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JAKARTA (TheInsiderStories) – The trade war has escalated beyond expectations and the stakes are high for the global economy, said Steve Cochrane, Moody’s Analytics Asia-Pacific Chief Economist in his latest report released on Thursday (08/08).

“Our global recession odds for the next 12 to 18 months have increased from 40 percent to 50 percent,” he stated. Based on the paper, the most recent escalation of tariffs by the United States (US) President Donald Trump administration to introduce a 10 percent tariff on the remaining US$300 billion in Chinese goods imports starting Sept. 1.

The additional tariff on China would put the total effective US tariff rate at 5.4 percent compared with 4.4 percent today and 1.5 percent seen at the end of 2017. He rated, the damage that the existing tariffs have caused should not be understated and provide a good starting point to gauge the impact of the latest round.

He added, the potency of further expansionary monetary policy is limited by the unfavorable backdrop.

“Our expectation is that central banks throughout the Asia-Pacific region will ease policy to shore up domestic demand. But the problem is that local monetary stimulus does not meaningfully change the status quo, only a more permanent truce to the trade war can do that,” said Cochrane.

Futhermore, he sees, the pattern of trade and the rules have changed dramatically over the past two years from a system that was set up shortly after World War II and that more or less thrived until the current trade war. No matter the outcome of the trade war between the US and China, global patterns of trade and investment have likely been fundamentally and permanently changed, he adds.

Furthermore, he rated the shift in foreign investment away from China toward other locations in Asia and around the world, which began before the US – China trade dispute because of the rising cost of production in the second largest economy in the world, has intensified.

If the US plays its final hand, raising the tariff from 10 percent to 25 percent on the more than $300 billion of imports from China, this “full trade war” scenario would see the U.S and China enter into an entirely new world of trade with effective tariff rates of 7 percent and 12 percent, respectively.

Followed the dispute, most of financial market in the world plummeted after China struck back United States (US) President Donald Trump’ threatened to impose another 10 percent tariffs for US$300 Chinese goods on September. Demand for haven assets spiked on concern the conflict between the world’ two biggest economies will weigh on global growth.

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