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Moody's: US-China trade spat to have a limited effect on European businesses

The EU's small direct trade exposures, global presence, and lower Chinese tariffs on some EU products will reduce the negative credit effect of U.S.-China trade tensions on European companies, Moody's said in a report.

"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, an analyst at Moody's.

European companies in the transport equipment, electrical and optical equipment, chemicals and metal product sectors would be most vulnerable to supply chain disruptions. But the rating agency said the disruption would be limited for European companies because merchandise trade with the U.S. and China accounts for a relatively small portion of total trade.

Uncertainty around trade will also affect business and consumer sentiment, resulting in lower investment and consumption. Due to heightened financial market volatility, companies could delay investment and refinancing costs could increase, Moody's said.

A reduction in global demand for chemical products due to the trade dispute would have a negative impact on European producers, with weaker demand from customers in end-industries having a particularly negative impact.

International companies have localized production in various locations and source raw material components locally, reducing the impact of emerging trade barriers, Moody's said.

In a separate report, the rating agency said the trade dispute will have significant impact on global supply chains, especially in Asia, and will have unintended consequences for U.S. companies.

"Industries that will use more expensive imported or domestically produced inputs will be hurt," said Elena Duggar of Moody's. "Moving production chains will be costly and rising uncertainty will affect investment."

The U.S. tariffs on $200 billion of Chinese goods will be credit-negative for Chinese commodity-related sectors and component manufacturing. In the U.S., retail and wholesale distributors of furniture, home goods, electronics, hardware and appliances that source finished goods from China will be affected. The U.S. tariffs are also negative for the U.S. construction, transportation, telecommunications and machinery manufacturing sectors as about half of imports targeted by the tariffs represent intermediate inputs.