those heavily reliant on exports.
- The political landscape, including ongoing trade discussions, can significantly influence the financial performance of various industries and nations, with sector-specific challenges such as limited pricing power or complex supply chains compounding the effects of tariffs on general-news issues like economic growth and sovereign risk perceptions.
