US-China trade war to have unintended impact on supply chains - Moody's

Source: ICIS News

2018/10/11

LONDON (ICIS)--The US-China trade war will likely have “unintended consequences" on supply chains in the US and elsewhere, credit ratings agency Moody’s said in a report on Thursday.

Industries that use more expensive imported or domestically produced inputs to replace inputs imported from China will be hurt, said Elena Duggar, chair of Moody's macroeconomic board.

"Moving production chains will be costly and rising uncertainty will affect investment,” she said.

“The disruption will be higher in Asia than elsewhere given the region's integration in global supply chains," she added.

A hit on credit ratings

As for credit ratings, the US tariffs on $200bn of Chinese imports will be credit negative for Chinese commodity-related sectors and component manufacturing, Moody’s said in the report.

But the tariffs will also have unintended consequences for US companies.

The tariffs are credit negative for US retail and wholesale distributors of furniture, home goods, electronics, hardware and appliances that source finished goods from China destined for both US consumers and businesses, Moody’s said.

Furthermore, as about half of imports targeted by US tariffs represent intermediate inputs, the tariffs are also negative for a number of US sectors, including construction, transportation, telecommunications, and machinery manufacturing, the agency said.

Also, US export and investment controls on Chinese companies may disrupt certain US technology industries.

Limiting Chinese direct investment in the US technology sector and a potential retaliatory response might dampen investment, financing conditions and growth potential of affected sectors and companies, including for semiconductors, the agency warned.

Rise in commodity prices

The dispute could also contribute to higher commodity prices, especially for metals in which China represents a large share of the global market, Moody’s said.

The agency noted that while US and “advanced economies” trade flows have declined over the last few months, it is not yet clear how much of the decline in trade flows is due to the trade tariffs.

Going forward, Moody’s expects the US-China trade dispute to continue to limit investments, prolong tariff restrictions and elevate geopolitical tensions, it added.

In a related report on Thursday, Moody’s said that it expects negative impacts of the US-China trade dispute on European chemical companies to be limited.

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