US-China tensions to contribute to renewed slowdown in global economy, cautions Moody’s

Moody's Investors Service cautioned that the rise in tensions between the United States (US) and China will contribute to a renewed slowdown in systemically important regions of the global economy. This would not only be through the trade channel but also through the impact on sentiment and risk aversion.

The global credit rating agency stated that the export-oriented economies of Asia may be particularly exposed to the risk of global and regional trade downturns. Since both the US and China are important sources of export demand and investment, export-oriented Asian economies may find it challenging to navigate between two increasingly hostile trading partners.

In the long term, the deterioration in the trade relationship between the US and China will lead to increased fragmentation of the global trading system and may weaken the rules-based system that has underpinned global growth for the past several decades.

In this regard, the agency underscored that greater inefficiency in production and supply chains will reduce global growth potential.

Moody's comments come in the backdrop of the US administration increasing tariffs on Chinese imports that were worth $200 billion. The tariff were increased from 10 per cent to 25 per cent. In response, China said it will take retaliatory action.

"These developments will weigh on global economic growth. We believe that trade negotiations between the US and China will continue, and that a deal in some form will be eventually reached. However, the risk of a complete breakdown in trade talks has certainly increased," the agency said in its sector comment.

The hike in tariff is a significant setback in the trade negotiations between the US and China during the past one and half years. Moody's said it adds to the existing uncertainty around the global trading environment.

"Global financial markets have been buoyed in recent months by the prospects of an end to the monetary-policy tightening in the US and optimism about a resolution of trade talks between the US and China. An abrupt breakdown in trade talks, if that were to occur, will inject considerable policy uncertainty, increase risk aversion and lead to an abrupt repricing of risk assets globally," the agency said.

It cautioned that tighter financial conditions will return and, notwithstanding the dovish policy stance of the US Federal Reserve, will pose a negative confidence shock that drags down global growth.

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