US duty hike to exacerbate uncertainty in global trade: Moody’s

New Delhi: The US decision to more than double tariff on USD 200 billion Chinese imports to 25 percent “exacerbates the uncertainty” in the global trading environment and could lead to tighter financing conditions as well as slower growth, Moody’s Investors Service said on Friday.

The US on Friday increased tariffs on import of USD 200 billion Chinese products from 10 percent to 25 percent. US President Donald Trump has said that such a move was necessary to hold the Asian country to previous commitments, while China’s Commerce Ministry has warned that Beijing will not “capitulate to any pressure” and has threatened retaliation.

The 25 percent tariffs imposed by the US on USD 200 billion of Chinese imports from the previous 10 percent exacerbates the uncertainty in the global trading environment, further raises tensions between the US and China, negatively affects global sentiment and adds to risk aversion globally.

“The higher tariffs could also lead globally to the repricing of risk assets, tighter financing conditions, and slower growth,” Moody’s Investors Service Managing Director, Credit Strategy, Michael Taylor said.

In addition, the trade tensions could result in an increasingly fragmented global trading framework, weakening the rules-based system that has underpinned global growth, particularly in Asia, over the past several decades.

With regard to impact of duty hike on China, Moody’s said it will have a “significant negative effect on exports”, against the backdrop of a slowing economy.

“The Chinese advanced technology sector will also likely be adversely affected, as the US intensifies restrictions on that sector. For the rest Asia’s export-dependent economies, a slowdown in China will dampen growth rates,” Taylor added.

In 2018, the US imported goods worth USD 540 billion from China.

In a separate note, global rating agency Fitch said a 25 percent tariff rate would impose a cost of USD 72 billion, or 0.5 percent of China’s GDP, which could imply a cut to growth forecasts in absence of a much more aggressive domestic policy response.

“If trade tensions eventually lead to blanket US tariffs on all Chinese goods, the potential impact to China’s sovereign ratings could be much more serious, as it may tempt the authorities to abandon their restrained approach to policy easing, and fall back on credit stimulus measures that further exacerbate the country’s already significant financial vulnerabilities,” Fitch Ratings Director Sovereign Ratings Andrew Fennell said.

Fitch Ratings Chief Economist Brian Coulton said if the US-China trade tension stops here, with the increase to 25 percent on the USD 200 billion, it is unlikely to impact Fitch’s current China 2019 growth forecast of 6.1 percent.

“The bigger worry would be if this pushes it closer to a new 25 percent tariff rate on the rest of US imports from China. That would be a much more material threat to China’s growth outlook unless we saw some quite aggressive policy easing,” Coulton said.

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