Rising US, China tension to create fault lines in AsPac

MANILA, Philippines — The increasing tension between the Unites States and China is seen to create economic and financial fault lines in Asia-Pacific including the Philippines.

In a report, Moody’s Investors Service said Asia-Pacific economic and financial relationships would diverge along four fault lines against the backdrop of more elevated competition between the two economic giants and their allies in the region.

These fault lines or fractures span geopolitical, technology and manufacturing, trade and financial aspects.

Moody’s said the fault lines reflect the formation of new political alliances and the reconfiguration of Asia’s economic, trade and financial relationships.

“These may pressure international companies, investors and financial institutions to reshape or build redundancy into their operations,” it said, adding that “these fault lines could carry long-lasting credit effects. ”

For one, geopolitical fault lines reflect the political and security alliances centered around competition between the US and China that may drive shifts in international business strategies over time.

Moody’s said these could also have credit implications in terms of economic competitiveness, cross-border investment policies and the development of export markets.

According to Moody’s, political and security alliances are firming up or being reactivated along two blocs, with the potential for non-aligned countries to carve out their own roles independently.

“These pacts include the Quadrilateral Security Dialogue (Quad), the US’ bilateral defense treaties with Japan, Korea and the Philippines,” Moody’s said.

“These alliances, while oriented mainly for security purposes, will likely have spillovers to economic relations and trade to reflect the nexus between national security and economic competitiveness,” it said.

Over time, Moody’s warned that this may have consequences for longer-term trade, commercial and investment relationships.

While many Southeast Asian countries, including the Philippine, support the US security presence in Asia-Pacific, they also recognize China’s importance as a long-term economic partner.

“Their neutrality with respect to geopolitical alliances will therefore work to their benefit, as it lowers their exposure to geopolitical conflict and fosters foreign direct investment, including for the reconfiguration of supply chains away from China,” Moody’s said.

The debt watcher also said that some ASEAN countries, such as the Philippines and Vietnam, have disputes with China over claims in the South China Sea that could lead to accidents or tensions in important shipping lanes.

Apart from geopolitical fault lines, Moody’s warned that technology and manufacturing would also be affected as the United States and China would continue to regulate how sensitive technologies, such as semiconductors and renewable energy, are transferred and adopted across borders.

This means that a closer scrutiny of foreign investments and data localization efforts may become prevalent, raising regulatory and operational costs for multinational companies.

Moody’s said tension between the two powerhouses may also affect the regionalization of trade flows as well as finance as capital and banking flows align with geopolitical norms.

“While the US dollar remains central to international trade, the threat of US sanctions may induce sovereigns, central banks and companies to diversify the currencies in which they raise funds, invest their reserves or invoice merchandise trade,” Moody’s said.