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Escalating Trade War Raises Recession Threat For Global Economy

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The world may be underestimating the risk posed by an escalating US-China trade war, which actually has the potential to lead the global economy into a recession in less than a year, Morgan Stanley warned.

The global economy could slip into recession in nine months if the Donald Trump administration pushes ahead with a 25 percent hike in tariffs on the final US$300 billion of Chinese imports and triggers retaliation from China, Morgan Stanley Chief Economist Chetan Ahya said in a note published Sunday.

Elsewhere, economists at Goldman Sachs predicted that the likelihood of the US following through its threat of slapping tariffs on the final $300 billion of Chinese imports has risen to 60 percent from 40 percent.

Goldman Sachs economists also expect further escalation as both sides add tariff and non-tariff measures. They downgraded the US growth forecast for the second quarter to 1.1 percent from 1.3 percent, and the projection for the second half of the year to 2 percent.

They also predicted that the Federal Reserve was likely to cut interest rates.

In May, the US raised the tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent. China retaliated by raising tariffs on $60 billion worth of imports from the US.

While the outcome of the trade war remains highly uncertain, Ahya said, "We could end up in a recession in three quarters."

"Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook," Ahya wrote.

On Sunday, the China government released a white paper where it claimed that the country does not want a trade war, but is not afraid of one and was ready to fight if necessary, the state-run news agency Xinhua reported.

The US began imposing trade tariffs on Chinese imports last year and Beijing retaliated with similar measures. However, the spat does not end with just raising tariffs.

Several Chinese firms, the most prominent being the telecom giant Huawei, have been targeted by the US.

The US is trying to prevent the use of technology from the Chinese telecom giant Huawei Technologies Co. in 5G mobile networks globally, citing security risks.

The latest in this saga is the news that China is investigating the US logistics giant FedEx. The government has announced that it will create an "unreliable entity list" with respect to business firms.

Businesses in both the US and China are worried as the trade war escalates, it is they who suffer.

The tensions are spilling over into other spheres and China has warned countries of military action if they try to meddle in matters concerning Taiwan.

"The series of actions over the weekend means that China's "long march" has begun. We take this seriously," ING economist Iris Pang said.

"It means that the trade war has not only become a technology war but also a broad-based business war. There will be more retaliation actions from China, especially for the technology sector."

Meanwhile, the Trump administration has also raised the tariff threat against imports from the European Union and Mexico.

Late May, Trump announced that new tariffs will be imposed on Mexican imports if the country does not take steps to curb immigration. He has threatened to slap a 5 percent tariff on all imports from Mexico starting June 10.

The White House warned that if Mexico did not act as Trump demanded, tariffs would rise by 5 percent each month until October 1, when the rate would reach 25 percent.

Economists at Goldman Sachs see a 70 percent chance of the US following through on its threat against imports from Mexico on June 10. They also expect the tariffs to be raised to 10 percent at the start of July.

A major concern for both Mexico and the EU is Trump's threat to raise tariffs on automobile imports.

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