Over the last several weeks, global trade tensions have escalated as the U.S. government implemented tariffs on certain goods coming to the U.S. and announced plans for higher tariffs--up to as high as 50%--for 83 countries. The Trump administration is using the announced tariffs as a negotiating tool as it attempts to revert the shift in trade relations of the last 25 years (see chart 1).

Following negotiations, the U.S. announced a 90-day pause on the higher tariffs and a lower baseline 10% tariff for all countries except China.

S&P Global Ratings expects most sovereigns to maintain current ratings while they weather the direct effects of the trade tensions. However, the heightened uncertainty and elevated market volatility could pose risks to sovereigns with large exports to the U.S. and to those that are entering this period of stress with weak fiscal and external positions.

Chart 1

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect 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: spglobal.com/ratings).

Sovereigns With Large Exports To The U.S. And Limited Diversification Are Most Exposed

The recent market volatility and sharp losses shook markets globally, bringing back memories from March 2020 at the onset of the COVID-19 pandemic. That said, for sovereigns, the characteristics of the global trade conflict are different, and we expect that so will be the measures they will use to weather this period of stress.

Looking at the largest sources of the U.S. trade deficit is a good place to start to grasp the first-round effects of tariffs--which will hit the volumes of merchandise exported and market shares. In 2024, 12 sovereigns account for roughly 90% of the goods deficit (see chart 2).

Chart 2

We expect that the sovereigns where trade represents a smallest share of GDP will be able to withstand the first-round, or direct, effects of the tariffs better than those open economies highly dependent on keeping the flow of exports open (see table). Trade is not equally relevant to the economies of all sovereigns. For Mexico, for example, exports represent 36% of GDP and for Vietnam 87% of GDP, while for China exports are just 19% of GDP and for Brazil 18% (see chart 3).

The other factor to consider is the main destination of exports. For Vietnam, 87% of GDP comes from exports, but just 28% of those are to the U.S. On the other hand, for Mexico and Canada, the U.S. is the destination of roughly 80% of their exports. About 15% of China's exports go to the U.S. Market diversification plays a fundamental role on the way economies will manage the impact of tariffs.

Chart 3

Trade Instability Could Pose Secondary Effects Of Economic Slowdowns, Geopolitical Risks, And High Funding Costs

In our view, as trade negotiations continue, the key risks for sovereigns are the secondary effects of trade instability. The impact of the expected slowdown in economic activity and investment on commodities prices, for example, could weigh on some emerging and frontier market sovereigns that aren't the most severely hit by tariffs.

The global geopolitical tensions, which are still at their worst in decades, have the largest potential for causing disruption, in our view. Trade tensions could further exacerbate the potential for more military confrontations. In Europe, we are already seeing the fiscal effects, as many nations embark on a rearmament process not seen since World War II.

Finally, funding costs remain elevated, more so for lower-rated sovereigns, which increases the event risks and adds pressure on refinancing amid such instability.

Regional Perspectives

Middle East, Africa, and the Commonwealth of Independent States (CIS): Sovereigns are more exposed to the likely second-round effects of U.S. tariffs

Although the final tariff rates for emerging economies in Africa, the Middle East, and CIS are uncertain, we think the direct impact is currently relatively contained. In general, we view second-order effects as more material for regional sovereign credit quality. In particular, a tariff-induced demand shock is already leading to lower commodity prices, which we view as the primary factor that could affect credit quality.

We estimate that the region's exposure to U.S. tariffs--measured by current non-exempted exports to the U.S.--averages 5% of total exports (see chart 4). This low level implies sovereigns have significant protection from their limited direct trade linkages and through exemptions.

China accounts for more imports from Africa, the Middle East, and CIS than the U.S. does. In particular, China typically imports about $80 billion per year (2023 data) from Africa, around 2.5x more than the U.S. does, and about $220 billion from the Middle East and CIS, around 4x more than the U.S. does.

Chart 4

In the region, only a few rated sovereigns have more than 10% of total exports going to the U.S. Further, they produce a significant amount of raw materials that are currently exempt from tariff increases, including oil; liquefied natural gas; and copper, gold, cobalt, and numerous other metals used by strategically important U.S. manufacturers.

Export bases in the region are typically concentrated on one commodity, or derivatives of it. Where these commodity groupings are currently exempt, we do not expect substantive negotiations or retaliatory tariffs.

Some negotiations could be possible where non-exempt exports are more material and strategic geopolitical considerations play a role in U.S. relations--for example among Gulf Cooperation Council (GCC) states. Where a greater proportion of exports to the U.S. are not exempt--including for textile, steel, and aluminium producers--we view the ability of regional exporters to negotiate better terms as relatively limited.

Given our expectations of weaker growth in global oil demand, we have revised down our 2025 oil price estimates to $65/barrel (bbl) from $70/bbl (see "S&P Global Ratings Lowers Its Oil Price Assumptions On Potential Oversupply; Natural Gas Price Assumptions Unchanged"). At the start of 2025, we had expected oil prices to average $75/bbl. Further, a trade war between the U.S. and China could threaten Chinese--and global--demand and related import volumes. Although, there is some potential for a Chinese stimulus which could act as an offset.

Still, tariff increases have the potential to weaken regional exports and fiscal earnings, reduce inward investment, raise borrowing costs, and constrain growth. These effects could leave governments with already strained fiscal positions more vulnerable to further shocks. Such sovereigns often have a low and cyclical revenue base and a rigid expenditure profile--which we find among some African sovereigns.

On the other hand, fiscal flexibility has improved for rated sovereigns in the Middle East over the last decade. Several sovereigns have significant fiscal buffers they can use to implement countercyclical policy to protect growth and overall macroeconomic stability. Equally important, and a reason behind a number of upgrades of hydrocarbon exporters over the past few years, has been a concerted policy effort to reduce the concentration of hydrocarbon receipts in fiscal and external revenues and gross value creation.

As a result, we believe a number of previously more vulnerable GCC states have a greater ability to cut spending or raise revenues through introducing new fees or taxes, or increasing corporate tax rates or value-added taxes. But, weaker sovereigns with smaller asset buffers could still be more exposed to a sustained drop in oil prices, such as Bahrain, Oman, and Kazakhstan.

Developed and Emerging Europe: The 90-day pause doesn't alleviate the heightened uncertainty that will weigh on consumer and business confidence

Europe's trade-intensive economies still face 25% tariffs on steel, aluminum, and autos and auto parts, and the pharmaceutical sector is likely to be targeted soon. The drag of lower growth on fiscal performance comes on top of the higher cost to European governments to pay for greater defense autonomy from the U.S.

There are, however, a few mitigating factors. Unlike previous external shocks--most recently to energy prices in the aftermath of Russia's invasion of Ukraine--the second-round effects of rising global protectionism for Europe are disinflationary, not inflationary. That gives the European Central Bank latitude to take actions to support euro area GDP growth.

Euro area governments entered 2025 with an average general government deficit of an estimated 3.1% of GDP, or roughly half that of the U.S. They also had solid balance-of-payments positions and very strong private-sector balance sheets.

On March 18, Europe's largest and least indebted economy, Germany, amended its Basic Law to facilitate the establishment of a €500 billion (11% of GDP) public infrastructure investment fund. It also agreed to modify its debt brake rule to permit increases in spending on defense, cybersecurity, and support for Ukraine.

An investment boost in Germany will prove supportive to growth in key European trading partners, and partly offset the damage to German growth prospects from the auto tariffs imposed by the U.S. Nevertheless, whether they fully offset the second-round effects of a worsening trade confrontation remains to be seen. Direct net trade exposures to the U.S. are highest for Ireland (pharma), Germany (autos), and Italy (a more diversified mix) (see chart 5).

Chart 5

In Central and Eastern Europe and Turkiye, things are even more complicated. Weaker fiscal positions in Hungary and Poland, higher inflation rates (especially in Hungary), and wide-open economies with large auto sector exposures make them even more vulnerable to global trade and growth shocks.

Turkiye managed to stabilize the U.S. dollar-to-Turkish lira exchange rate--via a large drawdown of its foreign exchange reserves--before the U.S. announced higher tariffs on April 2. Turkiye was once again spurred by high corporate demand for dollars against a backdrop of nonresident outflows. In addition, domestic protests against the imprisonment of opposition leaders continue, albeit sporadically. Nevertheless, we believe the Turkish government will continue to pursue its disinflation strategy.

Chart 6

The Americas (excluding Canada and Mexico): U.S. trade policies are likely to have a smaller direct impact compared with other regions

In much of the region (other than Canada and Mexico), the biggest impact on economic performance is likely to come from uncertainty about future U.S. policies and from the global fallout of possible trade retaliation by other countries. The indirect fallout for the region--namely, disruptions in global supply chains, economic growth, and financial conditions--could be substantial.

Moreover, a potential stagnation or reduction in remittances from the U.S. could lower domestic consumption and GDP growth in Latin America.

Chart 7

The U.S. imposed a 10% general tariff (with minor exceptions for certain products) on all countries in the Americas region. The administration had announced plans for higher tariffs on certain countries--42% on the Falkland Islands (A+/Stable/A-1), 18% on Nicaragua (B+/Stable/B), 15% on Venezuela (not rated), and 38% on Guyana (not rated)--which are now on a 90-day pause. On average, the U.S. has applied higher tariff rates on countries in other regions.

Much of the region, especially South America, depends on commodity exports, typically to Asia. Many economies are heavily driven by domestic factors, with exports typically accounting for a smaller share of GDP than in Asian and European countries.

Most countries in the Americas, other than Canada and possibly Mexico, will likely avoid retaliatory trade measures against the U.S.

Canada and Mexico: Canada's economy should remain resilient; Mexico could face a slight contraction

Despite the negative impact of trade barriers and investor uncertainty on the economy in the short term, Canada's prosperous and resilient economy should sustain the sovereign's creditworthiness. We expect continuity in key economic policies regardless of the results of national elections due in late April.

The U.S. accounts for more than three-quarters of Canadian exports (and around two-thirds of its imports), highlighting the deep economic integration of the two countries. Canadian provinces typically export more to the U.S. than to the rest of Canada.

The U.S. imposed a 25% tariff on imports from Canada and Mexico in March on goods that are not subject to the United States-Mexico-Canada free trade agreement (USMCA). In addition, it imposed a 10% tariff on energy and potash exports, as well as 25% on steel and aluminum products. The U.S. also announced plans to impose a 25% tariff on non-U.S. content in autos and auto parts exported from Canada and Mexico that are within the terms of the USMCA.

The Canadian government introduced retaliatory tariffs on U.S. imports in March, including on steel and aluminum. In April, Canada announced a 25% tariff on non-USMCA compliant vehicles made in the U.S. and on the U.S. content of vehicles that enter under the USMCA. Mexico has not retaliated.

For Mexico, the negative impact of higher tariffs on exports and on domestic business confidence in general will hurt economic performance, with the economy potentially facing contraction in 2025. A weak economy will make it harder for the government to reduce its recently high fiscal deficit to avoid a higher-than-expected general government debt and interest burden.

Chart 8

The 25% tariff on Mexican exports to the U.S. is applied to goods from that country that are not subject to the rules of the USMCA. Such goods are estimated to be just under half of all Mexican exports to the U.S. and are subject to a low tariff under other international agreements.

Moreover, the Trump administration has threatened to impose additional tariffs on Mexico if it, in President Trump's judgment, fails to make sufficient progress in various policy matters, including blocking illegal immigration into the U.S.; shutting the flow of fentanyl across the border; and substantially limiting the ability of other countries, such as China, to enter global supply chains that sell into the U.S. market via Mexico. This will likely result in restrictions on Chinese exports to Mexico and local manufacturing in Mexico by Chinese companies.

Asia-Pacific: GDP growth should hold up despite downside risks; China faces greater uncertainty

In light of the 90-day pause on tariffs, we don't expect the 10% additional U.S. trade tariffs that Asia-Pacific economies (except China) face to derail real GDP growth this year. However, the downside risks to our forecasts are higher. Economic uncertainties have increased after the events of the past two weeks, and there is still potential for higher U.S. trade tariffs later in the year. But these uncertainties currently do not negatively affect credit metrics in a material way.

Some governments have rolled out support packages for affected businesses, which could strain the governments' fiscal metrics. Apart from the general 10% increase, exporters of passenger vehicles, steel, and aluminum are subject to higher tariffs of 25%.

The Korean government has announced a support package for its auto sector. Much of the support come in the form of policy financing, and measures that affect the budgetary position are small. The Taiwanese government also announced 20 measures to support agricultural and manufacturing industries. The budgetary impact should also be modest.

China faces a more uncertain growth outlook than other countries because of the much larger tariff increase on Chinese exports. Nevertheless, domestic demand in the Chinese economy significantly outsizes the importance of exports. Consequently, while the higher tariffs will weigh on China's growth, a stronger recovery of domestic demand could offset the negative impact.

The trend of the sovereign rating will depend much on how quickly domestic demand recovers from its recent weakness. If we expect the recovery to be slow, then the need for stimulative fiscal policy in the next few years will weigh increasingly on the sovereign ratings.