Credit Default Swaps Offer Clues on Effects of Trade War

The escalating trade conflicts of 2025 have reshaped global economic dynamics, with Credit Default Swaps (CDS) serving as a critical barometer of perceived risk. As tariffs and retaliatory measures reshape supply chains and consumer prices, CDS spreads now highlight the uneven toll on sovereign and corporate creditworthiness. The data tells a stark story: the U.S. faces elevated default risk, while Europe and Asia navigate divergent exposures—and the Trade Information Warehouse (TIW) is at the center of managing the fallout.

The U.S. Economy: Stagflation and Rising Risk

The U.S. has become the epicenter of trade war fallout. Yale Budget Lab estimates that tariffs could boost inflation by 2.3% in the short term while shrinking GDP by 0.9 percentage points in 2025. The Federal Reserve’s constrained ability to cut rates—due to sticky core inflation and elevated expectations—has left markets pricing in heightened sovereign risk. U.S. five-year CDS spreads have surged to levels not seen since the 2020 pandemic, reflecting skepticism about the economy’s resilience.

The agricultural sector faces a “full-blown crisis,” with Chinese retaliatory tariffs collapsing export demand for pork, hay, and lumber. Meanwhile, the Port of Oakland reports a 44% year-over-year decline in China-U.S. vessel traffic, signaling a collapse in trade volumes. The SHIPS Act’s $1.5 million port fees for Chinese vessels have exacerbated the strain, particularly on containerized exports like beef and dairy.

Data shows a 60% drop from 2020 levels by 2025.

Europe and the U.K.: Fiscal Shields and Sectoral Resilience

Europe’s exposure to U.S. tariffs is limited to just 3% of EU GDP, with services sectors (comprising 85% of the region’s economy) largely insulated. The European Central Bank (ECB) is expected to cut rates by 50–100 basis points, while Germany’s expanded fiscal policy and EU defense spending provide a buffer. The U.K., however, faces tougher terrain: fiscal constraints and sticky inflation could cap growth at 0.5%–1%, with auto exports and energy sectors bearing the brunt.

The trade war has also accelerated Europe’s push for regional economic cohesion. The EU’s “once-in-a-generation” fiscal shift toward infrastructure and defense spending underscores a strategic pivot to counter U.S. unilateralism.

Asia-Pacific: Divergent Vulnerabilities

The region’s exposure varies sharply. Vietnam, with 27% of GDP tied to U.S. exports, faces the starkest risks. Thailand, Malaysia, and South Korea see moderate exposure (6%–9% of GDP), while China leverages fiscal easing and yuan depreciation to offset losses. Beijing’s diversion of exports to non-U.S. markets has dampened global goods inflation, allowing central banks to cut rates.

Tesla’s shares fell 15% in early 2025 amid supply chain disruptions and rising input costs for automotive sectors.

The Trade Information Warehouse: Mitigating Operational Risks

The TIW’s role in managing credit events has never been more critical. Since 2024, it has processed over 36,000 trades related to credit lifecycle events, including defaults and credit event auctions. During the 2025 turmoil, its automated systems reduced manual errors in calculating settlements for protection buyers and sellers. The TIW’s “golden record” of transaction data ensures consistency in complex products like mortgage-backed securities, preventing fragmentation in post-trade processing.

Global Trade Decline and Systemic Risks

The WTO warns of a 0.2% decline in global merchandise trade in 2025, with North American exports collapsing by 12.6%. A worst-case scenario of a 1.5% decline could trigger systemic risks, particularly in emerging markets. Southeast Asian manufacturing hubs—reliant on U.S. demand—face order cancellations and currency devaluations, widening CDS spreads for corporations and sovereigns.

Conclusion: CDS as a Crystal Ball for Trade Uncertainty

The 2025 trade wars have indelibly altered the credit risk landscape. CDS spreads now reflect not only immediate market reactions but also long-term structural shifts. The U.S. faces elevated sovereign risk, while Europe’s fiscal resilience and Asia’s diversified strategies offer relative stability. The TIW’s infrastructure has been vital in managing post-trade processes, but systemic vulnerabilities remain.

Without resolution, trade disputes risk perpetuating a cycle of higher CDS costs, reduced liquidity, and increased default probabilities. Investors would be wise to monitor CDS spreads—a 20-basis-point rise in U.S. CDS since early 2025 is no anomaly—and prepare for prolonged volatility. The stakes are clear: trade wars are no longer just economic battles but existential tests for global credit markets.