The re-emergence of protectionism | KPMG | AU

The re-emergence of protectionism: potential consequences for the Australian economy

The re-emergence of protectionism

Brendan Rynne, KPMG’s Chief Economist, assesses the extent of domestic and world economy risks from the current tensions in global trade arrangements.

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Partner, Chief Economist

KPMG Australia

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Retaliation by the rest of the world to any US tariffs would cause economies such as Canada, the EU and the UK to tip into recession, economic modelling by KPMG Australia has shown. It would also create substantial job losses in Australia.

But the overall global economy would escape a recession due to much faster real GDP growth rates of large, emerging economies, such as China and India.

Key insights

  • Openness and trade liberalisation are now regarded as key components of a nation's economic growth and well-being. KPMG modelling shows that tariff retaliation would significantly damage global growth.
  • Australia’s history shows that from the middle of the 20th century our trade policy in effect closed the domestic economy to global competition, which ultimately had the effect of increasing unemployment and creating a structural current account deficit.
  • Australia started actively participating in the process of trade liberalisation from the early 1970s, and arguably it has been this process that started the transformation of Australia’s economy to today’s modern industrial structure.
  • Trade liberalisation can be seen as a cooperation strategy, whereas trade protectionism can be considered a defection strategy. Since the middle of the 20th century the world has been broadly playing a mutual cooperation strategy in the game of international trade. Unsurprisingly, living standards have been rising throughout that period as trade barriers declined and economies opened up.
  • The latest, high-profile trade protectionism action has been the signing of a memorandum by the President of the United States on 22 March 2018 to consider the imposition of tariffs on the importation of Chinese goods and restrict investment in domestic companies in industries or technologies ‘deemed important’ to the United States.
  • China's Commerce Ministry immediately responded to this proposal by announcing that should the potential escalation in trade restrictions by the US materialise, China would impose a 15 percent tariff on 120 US products, including fresh fruit, dried fruit, nuts, wine, ginseng, and steel pipes worth just under $US1 billion in annual trade. Further, China would impose a 25 percent tariff on eight products, including pork and recycled aluminium, which would impact about $US2 billion in trade, and it would also remove existing tariff concessions on US steel and aluminium.
  • This latest action is in addition to the recent imposition by the US of a 25 percent ad valorem tariff on steel and a 10 percent ad valorem tariff on aluminum imported into the US from all countries, except Australia, Europe, South Korea, Canada, Mexico, Argentina and Brazil (who will instead have import quotas applied to exports of steel and aluminium into the US), from 23 March 2018.
  • Using KPMG Economics’ Computable General Equilibrium (CGE) model of global production and trade we have estimated the impact on the world economy of different hypothetical retaliatory scenarios associated with countries choosing to escalate their response to the introduction of import tariffs on steel and aluminium by the US.

Trade scenarios

Our analysis is based on four hypothetical retaliatory trade scenarios:

  • Scenario 1a: A 5-percentage point increase in tariffs by all countries on all manufactured goods.
  • Scenario 1b: A 5-percentage point increase in tariffs by all countries on all goods, primary and manufactured.
  • Scenario 2a: A 10-percentage point increase in tariffs by all countries on all manufactured goods.
  • Scenario 2b: A 10-percentage point increase in tariffs by all countries on all goods, primary and manufactured.

 

  • If the rest of the world responds to the introduction of import tariffs on steel and aluminium by the US by implementing retaliatory tariffs of 5 percent on all manufactured goods (Scenario 1a), growth in the global economy would slow by about 1.3 percentage points.
  • This least-worst scenario would still result in economies like the EU, UK, and Canada entering a recession, and would see growth in the Australian economy decline by more than 0.8 percentage points, the equivalent of AU$15 billion and about 130,000 FTE jobs.
  • In the event the retaliatory response from the rest of the world is much stronger, such that it involved a 10-percentage point increase in tariffs on goods (Scenarios 2), impacts would be roughly twice as bad.
  • When the 10-percentage point tariff increase is applied to all primary and manufactured goods (Scenario 2b), the global economy would enter a severe recession, similar to the Great Recession of 2009. The decline of 3.3 percentage points in growth would result in a negative growth rate of world real GDP per capita of 0.8 percent.
  • This more aggressive hypothetical retaliatory trade scenario would reduce Australia’s GDP by nearly AU$35 billion and more than 285,000 FTE jobs.
  • KPMG’s CGE modelling of various retaliatory scenarios confirms the lessons learnt from the playing of theoretical games of cooperation and conflict, like Prisoners Dilemma; everyone suffers if you adopt a strategy of trying to make the other player worse off.
  • KPMG’s analysis shows it is important for the Australian and world economy that this current tension in global trade arrangements does not escalate into a scenario that results in the hard-fought gains from liberalisation being diminished, or worse still, lost.

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