Trade war hurts small Asian economies

Ratings agency Standard & Poors has warned that a strong US economy now threatens to prolong international trade tensions by increasing Washington's resolve to go ahead with the tariff increases it threatens on Chinese imports.

S&P analysts believe the direct economic impact of the US measures and the retaliatory Chinese responses are unlikely to be severe for either economy.

But they argue a US-China trade war has the potential to spill into other aspects of ties between the two which is likely to heighten regional geopolitical risks.

In addition, the ratings firm says the impact of the dispute on smaller Asian economies that are dependent on international trade - including Taiwan, Malaysia, and Korea - could be more significant that it is for the world’s two largest economies.

"The elevation of cross-straits tension with Taiwan is one possible spill-over of the growing trade spat," said S&P credit analyst KimEng Tan.

"Both China and the US have made unusual naval manoeuvres in the seas around Taiwan recently as relations between the governments in Beijing and Taipei grew colder."

Beijing's setback

Meantime, China's deleveraging of its highly indebted corporate sector could also face a setback if economic uncertainties rise owing to trade tension. Mounting resistance to Beijing's efforts to lower domestic financial risks is viewed as likely by Tan if economic growth weakens significantly.

"A slowing economy could reverse the policy tightening, and the repair to Chinese financial stability could stagnate," Tan said.

S&P said perceptions that the events above are becoming more likely could also intensify risk aversion among emerging market investors.

In this scenario, externally dependent sovereigns such as Pakistan and Sri Lanka could face elevated funding pressures.

Funding costs in Indonesia may also increase, although the pro-activeness of its central bank is likely to anchor investor confidence better than in most other emerging markets, according to the agency.

Nevertheless, S&P still says most Asia-Pacific sovereign credit ratings are likely to remain unchanged in the next one to two years.

There are 18 sovereign ratings with stable outlooks, two with positive outlooks (Japan and Philippines) and one with negative outlook (Australia) in the region as of June 30, 2018.

"The negative outlook on Australia reflects risks to the government's fiscal consolidation plan and risks to financial stability, economic outlook as well as fiscal performance should home prices fall abruptly with negative consequences for financial stability."

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