Virus dampens US-China deal optimism, steel tariffs remain

The US-China phase one trade deal reduces the risk of a near-term escalation in trade tensions between the countries, but trade policy uncertainty has not gone away, says Moody’s. The US threat of 25% tariffs on auto and auto parts imports, for example, remains on the table, while tariffs on steel and aluminium have been extended.

“Faced with the shock to its economy from the coronavirus, China will have more difficulty meeting the already ambitious commitments it made under the agreement,” Moody’s says in a report sent to Kallanish. “Therefore, the trade war could be reignited if and when the US Trade Representative (USTR) determines that China has not met its obligations.”

The outbreak of the coronavirus has dented the optimism created by the US-China trade deal and early signs of a pick-up in the industrial sector.

“There is already evidence — albeit anecdotal — that supply chains are being disrupted, including outside China,” Moody’s says. “If the outbreak persists, domestic and international supply chain disruptions are likely to become significant, amplifying the shock to the global economy.” Factory shutdowns could lead to shortages and raise the prices of manufactured goods globally.

The Chinese government and private sector will likely slowly relax quarantine and travel restriction rules once the rate of new infections meaningfully falls. Moody’s baseline forecast assumes the rate of disease transmission will slow in the coming weeks. Under this assumption, the economic impact will be limited to the first quarter and certain normalcy will be restored by the beginning of Q2.

The episode is nevertheless forecast to shave 0.6 percentage point from China’s GDP growth in 2020. Moody’s has revised its China GDP growth forecast to 5.2% in 2020.

Fiat Chrysler Automobiles (FCA) has temporarily suspended production at its Kragujevac plant in Serbia due to reduced availability of certain components sourced in China (see separate article).