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The U.S.'s imposition of tariffs on major economies has hurt business confidence. In our view, this week's U.S.-China tariff de-escalation brings only temporary relief to the global trade environment—with upside for the macroeconomic picture, alongside prolonged pressure on credit conditions and our rating outlook at large.

What We're Watching

The U.S. and China's surprising reduction of bilateral tariffs, and enaction of a 90-day pause to help facilitate a broad-based agreement, saw starting May 14 the removal of all escalatory and reciprocal tariffs that had been added after April 2. Only the 10% "universal" tariff, 20% fentanyl-related tariffs that were imposed in February and March, and additional tariffs that were already in place at the start of the year from previous American administrations remain.

The move is the latest in a series of unprecedented developments that have ricocheted markets with uncertainty and volatility. S&P Global Ratings believes that while this U.S.-China tariff climbdown may provide positive implications for credit conditions and economic performance, the relief is partial and could prove temporary. After the pause period lapses and absent an agreement, tariffs are likely to go up again (and potentially sharply).

The objectives of U.S. tariff policy remain uncertain. The U.S. has secured just two bilateral trade deals so far with China and the U.K.—and with no concrete template for scaling these agreements, there are ultimately more targets than instruments.

It remains to be seen whether the Trump administration's objective is to reduce the U.S. trade imbalance, move manufacturing to the U.S., incentivize higher purchases of U.S. exports, lower immigration and/or drug flows, or generate higher defense spending. Until these issues are resolved, geopolitics are unlikely to return to a semblance of trade policy normalization.

What We Think And Why

The U.S.-China de-escalation improves our macroeconomic outlook—reflecting the direct effects of lower bilateral tariffs on the world's two largest economies, a reduction (though not elimination) of policy uncertainty, more buoyant asset prices, and some reopening of previously frozen markets. However, we still anticipate a slowdown across all major economies as the secondary effects of tariffs affect consumer confidence and corporate investments, which are likely to weigh more materially on economic growth than the tariffs themselves.

This week's announcement on China tariffs brings us closer to our March forecast. We revised our GDP growth forecasts downward on May 1, and had most recently expected global growth to be 0.3 percentage points lower in 2025 and 2026 relative to our previous forecast round with all regions affected negatively. The actual macroeconomic output is likely to be between these two scenarios, depending on the unfolding negotiations on tariffs.

We expect the Federal Reserve to maintain higher rates for a longer period and, as such, have adjusted our forecast for an interest rate cut to 50 basis points in the fourth quarter of this year and followed by further reductions in 2026.

While tail risks have somewhat eased, we believe that the global trade environment will continue to weigh on credit conditions and our rating outlook at large. The potential impact continues to be uneven across sectors and countries.

We have likely reached a turning point in the positive credit momentum seen over the last 12-18 months through the first quarter of this year, reflected in more mixed rating actions and increasing negative bias in our rated portfolio. To date, ratings actions primarily related to tariffs have been limited, with 11 globally as of May 2.

Rating actions will likely accelerate should the recent de-escalation in trade tensions not be sustained. Investment-grade entities are best positioned to weather an extended period of uncertainty than lower-rated, riskier credits.

Our base-case expectation is a 3.5% speculative-grade default rate in the U.S. by December 2025. Under an optimistic scenario, this could decline to 2.25%—or increase to 6% in the most pessimistic scenario. The current economic and market uncertainty (related to the length and size of trade tariffs, the inflationary versus recessionary impact of tariffs on growth, and the monetary policy strategy of the Fed, among the many unknowns) could drive our estimates more toward the pessimistic scenario while widening the confidence interval of possible outcomes.

What Could Change

The redirection of Chinese exports remains underway as manufacturers seek to reduce reliance on the U.S. market. Reshoring and supply chains rejig remain key long-term considerations for credit. We expect the shifts in supply chains, triggered by the April 2 announcements, will continue to take place underlining the Trump administration's focus on America First policy. Similarly, the need for Chinese businesses to diversify revenue and export channels to outside the U.S. will persist. For businesses, the need to reshore operations back to the U.S. will entail higher capital expenditure and more spending.

Regardless of where they ultimately settle, tariffs will remain higher than when 2025 began under the Trump administration's America First policy—with an additional 10% level likely to persist as a minimum in our view.

Based upon our calculations, the result of the most recent U.S.-China agreement is an effective tariff rate of roughly 40% for China's imports and 25% on U.S. exports. Companies will continue derisking their supply chains and increasing diversification, prompting shifts that can be complex, costly, and unfold over several years.

Beyond tariffs, we are witnessing significant changes in the geopolitical landscape. The U.S.'s evolving international role will likely have profound effects on the post-World War II globalized economy—with interlinked implications on geopolitics, trade, the technological revolution, energy and climate policy, and beyond.

S&P Global Ratings plans to provide a full macroeconomic and credit update at the global and regional levels in our next credit conditions exercise, scheduled to be completed in late June.

Writer: Molly Mintz