The United States and China will likely strike a trade deal to stave off a possible trade war that could undermine the world's two biggest economies, a state-run trade agency said Thursday.

The two global powers this week have moved to slap massive tariffs on each other's goods, sparking fears of a trade war.

"It is possible the two sides will engage in negotiations to produce a compromise deal as any implementation of retaliatory tariffs will cause catastrophic losses on the economies of the US and China," the Korea International Trade Association said in a report.

KITA also advised South Korean businesses to closely monitor any developments involved, stressing any trade war between the two economic powers will adversely affect Korea.

It will likely take several months for the US to undertake steps before it actually imposes retaliatory tariffs, the agency said.

"Korean firms that have factories in China exporting products to the US and any local companies shipping goods to the US through Chinese companies will likely be hurt," the report said. "Such companies will have to check if their products belong to a list of companies affected by the US Super 301."

The Super 301, which refers to Section 301 of the US Trade Act of 1974, authorizes the US president to take retaliatory measures against countries engaged in unfair trading practices.(Yonhap)