Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible response—specifically with regard to tariffs—and the potential effects on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts, and reassess our guidance accordingly (see our research here: www.spglobal.com/ratings).

The prospects of higher tariffs and escalating tensions between the U.S. and its trading partners are the top concerns for many U.S. corporate borrowers we rate. In fact, higher tariffs are the most frequently cited negative risk to our corporate sectors' baseline views (see "Industry Credit Outlook 2025: Compilation and Key Themes," published Feb. 4).

President Donald Trump has started his second term with a slew of executive orders, with many actions focusing on trade and tariffs (see chart 1). As it stands, the 10% additional tariffs on imports from China, and China's counter measures, have come into force. The 25% tariffs on Mexico and Canada imports, and the 25% tariffs on steel and aluminum products are due to become effective on March 4 and March 12, respectively. President Trump also suggested he would double the recent tariffs levied on China starting March 4.

Significant uncertainties also remain for other measures—including reciprocal tariffs, and additional tariffs on specific products, as well as the possibility of 25% tariffs on imports from the EU —that the president has suggested.

Following growth of 2.8% last year, we forecast the world's biggest economy to expand 2.0% this year and next. The levying of an additional 10% tariff on Chinese goods is in line with the assumptions included in our most recent economic base case, where we reckoned the president would raise the bilateral effective tariff rate (weighted average) to 25% (see table 1 and "Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty," published Nov. 26, 2024).

Table 1

In a scenario in which the proposed 25% tariffs on imports from Mexico and Canada are fully implemented, we estimate those could cause a one-time 0.5%-0.7% rise in U.S. consumer prices, assuming the tariffs remain in place through year end. In our rough estimate, U.S. real GDP over the next 12 months would be 0.6% lower than what we currently forecast (see "Economic Research: How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?," published Feb. 6, 2025).

At the same time, the prospect of tariff-fueled inflation is throwing a wrench into the Federal Reserve's monetary-policy easing, and any related economic disruption could dampen market sentiment. Against this backdrop, investors could soon demand higher risk premiums and as a result, the cost of debt service and/or refinancing may be overly burdensome for some borrowers—especially those at the lower end of the ratings ladder.

We believe increasingly protectionist trade policies, including materially higher tariffs, would likely result in inflationary pressures through higher prices for consumers and rising input costs for U.S. sectors exposed to imports and cross-border supply chains at a time when they are grappling with already-elevated costs and a more difficult passthrough environment. Many of the trading partners likely subject to higher U.S. tariffs account for large shares of U.S. product imports (see chart 2). Any retaliatory actions could also hurt those relying on key components and foreign markets. All this could put more margin pressure on corporates, weighing on their credit quality.

What follows is our assessment on how the announced tariff actions, focusing on the ones on China, Mexico, Canada, and steel and aluminum, might affect the U.S. nonfinancial corporate sectors we rate, and highlight the key sectors to watch (see chart 3).

Aerospace And Defense

Highly technical specifications, extensive qualifications, and performance surveillance have largely limited the extent of offshoring among issuers in the aerospace and defense sector. There are also high requirements to preserve intellectual property and protect national security, particularly for defense companies with large contracts with the U.S. government.

Sustained tariffs on imports from Canada and Mexico would make certain parts and components used in aircraft-related products more expensive for the original equipment manufacturers (OEMs). However, we don't expect this to have a material credit impact on our rated issuers. In our view, aerospace companies are likely to pass on higher costs to customers for inputs for which they are unable to receive exemptions—particularly with sustained strength in new aircraft and engine demand. Moreover, there are a limited number of rated U.S. aerospace issuers that have manufacturing facilities in Mexico and Canada, of which none account for more than 10% of consolidated sales.

China, however, remains a significant market for commercial aircraft, and some companies have long-standing customer relationships there. The potential for retaliatory trade actions could have a material impact on sales for certain issuers, notably OEMs (e.g., Chinese customers account for a large component of Boeing's current aircraft backlog).

Defense companies rely less on imported materials and components compared with commercial manufacturers. Cost-plus contracts account for a meaningful share (about half) of rated defense issuers' business, whereby higher costs are borne by the customer. Issuers with fixed-price exposure are most exposed, but not to an extent that presents meaningful credit risk. In certain of these contracts, cost-escalation provisions for specific inputs can also mitigate exposure to tariff-led inflationary pressure.

Autos

A sustained 25% U.S. tariff on imports from Mexico and Canada could derail the North American auto industry, perhaps slashing billions of dollars from automakers' profits and disrupting supply chains. In a worst-case scenario, we estimate a 25% tariff on imports from Mexico and Canada could cost affected U.S. carmakers on average around 10%-25% of their annual EBITDA. This estimate is before taking into consideration any strategic (i.e., mitigation) responses by OEMs. In addition, proposed across-the-board tariffs on steel and aluminum would also increase costs for the industry, which accounted for 15% of net shipments of iron and steel last year.

Trade barriers with Mexico and Canada are the biggest risk for mass-market carmakers like General Motors (GM), Ford, and Stellantis given their significant production footprints in Mexico resulting from lower labor costs, favorable trade agreements—in particular, the U.S.-Mexico-Canada Agreement (USMCA)—and the proximity to the U.S. market. With auto suppliers having moved production to Mexico from the U.S.in recent decades, about $84 billion of auto parts were imported to the U.S. from Mexico last year, according to Panjiva data.

GM produces eight models in Mexico (including its two best-selling vehicles, the Chevrolet Silverado and GMC Sierra) and has a higher exposure to tariffs on assembled products from Mexico relative to Ford, which produces three models in the country. Both automakers will face higher costs due to their significant reliance on the Mexico-Canadian parts supply chain.

For suppliers, the higher risk to credit metrics stems from longer-term secondary effects. These include lower volumes due to higher prices, supply shortages, increased production volatility, and the potential for increased capital spending to relocate production. These risks would be material if the tariffs are in effect beyond three to six months—or, worse, if they persist through 2026.

History suggests the costs of tariffs will largely be borne by American consumers. We expect most tier 1 suppliers would pass a substantial burden of the higher costs on to automakers, which would eventually have to pass them on to consumers through higher prices. We believe most company ratings would be unaffected if the tariffs were short-lived, but we expect the uncertainty around U.S. tariff policy to linger.

For more details, see "Uncertain Tariff Policies Could Create Ratings Risks For North American Automakers And Suppliers," published Feb. 18.

Building Materials, Homebuilders

Any additional tariffs on Canada and Mexico will likely increase construction costs for homebuilders. The National Association of Home Builders (NAHB) estimates that $184 billion worth of goods were used in the construction of new housing in 2023 and about $13 billion of those goods, or 7%, were imported to the U.S., with Canada and Mexico accounting for about 25% of these imports.

Two essential materials used in new home construction, softwood lumber and gypsum (used for drywall), are largely sourced from Canada and Mexico, respectively. According to U.S. Census Bureau, total imports of wood products from Canada totaled $11 billion in 2024, with the bulk of this toward homebuilding. Many of the lumber imports are already subject to a 14.5% antidumping and countervailing duties (AD/CVD) tariff and any additional tariff could hike total duties to 30%-40%. The U.S. imported $452 million worth of lime and gypsum products in 2024, with $329 million or 73% of these products originating from Mexico.

The U.S. is less reliant on Canada and Mexico for cement, with these two countries accounting for 27% of cement imports and nearly 7% of cement consumption, according to the Portland Cement Association. The U.S. is one of the largest importers of iron and steel, essential housing materials, with about a quarter of America's imported iron and steel coming from Canada as of 2024. Additionally, tariffs on finished products, such as appliances, electronics, cabinets and fixtures from Mexico and China can further increase to the cost of building a home. When possible, we expect homebuilders and developers to pass along these costs to consumers, which can further worsen housing affordability and weaken demand for housing.

Heading into 2025, we expected building materials companies to still experience some margin pressure from higher commodity, labor, and freight costs. Looming tariffs could further stress margins via materially higher prices, which could dampen demand. We anticipate margin pressure should pass through capabilities diminish.

Capital Goods

The U.S. tariffs on China, along with the proposed levies on Canada and Mexico, would apply to an estimated 45% of key imported material inputs for rated U.S. capital goods firms—and could increase the sector's total costs by 3%-5%. We estimate the higher costs from these tariffs would amount to 10%-15% of EBITDA for rated U.S. capital goods companies, necessitating a break-even price increase of 2%-4% to maintain flat earnings compared with 2024.

The largest impact to the sector would be from tariffs on Canada and Mexico, with these two countries accounting for about one-third of total imported material input costs, which consist of both raw materials and intermediate components. As such, we expect a greater risk of operational disruption in the near term if companies decide to quickly relocate sourcing away from these deeply integrated trade partners.

We believe the sector can better manage the tariffs on China, as U.S. companies continue to diversify supply chains to other countries following tariffs imposed in 2018 and supply challenges during the COVID-19 pandemic. We estimate the additional 10% duties on China translates to a cost increase of about 50-60 basis points for U.S. capital goods firms.

Still, price fatigue could impede firms' ability to increase prices, posing a risk for issuers with lower, speculative-grade ratings. Generally, investment-grade borrowers are better-positioned to defend their margins and their credit quality, thanks to their strong competitive positions that stem from diversified revenues and production costs, brand power, and deep, widespread distribution channels.

For more details, see "U.S. Capital Goods Brief: Tariffs Would Test Pricing Power," published Feb. 6.

Chemicals

The U.S. chemicals sector has fairly close linkages to global chemicals markets and could quickly feel the effects of trade disruptions. The U.S. imports a small number of chemical products that compete with domestically produced chemicals as well as intermediates required for domestic chemical production. In addition, the U.S. exports a little over a quarter of its volume. Canada and Mexico in particular, and to a lesser extent China, are the largest trade partners for the sector. Disruptions to global trade, especially to these three markets, creates uncertainty at a time when supply chains are recovering from destocking, there is oversupply in some chemical chains, and the U.S. chemical output has been shrinking. Additionally, tariff-related demand or supply disruptions in China—the largest chemical market—could reverberate throughout global markets, including the U.S.

In the near term, some U.S. chemicals subsectors could benefit from higher product prices if imports of competing products rise because of tariffs. On the other hand, costs could increase for U.S. importers of intermediate chemicals and for companies which export a large portion of their product and become subject to retaliatory tariffs.

Beyond the immediate direct impact, escalating trade tensions, barriers, and retaliatory measures could have widespread indirect repercussions. These include deepening economic uncertainty, weakening demand for chemicals from key customer industries such as automotive, and disruptions to complex global supply chains.

Companies that try to pass on higher costs to customers could have mixed results—those with favorable competitive positions are likely to be more successful, while others run the risk that higher prices could weaken demand for their product, which could constrain their ability to pass on higher costs.

Consumer Products/Retail

U.S. retail and consumer products companies could suffer more from broad-based tariffs this time around than they did in 2018. Around 24% of borrowers we rate in the retail sector and 19% of those in consumer products have negative outlooks, indicating an above-average negative bias and little headroom for additional macroeconomic pressures.

In 2018, when the first Trump administration applied tariffs on China, the levies weren't all- encompassing and didn't cover all consumer goods imports from China. At that time, less than 20% of U.S. consumer goods imports were subject to tariffs. Certain popular categories that were excluded from the original levies—including toys and kids' clothes—would likely be included in the latest round.

Moreover, with inflation hovering at about 2% at the time, companies were able to pass along nearly all related cost increases to consumers. As such, we took few rating actions related to tariffs. Now, inflation-weary buyers will likely be loath to absorb tariff-fueled price increases. The retail price of goods and services are on average 25%-30% higher than in 2018, and consumer fatigue is weighing on discretionary spending.

Exposure to China for toy manufacturers has decreased in the past few years but still remains significant, and we believe higher tariffs on Chinese imports will translate to increased input costs and may damp gross margins. While toy manufactures will try to pass on these costs, retailers' ability to continue to share higher input costs with toy manufacturers ultimately depends on consumers' willingness to pay higher prices. We believe amid a flat revenue environment this year in the toy industry, material tariffs could pose a significant burden on margins, which could lead to weaker credit metrics if not offset by other cash-preservation actions.

On the bright side, many consumer products companies have in recent years shifted manufacturing out of China and diversified their sourcing. Retailers have also widened their supplier bases and have taken steps to better manage their inventories. In this light, the ratings effects of tariffs depend on a company's product, supply, and manufacturing mix—with subsector impacts varying widely.

Retailers with scale and pricing power (such as Walmart, Amazon, and Costco) will likely be more resilient, because these companies have negotiating power over their suppliers—even though they have meaningful exposure to tariffs. For example, although Walmart sells groceries with exposure to Mexico, and hard goods and apparel sourced from China, its competitive prices will likely allow it to continue to gain market share. Similarly, Amazon has meaningful exposure to Chinese imports, but its dominance, convenience, and negotiating power could mitigate the tariff risk.

Small, narrowly focused retailers will suffer more than the larger players because they have less negotiating power with suppliers and limited pricing power with consumers.

Many U.S. consumer products companies source commodities abroad and have manufacturing facilities in Canada and Mexico—and these regions have been an extension of their U.S. supply chains. For most companies, the cost of producing in the U.S. may still exceed the costs of manufacturing in these two countries even when accounting for proposed tariff levels because of the lower labor and production costs abroad.

Higher tariff exposure doesn't necessarily equate to elevated credit pressures or downgrade risk. But among U.S. retailers we rate, our downgrade to upgrade ratio reached 1.5-to-1 by the start of the 2025, indicating stress in the sector. We expect this will increase as tariffs from suppliers are passed forward. While last year's rating actions on U.S. consumer products companies turned more positive, with upgrades and downgrades about equal, we think tariffs and the resulting input inflation will skew rating actions back to negative.

For more details, see "Tariffs Will Hurt U.S. Consumer And Retail And Restaurant Companies--To Varying Degrees, And Depending On The Subsector," published Feb. 13.

Containers And Packaging

We expect U.S. containers and packaging issuers to see minimal direct effects from tariffs. Issuers typically source most raw materials from the regions they produce in and locate facilities close to customers to limit freight costs. Although some packaging issuers could rely on materials from Canada, Mexico, or China, or sell some products outside the U.S., we believe such instances would represent a minimal amount of revenues.

Issuers have already been examining the impacts of tariffs and have plans in place to shift production where necessary to minimize the costs. Much of this was already executed under tariffs implemented during the first Trump administration. For aluminum can producers, the majority of materials in the U.S. are sourced domestically, particularly as can producers have sought to increase the recycled content of cans as it drastically saves on costs compared to virgin aluminum. We believe this mitigates much of the direct impact from the aluminum tariffs.

Still, tariffs will likely increase raw-material premiums, and to the extent that occurs packaging issuers typically have provisions that pass on costs to customers, which in turn pass on those costs to the consumers. Containers and packaging represent a small portion of the cost of products, and thus draw somewhat less scrutiny on price compared with other input costs, with generally a higher consideration for quality and service. However, prices remain elevated following high inflation over the last several years, and further price increases may be harder for consumers to swallow this time around.

Additionally, though the packaging may be supplied locally, the end packaged product may be subject to direct tariffs. If broad tariff actions strangle expected volume recovery, this could impact operating leverage and lead to further assets downtime, similar to what occurred in 2024. This could put some ratings at risk, particularly at the lower end of the spectrum, where issuers have businesses and/or balance sheets that are less resilient.

Health Care

The main tariff-related concern for the U.S. health care industry regards the more commodity-like product manufacturers and distributors, as well as health care service providers. Medical products, such as surgical gloves, face masks, and syringes, though commodity-like, are still essential products for performing medical procedures and are a significant expenditure for health care providers, such as hospitals, where medical supplies account for 15% and higher of the cost base (varies depending on patient mix).

China accounts for roughly 10% of U.S. imports of medical instruments, equipment, and supplies. The 10% tariff raises costs for health care service providers, but we think it would be initially muted and gradual, as the ability to pass on costs for medical product manufacturers and distributors is limited as they typically operate through large group purchasing organizations that have three-year purchasing agreements. The ability to quickly switch to alternative sources in the near term is limited, as highlighted by the pandemic-era shortages of medical supplies and the lack of success of manufacturers to reshore operations. Thus, manufacturers and distributors will have to absorb the higher costs until they are able to negotiate and pass on those costs to providers.

Canada isn't a major source of healthcare products—but Mexico is, and 25% tariffs may be more problematic. Potential tariffs on Europe, another significant source of medical products and devices, would further add to the risk. However, it depends on the mix of product. Manufacturers of higher-end, higher-margin medical devices can more readily absorb the costs, and we believe they can pass them on to payors more easily, given that the medical device is typically a low percentage of the overall cost of the procedure. The medical device industry hasn't typically faced significant pricing pressure. For the more commodity-like medical products, the tariff impact would be more significant, especially if manufacturers and distributors cannot shift sourcing and it is more difficult to pass on the costs.

If other countries impose reciprocal tariffs, we think it would have limited impact, given the specialized nature of the higher end medical devices. However, there could be other retaliatory measures, such as export bans of critical materials, which could affect higher-end medical device and equipment makers that rely on metals or semiconductors from China, resulting in manufacturing disruptions and order backlogs.

Hotels, Gaming, And Cruise

The hotel, gaming, and cruise sectors are more heavily weighted to domestic travel and leisure-services spending, but there is still a meaningful level of leisure supplier and manufacturing risk in China and Mexico for a small subset of borrowers we rate. For example, rated outdoor recreation companies like powersports, motorcycles, and boats, source parts and materials or manufacture products in China and Mexico. While exposure to China has decreased over the past few years, we believe a universal tariff or sharply higher tariffs on Chinese or Mexican imports will translate to increased input costs and ultimately dampen gross margins.

Leisure manufactures will try to pass on higher input costs to the degree they can, but success ultimately depends on consumers' willingness to pay higher prices amid potentially higher-for-longer interest rates given these products are typically financed. In addition, the current retail health of several outdoor recreation products, particularly motorcycles, powersports, and marine, will be at best flat in 2025. If revenues are flat, material tariffs could pose a significant burden on margins and may lead to weaker credit metrics compared to our current base case assumptions.

Regarding leisure services sectors, to the extent higher tariffs raise prices for consumers and discretionary spending plans are tightened, then travel and entertainment spending for hotels, casinos, and cruises could suffer.

Media And Entertainment

Overall, the media and entertainment sector doesn't rely much on China. Of the legacy media companies, only Disney and Comcast may see some effects, as both companies operate theme parks in China. But revenues from those theme parks are small relative to the size of the two companies.

Before the pandemic, we would have been concerned that Beijing would retaliate and lower the number of American films released in China. But China is now a tiny part of the global box office for U.S. films—due to a rise in Chinese nationalism that has hurt the performance of such films there and a unilateral reduction in the number of English-language films allowed into the country.

Global digital platforms have benefited significantly in the past few years from robust ad spending by Chinese-based companies looking to grow their presence outside of China, especially in Europe and the U.S. In particular, Chinese e-commerce companies have benefitted from the de minimis exemption in the U.S. Any actions that reduce or slow the sales of goods by these Chinese companies could affect advertising on the digital platforms.

Metals And Mining

Proposed steel tariffs in the U.S. could support credit quality for most American steel producers with volume gains at the expense of imports, higher domestic prices, and stronger profitability. By comparison, proposed aluminum tariffs boost the profitability of a small cluster of U.S. assets, as aluminum premiums in the U.S. jump to an all-time high. We believe sparking every aluminum smelter in the U.S. to 100% capacity—which is probably not possible—would displace only half of imported aluminum from Canada. We expect steel and aluminum buyers in the U.S. face higher input costs compared with global competitors, so downstream profitability depends on higher prices for fabricated products. Comparative advantage matters: The U.S. has a significant resource of iron, coal, and scrap to make steel profitably, but electricity to make primary aluminum looks scarce and expensive.

The price of hot-rolled coil steel in the U.S. jumped 15% off a cyclical low in the three weeks Jan. 20–Feb. 14, while prices in Asia and Europe stayed flat. Steelmakers in the U.S. have ample spare capacity and access to inputs to increase volumes by displacing imports, with the profitable umbrella of higher prices for every ton. With good tariff protection, steel producers in the U.S. could increase capacity utilization to a profitable 85% from a sluggish 75% now and displace half of the industry's imports.

All-in aluminum costs in the U.S. now rival the supply-chain disruptions in 2021-2022, and higher prices boost the profitability of U.S. operations. But the U.S. has only one or two small smelters that could be restarted within a year, so any more capacity would need to be constructed from scratch. We estimate the entire fleet of operating and mothballed smelters in the U.S. at 100% capacity utilization could only displace 20% of total imports with less than 1 million tonnes of incremental output, potentially with the highest costs in the world. Doing so would require enough electricity to power a city.

Midstream Energy

We believe the credit impact of the proposed tariffs will have little impact on the midstream industry's credit quality. Midstream companies don't take title to the products they transport or store, so the higher price of crude oil will be borne by the end user. An increase in the cost of steel is a consideration and could interrupt supply chains as midstream companies look to secure steel for pipeline projects. However, this long lead time item is typically the first to be secured when a project reaches final investment decision and most of the pipeline projects that have been announced have procured the steel needed.

A potential headwind for midstream companies could be lower demand for refined products, crude oil and natural gas if higher prices result in weaker demand. We think this is possible if the tariffs stay in place for a period of 12 months or longer. However, most midstream cash flows are highly contracted with price escalators that account for inflation, which could at least partly mitigate the risk of weaker demand.

Oil Refineries, Oil And Gas Exploration And Production

We believe the proposed 10% tariff on Canadian crude oil import and 25% on Mexican crude oil announced by the Trump administration will likely be a headwind for the refining industry and weaken margins for assets in certain regions. The tariffs, which could be imposed on March 4, will likely affect refineries located in PADD 2 (Petroleum Administration Defense Districts) and comprises the Midwest region of the U.S., which is where almost 25% of the total refining capacity, or 4.3 million barrels per day (bpd) is located. The U.S. imports about four million barrels per day (bpd) of heavy crude oil from Canada, which accounts for 60% of total imports. Canada's crude oil, known as Western Canadian Select (WCS), is the preferred feedstock for many complex U.S. refineries in the Midwest and Gulf Coast regions, due to the ability of these refineries to upgrade it into more profitable finished products such as motor gasoline, diesel, and jet fuel. WCS typically trades at a significant discount to West Texas Intermediate crude in the U.S., which is a lighter, sweeter grade of crude.

A 10% tariff on Canadian crude could add about $6 per barrel of cost to refineries in PADD 2 (and about 15 cents per gallon at the pump), which don't have many alternatives to replace the Canadian crude given they are landlocked and have fewer pipeline alternatives to transport crude from other areas of the U.S. That said, Canadian producers cannot find alternative markets for all their production that currently crosses the border, although some can find alternative markets via the Trans Mountain pipeline to Asian markets.

We believe higher costs will likely be shared by both parties, however if the tariff continues for a long period of time, it will harm the profitability of refineries that almost solely rely on Canadian crude given their high fixed-cost structure. While we acknowledge Gulf Coast refineries also prefer heavy Canadian crude as a feedstock, their location on the Gulf Coast allows for more optionality of worldwide feedstocks that can replace it.

The tariff on Mexican crude in our opinion will have less of an impact on refineries' profitability since imports amounted to about 500,000 bpd. Another effect of the tariff will be its impact on crude differentials, which is a factor in how a refinery decides on its optimal feedstock, and a key driver of profits.

We don't expect the proposed tariffs to have material impact on U.S. exploration and production companies.

Pharmaceuticals

For the pharmaceutical sector, our concern from a credit perspective is more focused on the generic drug manufacturers, given their lower margins, relative to branded patented pharmaceutical companies, and more limited ability to pass on the higher tariff costs. While Canada and Mexico are very limited sources of pharmaceutical product to the U.S., China has been a growing source of active pharmaceutical ingredients (APIs; the components of medications that produce the intended health effects) used mainly for generic drugs. We estimate 10% tariffs on China, for a generic drug maker that sources all of its APIs from China, could see a 2% to 3% hit on a company's profit margins, which is not insignificant for a generics industry where EBITDA margins are typically in the 15% range. We believe the ability for generic makers to pass on the higher costs is limited, given the commodity like nature of the product and the U.S. pharmacy and drug distribution market is concentrated.

An additional concern is that should generic drug makers seek to source APIs or finished products from alternative sources, it could disrupt the supply chain for an industry that is already seeing shortages of key generic drugs in the U.S. market. This could cause loss of market share and create public safety issues. Potential tariffs on India would further disrupt the industry from a margin and potentially a supply standpoint, given it is also a major source of APIs and generic drugs.

For the much higher-rated branded patented drug manufacturers, we believe tariffs are less of an issue. China and India are much less of a source of branded pharmaceutical product. Should tariffs extend to Europe, which is a significant source of branded U.S. pharmaceutical imports, especially Ireland, Germany, and Switzerland, we expect it to be a limited issue from a credit perspective given their much higher margins (typically over twice as high as generic drug makers) and greater ability in passing on increased costs. The major branded pharmaceutical and biotech companies also typically have manufacturing infrastructure worldwide and have the flexibility of shifting production volume to sites that are not as exposed to tariffs.

Reciprocal tariffs are currently a limited concern. European countries are under single payor systems, so to apply tariffs to U.S. branded pharmaceutical product would not make sense. For China, the demand for western pharmaceutical, life science, and medical devices remains high and there are no strong local equivalents. However, for the pharma and life-science industries, trade tensions would not only affect supply chains but also weigh on relationships regarding clinical trials and patient data for the development of products. Disruptions could lead to delays in new drug and product development.

Regulated Utilities

The utility industry relies on the import of solar panels, batteries, wind turbines, and other replacement parts from China. More severe trade restrictions could increase such costs. While we expect higher costs will ultimately be passed onto utility customers, materially higher electric bills from increasing tariffs could challenge the industry's ability to effectively manage regulatory risk, potentially pressuring credit quality.

The industry is making progress in onshoring manufacturing. We expect the industry will continue to gradually diversify, reducing their reliance on China and exposure to rising tariffs.

Technology

S&P Global Ratings believes the proposed tariffs on imports from Mexico and China would have a larger impact on the global tech sector than those levied during President Trump's first term. At that time, only a subset of tech products (such as routers and switches, hard disk drives, modems, motherboards, and certain computer parts) were subject to 25% tariffs on China.

Without any product exemptions, the applied and proposed tariffs will cover a broader scope of tech products, representing a higher proportion of overall global IT spending. They will also include more finished goods, which are more expensive than intermediate goods and therefore subject to higher tariffs.

The effects on revenues and profit margins are difficult to assess because most companies don't disclose how much of their products are manufactured or assembled in Mexico and China before being imported to the U.S. But we believe most OEMs still have significant manufacturing and final assembly presences in China due to supply chain efficiencies, and in Mexico due to its proximity to the U.S.

We estimate that about 90% of Apple's iPhones are manufactured in China. We believe the company will be able to pass along higher costs to carriers and end consumers through price increases, given its loyal customer base among those who are generally less price-sensitive than Android users. We expect there would be a modest hit to Apple's sales, gross margins, and free cash flows as its large and growing services business continues to offset most of these effects.

Meanwhile, about 79% of laptops imported to the U.S. come from China, according to the Consumer Technology Association. HP Inc. and Dell (the U.S.'s two biggest PC manufacturers) still have a significant manufacturing presence in China, but their mix of Chinese-manufactured PCs is likely lower than the industry average due to efforts to diversify their manufacturing activities away from China over the past few years. That said, a sizable portion of Dell servers are manufactured in Mexico.

We believe HP will continue to work with its electronic manufacturing services partners to shift more of its laptop production to Thailand and Vietnam, but its significant China presence is likely to remain. We expect Dell to pass along most of the higher costs to customers and to continue to shift more of its laptop production to Vietnam, while aiming to phase out chips made in China.

Dell and HP have similar business and financial risk profiles. Both have EBITDA margins in the high-single digits, which suggest limited ability to absorb significant tariff costs. We expect there to be some modest demand loss from price increases, but the net effect on sales to enterprise PCs will be at least partially mitigated by the need to upgrade PCs before Microsoft ends its support of Windows 10. We also don't expect the tariffs to significantly change our view of credit quality for HP and Dell, given the existing cushion within the ratings for operating shortfalls.

For more details, see "Proposed Tariffs Could Hurt The Global Tech Sector If Levied Too Long," published Feb. 4.

Telecommunications

Overall, the telecom sector has minimal exposure to China, Mexico, and Canada, as most of its revenue and cash flows come from the U.S. Further, the U.S. government has banned the sale of communications equipment made in China, although it will likely take time to fully expunge Chinese equipment from U.S. telecom networks. Data center operators may see a modest impact from higher tariffs on steel used to build new data centers.

Transportation

Transportation providers' international exposure is highly diversified, and the broader sector isn't overly exposed to trade flows with any countries. For U.S. airlines, freight shipments account for a small share of consolidated revenues. Shippers, especially Class 1 railroads, will likely pass on any tariff-related costs to customers, owing to their strong competitive positions. At the same time, incrementally higher shipping prices could slow industrial production and consumption, and therefore hurt transportation volumes, which is the biggest near-term spillover risk for the sector.

However, Mexico has benefited from ongoing nearshoring trends with expanded manufacturing capacity and is a notable source of rail shipments to/from the U.S. While speculative, the potential for tariffs to be applied to goods crossing the border could negatively affect the cost of goods and, in turn, reduce demand and the amount of carloads moved by railroads. Newly proposed port fees by the U.S. Trade Representative's office on Chinese vessels could also temper inbound shipments. However, we acknowledge the possibility for a subsequent increase in U.S.-based manufacturing capacity that would mitigate the effect on volumes given the primarily domestic orientation of our rated transportation providers.

Unregulated Power

The unregulated power sector has meaningful reliance on Asian suppliers for solar panels, trackers, battery chemistries, and wind turbines. Most developers have already reduced their direct exposure to Chinese manufacturers, but substantial amounts of imports of components come from Vietnam, Thailand, Malaysia, and Cambodia. All these countries have been subject to recent antidumping and countervailing duties. Yet, major developers have been planning on tariffs for over a year and have brought in much of the equipment they need for 2025-2026 projects. They are also moving increasing levels of their supply chain domestically. Some developers have offloaded tariff risk for suppliers to bear.

Global panel prices are now at all-time lows due to a glut of supply and improvements in the efficiency of manufacturing. However, there is a large gap between the prices in the U.S. and globally because of U.S. trade policy. As a result, there will still be potential for imports from Asian suppliers, including China, despite tariffs.

Tariffs have an adverse effect on the declining cost curve of the renewables industry, slowing growth plans of many companies. On the other hand, this may benefit the credit profile of companies that have been aggressively utilizing debt-funded growth to take advantage of IRA tax credit provisions.

Appendix

The product groups included in chart 2 are defined as follows based on NAICS codes: Aerospace and defense—3364 Aerospace Products & Parts. Agriculture—111 Agricultural Products, 112 Livestock & Livestock Products, 113 Forestry Products, Nesoi, 114 Fish, Fresh/chilled/frozen & Other Marine Products, and 115 Products Supporting Agriculture And Forestry. Autos—3361 Motor Vehicles, and 3363 Motor Vehicle Parts. Building materials—321 Wood Products, 3273 Cement & Concrete Products, and 3274 Lime & Gypsum Products. Chemicals—325 Chemicals. Communications—3342 Communications Equipment. Consumer products—311 Food & Kindred Products, 312 Beverages & Tobacco Products, 313 Textiles & Fabrics, 314 Textile Mill Products, 315 Apparel & Accessories, 316 Leather & Allied Products, 337 Furniture & Fixtures, and 3352 Household Appliances And Misc Machines, Nesoi. Capital goods—333 Machinery, Except Electrical, and 335 Electrical Equipment, Appliances & Components. Energy—211 Oil & Gas, and 324 Petroleum & Coal Products. Health care—3345 Navigational/measuring/medical/control Instrument, and 3391 Medical Equipment & Supplies. Metals and mining—212 Minerals & Ores, and 331 Primary Metal Mfg. Pharmaceuticals—3254 Pharmaceuticals & Medicines. Technology—3341 Computer Equipment, and 3344 Semiconductors & Other Electronic Components.

Editor: Kelliann Delegro

Digital Design: Jack Karonicka

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