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S&P Global Ratings expects most sovereigns to endure the initial effects of tariffs, but the U.S.'s announced import duties will not affect all sovereigns equally.

Those with solid external buffers, diversified economies, and limited merchandise exposure to the U.S. will likely be able to withstand immediate adverse credit implications. The secondary effects on most open, manufacturing-oriented economies—combined with lowered growth prospects and heightened uncertainty—could pose risks to countries entering this period of stress with weak fiscal and external positions.

What We're Watching

As the Trump administration leverages 10% tariffs on over 80 countries, global geopolitical risk is currently at the highest level seen in decades. While some nations may negotiate tariff reductions soon (following the U.S.'s de-escalation with China and agreement with the U.K.), the pathway of the complex situation remains uncertain.

The jump in U.S. import tariffs, trading partner retaliation, ongoing concessions, and subsequent market turbulence together constitute a shock to a financial system centered on confidence and market prices.

Despite some improvements, the U.S. dollar is still down between 3% and over 7% against major foreign exchange pairings this year. Most of the dollar's relative decline has also occurred after the prior 90-day tariff pause implementation on April 9. This had resulted in higher volatility across Asia-Pacific currencies, most prominently the Taiwanese dollar and Japanese yen.

The largest sources of the U.S. trade deficit and the main destination of trading partners' exports indicate where the first-round effects of tariffs could be most prominent at earlier stages—hitting the volumes of merchandise exported and market shares. Market diversification will play a fundamental role in how economies will ultimately manage the impact of tariffs.

As of 2024, 12 sovereigns (China, Mexico, Vietnam, Ireland, Germany, Taiwan, Canada, Japan, South Korea, India, Italy, and Switzerland) account for more than 95% of the U.S.'s merchandise trade deficit. Trade is not equally relevant to the economies of all sovereigns. While 87% of Vietnam's GDP comes from exports, just 28% of those are to the U.S. Comparatively, the U.S. is the destination of roughly 80% of Mexico and Canada's exports. And on the other hand, only 15% of China's exports go to the U.S.

What We Think And Why

S&P Global Ratings expects to broadly maintain its current rating levels on most sovereigns while they weather the direct effects of trade tensions.

But secondary effects could take a toll on credit quality over the medium-term, particularly in those economies with large direct trade exposures to the U.S. The 90-day tariff pause has done little to reduce uncertainty over which countries will secure deals or how higher import costs will affect consumers and producers amid rising inflation. Sovereign credit risks are growing gradually through secondary channels like lower commodities prices, increasing funding costs, and refinancing pressures, despite the benefit of a relatively weaker dollar and especially for lower-rated issuers.

At the beginning of this month, we lowered our global GDP growth forecasts (with all regions affected) by 0.3 percentage points for 2025-2026, and plan to provide a full macroeconomic and credit update at the global and regional levels in late June. The projected global slowdown, coupled with weaker commodity prices, will strain some emerging and frontier market sovereigns—especially those that are heavy commodities-exporters, though the most severe tariff impacts may be indirect.

Meanwhile, geopolitical tensions remain at decades-high levels and could exacerbate trade disputes that risk military escalation and drive historic fiscal shifts, such as Europe's large-scale rearmament.

With ongoing policy unpredictability, the full economic and credit implications will only become clearer over time.

A key trend to watch is the possible decline of U.S. exceptionalism amid waning confidence in its policymaking. This was evident shortly after the tariff announcements when the U.S. dollar—typically a safe haven during global shocks—unexpectedly weakened against major and some emerging market currencies, while yields in U.S. Treasury paper increased.

The U.S. administration aims to counteract the negative impact of tariffs and uncertainty by stimulating growth through tax cuts and investment incentives. However, it remains uncertain whether these measures will successfully restore pro-growth momentum. Concerns around the U.S. large budgetary deficits could also weigh on global demand for U.S. assets.

What Could Change

Trade instability could drag on economic growth in a global context already under pressure from geopolitical risks and high funding costs.

Across the Americas (excluding 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—via disruptions in global supply chains, economic growth, and financial conditions—could be substantial. Meanwhile, the U.S.'s closest neighbors are likely to see diverging outcomes: Canada's economy should remain resilient, while Mexico could face a slight contraction.

In Europe, the potential imposition of a 20% U.S. tariff on EU goods could exert a drag on the eurozone economy. This would particularly affect Ireland, Germany, and Italy as the three European economies with the largest bilateral merchandise trades surpluses with the U.S. as a percentage of GDP. However, these economies have considerable fiscal space in the form of lower debt-to-GDP stocks and higher private savings to contend with multiple years of weaker economic growth.

Ireland's pharmaceutical exports make up close to two-fifths of its total exports and dominate merchandise trade with the U.S., but at the same time the country is a substantive importer of U.S. services (including royalty payments on U.S. intellectual property rights.) Even so, Ireland's low corporate tax rate and predictable treatment of foreign investors and rule of law has long been a key attraction for U.S. and international companies in investing billions into manufacturing facilities there. In our view, reversing those investments will not be a decision that multinationals make lightly.

The EU's response strategy to rising U.S. protectionism remains a work in progress. Following initial retaliatory measures, the EU suspended counter-tariffs during a 90-day U.S. pause, but the risk of renewed trade tensions remains high. Unlike China and Japan, the EU is expected to rely primarily on monetary policy, with the European Central Bank likely to implement more aggressive rate cuts and potentially deploy balance sheet tools to stabilize markets amid potential financial contagion. Fiscal responses will be limited, given many member states are also under pressure to increase defense spending in response to the U.S. government's changing position on supporting NATO and Ukraine. Germany is a notable exception, where its massive 10-year investment package will ramp up government spending in the near-term.

The U.S.'s trade unilateralism will affect the Middle East, Commonwealth of Independent States, and Africa differently. The region's direct trade exposures to the U.S. average about 5% of total exports at most.

However, the indirect effects are already visible. Alongside concerns around the tariffs' effects on global growth, U.S. policy shifts are contributing to large declines in oil prices that are well below the price at which most Gulf countries' national budgets balance. That means more net borrowing by regional oil exporters that remain very reliant on oil prices to generate tax receipts, despite recent reforms to raise tax on non-oil GDP.

Saudi Arabia supported the OPEC+ decision to raise production in April and may support further output increases early next month. As a result, oil exporters across Africa (including Angola, Nigeria, and Ghana) are experiencing negative effects—although metals and other commodity prices have so far remained resilient, as the U.S. tariff regime has excluded commodity imports from taxation.

Large oil importers (including South Africa, Turkiye, and most of Eastern Europe) will benefit from lower import prices.

Finally, China faces a more uncertain growth outlook than other countries. Negotiations between the U.S. and China entered a better stage on May 14 when both countries agreed to lower reciprocal tariffs, to levels similar to before the April 2 announcements, and established a 90-day pause period to look for agreement alternatives. By now, it is clear that neither wants to return to the previous levels of tariffs. While in our view an agreement is likely, the timing of and ups and downs around it are quite uncertain. Nevertheless, domestic demand in the Chinese economy significantly supersedes the importance of exports. While the higher tariffs will weigh on China's growth, a stronger recovery of domestic demand could offset the negative impact.

Writer: Molly Mintz