The Ripple Effect of US Trade Policy: Three Scenarios Shaping Global Sovereign Credit

The resurgence of protectionist US trade policies under the Donald Trump administration has sent shockwaves through global markets. In April 2025, the announcement of sweeping tariffs marked the most significant peacetime trade disruption in over a century, raising urgent questions about the stability of sovereign credit ratings worldwide. Scope Ratings, a leading credit risk assessor, has identified three critical scenarios—tariff-light, trade war, and economic crisis—that could redefine fiscal resilience, inflation dynamics, and debt sustainability for nations across the globe.

This analysis unpacks these scenarios, evaluates their implications for sovereign creditworthiness, and highlights the countries most vulnerable to cascading risks.

---

Why US Trade Policy Matters for Sovereign Credit

The United States (rated AA with a Negative Outlook by Scope Ratings) sits at the epicenter of this policy shift. Proposed tariffs target key trading partners, threatening to disrupt supply chains, inflate costs, and destabilize currencies. Even if reversed, the erosion of trust in free trade agreements and alliances suggests lasting economic damage.

For sovereigns, the stakes are high:

• Trade-dependent economies face export declines and inflationary pressures.
• Debt-burdened nations risk higher borrowing costs amid market volatility.
• Dollar-reliant countries confront uncertainty over the greenback’s dominance.

Scope Ratings emphasizes that sovereign credit impacts will hinge on three factors:

1. The scale of US policy escalation.
2. Responses from trading partners (negotiation vs. retaliation).
3. Pre-existing economic vulnerabilities, from fiscal buffers to export diversification.

---

Scenario 1: Tariff-Light – Contained Risks with Selective Adjustments

In this baseline scenario, the US implements moderate tariffs focused on specific sectors (e.g., clean energy, EVs, steel), avoiding broad-based escalation. Trading partners like the EU and China respond with calibrated countermeasures while accelerating regional trade pacts.

Key Outcomes:

• Limited GDP Contraction: Global growth slows by 0.5–1% in 2025–26, per IMF estimates.
• Inflationary Pressures: Consumer prices rise 2–3% in import-reliant economies.
• Sovereign Winners/Losers:

• • Exporters with US exposure (Mexico, Canada) face short-term disruptions but adapt via nearshoring.

  • Diversified economies (Germany, South Korea) leverage alternative markets in Asia and Africa.

Credit Implications:

• US Rating: Negative Outlook persists due to fiscal strain from retaliatory tariffs.
• Eurozone: Strong industrial bases (e.g., Germany’s auto sector) mitigate risks, stabilizing AA ratings.
• Emerging Markets: Countries like Vietnam and India attract diverted investments, boosting BBB ratings.

---

Scenario 2: Full-Scale Trade War – Escalation and Retaliation

A 10–15% across-the-board tariff regime triggers a domino effect. China imposes export restrictions on rare earth minerals; the EU slaps tariffs on US tech and agriculture. Global trade volume drops 7–10%, reminiscent of the 1930s Smoot-Hawley fallout.

Key Outcomes:

• Recession Risks: Advanced economies face 1–2% GDP contraction; emerging markets slump 3–4%.
• Supply Chain Fracturing: Companies reshore production, inflating costs by 15–20%.
• Currency Volatility: The dollar surges 10%, pressuring emerging market debt (e.g., Turkey’s $450bn external liabilities).

Credit Implications:

• US Downgrade Risk: AA rating at risk as deficits widen and growth stalls.
• China’s Strategic Shift: Accelerates yuan internationalization, easing BBB+ pressures.
• Fragile Economies: Argentina (CCC), Egypt (B), and Pakistan (CCC+) face default risks amid dollar shortages.

Vulnerable Sovereigns:

• Italy: Debt-to-GDP (140%) worsens as borrowing costs spike.
• Ireland: Open economy (trade = 220% of GDP) suffers export collapses.
• Oil Exporters: Saudi Arabia and Nigeria grapple with falling demand and prices.

---

Scenario 3: Economic and Financial Crisis – Capital Controls and Dollar Decline

The worst-case scenario sees tariffs morph into capital controls and a crisis of confidence in the dollar. The EU and China bypass the dollar in energy trades, while the Fed hikes rates to 7% to curb inflation, sparking a liquidity crunch.

Key Outcomes:

• Global Recession: GDP contracts 3–5%; unemployment doubles in G7 nations.
• Dollar Alternatives: BRICS nations adopt currency baskets; euro and yuan gain 15% in reserves.
• Sovereign Defaults: Low-rated nations (Ethiopia, Sri Lanka) restructure $130bn+ debt.

Credit Implications:

• US Rating Downgrade: Falling to A+ as debt sustainability erodes.
• EU Resilience: Capital markets union progress supports AA ratings.
• Emerging Market Divergence: India (BBB) stabilizes via domestic demand; Turkey (B-) faces currency collapse.

---

Sovereigns at Risk: Who Faces the Highest Stakes?

1. High Trade Openness

   • Ireland: Trade-to-GDP of 220% exposes it to EU-US tensions.

   • Vietnam: Electronics exports (30% of GDP) hinge on US-China détente.

2. Debt Sensitivity

   • Italy: Rising yields could push debt servicing costs above 5% of GDP.

   • Ghana: Already in default; external debt > 50% of GDP.

3. Commodity Dependence

   • Nigeria: Oil exports (80% of revenue) suffer from demand shocks.

   • Chile: Copper price slump strains BBB+ rating.

4. Currency Risks

   • Turkey: Lira volatility exacerbates $200bn corporate debt.

   • Argentina: Milei’s reforms falter amid peso collapse.

---

The Dollar’s Dominance: A Tipping Point?

A protracted trade war could erode the dollar’s 59% share in global reserves. China and the EU may:

• Expand currency swaps (e.g., EUR-CNY agreements).
• Launch digital yuan/euro for cross-border settlements.
• Price hydrocarbons in alternative currencies (e.g., China’s petroyuan).

Implications for the US:

• Higher borrowing costs as foreign demand for Treasuries wanes.
• Inflation spikes from dollar depreciation.

---

Policy Responses: Mitigating the Fallout

Scope Ratings underscores the need for agile fiscal and monetary policies:

• Advanced Economies: Targeted subsidies for critical industries (EU’s Green Deal Industrial Plan).
• Emerging Markets: Diversify exports (India’s tech services push) and secure multilateral funding.
• Central Banks: Balance inflation control with growth support (Fed rate cuts in 2026).

---

Conclusion: Navigating a Fractured Global Economy

The trajectory of US trade policy remains the linchpin for sovereign credit stability. While a tariff-light scenario offers manageable risks, a full-blown trade war or economic crisis could unravel decades of globalization. Investors and policymakers must prioritize:

• Debt Sustainability: Lock in long-term borrowing amid rate volatility.
• Export Diversification: Reduce reliance on single markets.
• Currency Hedging: Mitigate dollar exposure risks.

Alvise Lennkh-Yunus is Head of Sovereign and Public Sector Ratings at Scope Ratings. This analysis incorporates contributions from Scope’s Eiko Sievert, Thomas Gillet, and Brian Marly.

---