Uncertainty Over U.S. Trade Policy Has Given Rise to Three Scenarios for the Country’s Economic Outlook: Light Tariffs, Trade War, or a Broader Economic and Financial Crisis Including the Introduction of Capital Controls in the U.S., According to Scope Ratings.

“The recent announcement of U.S. trade tariffs marks a notable escalation in the protectionist policy adopted by the Trump Administration,” says Alvise Lennkh-Yunus, Head of Sovereign and Public Sector Ratings at Scope.

“If implemented, the tariffs would represent the largest peacetime trade disruption to the global economy in more than 100 years. If maintained, this policy will have significant credit implications not only for the U.S. (AA/Negative) but also for other countries around the world,” Lennkh-Yunus states. “Even a full reversal, though unlikely, would not fully restore trust in previous alliances and supply chains, indicating a degree of lasting economic loss.”

In the “light tariffs” scenario, tariffs serve as a starting point for negotiations, with most countries appeasing the U.S., resulting in a slightly more protectionist equilibrium. Key implications include short-term growth and inflation volatility. A technical recession in the U.S. may cause modest effects on global demand and supply chains; growth and credit risks remain mostly contained.

In the “trade war” scenario, tariffs are high and permanent, with significant escalation and retaliatory tariffs. According to Scope’s projection, this leads to sustained pressure on growth and inflation in the medium term, with the U.S. likely entering a recession during the year. The impact on growth and credit quality for trade partners would depend on the depth of trade ties and existing vulnerabilities.

In the most severe scenario, a “broader economic and financial crisis”, tariffs are permanent, tensions between the U.S. and China intensify, and the European Union imposes broad countermeasures. Scope Ratings’ scenario includes the U.S. introducing capital controls and rising doubts about the dollar as a global safe-haven asset. Under this outlook, the U.S. falls into a multi-year recession, and countries with significant economic and/or financial exposure to the U.S. are heavily affected.

The final impact on growth, inflation, public debt, external credit metrics, and hence sovereign credit ratings will ultimately depend on the macroeconomic environment shaped by U.S. policy decisions, the responses of trade partners, and countries’ underlying credit strengths and vulnerabilities prior to this trade conflict.

The possible responses from U.S. trade partners range from appeasement through negotiations to a combination of countermeasures, new free trade agreements among themselves, and deeper domestic economic reforms to at least partially offset the adverse effects of U.S. tariffs.

“In our ratings, we will assess both the magnitude of the trade-related disruptions and the adequacy and quality of regional and national monetary and fiscal policy responses, focusing on countries’ fiscal adjustment capacity and underlying economic resilience to absorb and reverse the long-term impact of the situation,” says Lennkh-Yunus.

One of the most exposed countries is the U.S. itself, as the epicenter of this unorthodox policy shift—especially under Scope’s more extreme scenarios.

“In a prolonged trade war and/or the introduction of U.S. capital controls, viable alternatives to the dollar could emerge. For example, China and the EU might decide to deepen their trade relationship, and/or China could further liberalize its capital account, and/or the EU might accelerate its Capital Markets Union. These developments are unlikely to happen quickly, but if doubts were to grow about the exceptional status of the dollar, this would be very credit-negative for the U.S.,” Lennkh-Yunus affirms.

Countries with large trade surpluses and/or financial exposure to the U.S. are also highly vulnerable to the adverse consequences of the shift in U.S. trade policy, although the impact in Europe is expected to be uneven.