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US-China trade tensions will disrupt EU trade flows

Publication Date: 11 Oct 2018 - By ReachX Team By ReachX Team
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Macro Equity Fundamental Environmental, Social & Governance FX Multi Asset USA EU ex-UK China UK

While further trade tensions between the US and China would have a negative credit effect on European companies, the impact would be mitigated by the EU's small direct trade exposures, the global footprint of many rated European companies and lower Chinese tariffs on some EU products, according to a new report. 

In fresh research for its clients, rating agency Moody’s said European companies most vulnerable to supply chain disruptions in the wake of the China-US standoff are those in the transport equipment, electrical and optical equipment, chemicals and metal product sectors.

"A continuation of the escalating trade tensions between the US and China will modestly disrupt the trade flows between Europe and its two major trade partners," said Ruosha Li, analyst at Moody’s. "However, a number of factors will lessen the negative effect of trade disruption on EU companies."

Trade tensions can affect European corporate issuers in three broad areas: trade flows, business and consumer sentiment, and financial markets. But the disruption would be limited for European companies because merchandise trade with the US and China makes up a relatively small share of total trade, Moody’s said. 

“For commodities, such as soybeans, global trade flows will eventually reach an equilibrium following higher tariffs. To the extent that regional demand remains largely unaffected, higher tariffs imposed by the US and China on one another's products will more likely result in changes to supply routes and rising costs. Trade flows from other regions will compensate for reduced trade flows between China and the US,” the agency said.

The EU's trade with the US only accounts for 6.3% of the EU's total exports of goods and 4.2% of the region's GDP, while direct trade with China accounts for 6.0% of the EU's total exports of goods and about 4.0% of the region's GDP.

“However, uncertainty around trade will weigh on business and consumer sentiment, potentially leading companies and consumers to postpone investment and consumption. Uncertainly also adds to financial market volatility. As investors require higher risk premiums to compensate for rising uncertainty, companies may delay investment and refinancing costs will rise.”

If the US-China trade dispute suppresses overall global demand for chemical products, the impact on European chemical companies will be negative, given these companies' large role in the global value chain, Moody’s opined further. “A weakening in demand from customers in end-industries affected by tariffs, such as automotive, would be particularly negative.”

In recent years, international companies have started to localise production by building plants in various locations led by risk mitigation and cost optimisation, where raw material and components are likely to be sourced locally. By localising production, large companies have positioned themselves to maintain their respective positions with a degree of resilience to emerging trade barriers, the agency concluded.

 

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