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Trade wars: There are no winners

Trade wars: There are no winners

Brendan Rynne, KPMG Chief Economist, examines the current trade war between the US and China and assesses the consequences if it stays limited or expands globally.

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Partner, Chief Economist

KPMG Australia

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The domestic and global economy would be severely damaged if current US-China trade disagreements escalated into an all-out global trade war, new economic modelling by KPMG Australia, has found.

Involvement by a significant number of other countries in a trade war would cut Australian national income by approximately half a trillion dollars over 10 years – the equivalent of 40 percent of last year's total household disposable income. Around 60,000 jobs would be lost, and real wages pushed down by $16 per week for the average worker, KPMG Australia's paper Trade Wars: There are no winners, finds.

Globally, the effects of a substantial number of other countries introducing protectionist measures such as a 15 percent tariff on imports would be very significant. The world economy would contract by more than 3 percent.

The study models three scenarios:

  1. Limited escalation, no contagion: the restriction of the current trade war between the US and China to already announced tariff increases.
  2. Full escalation, no contagion: what is now proposed to occur in terms of the next step up in aggravation between China and the US – an escalation of tariffs to 25 perent between the two countries.
  3. Full escalation, full contagion: an all-out trade war, where a substantial number of other countries joined in and raised tariffs by 15 percent. This is close to the levels occurring now between US/China and US/Rest of World with respect to steel and aluminium.

The report shows that far from winning an all-out trade war, the US economy would experience a recession and a cumulative loss of GDP of 4.6 percent over 5 years.

While China would not fall into recession, its economic growth rate would slow to just 4 percent per annum and would stay below 5 percent per annum for around 5 years – China’s worst economic growth performance in almost three decades.

China's cumulative GDP loss over 5 years, compared to a situation where there was with no trade war, would be approximately 5.3 percent.

By contrast, the KPMG Australia modelling finds that in the scenario where the US-China trade war were confined to those two countries, and were restricted to current announced measures, then the negative impact on the world economy would be kept to below -0.5 percent global GDP.

Australia's GDP will be cut by 0.3 percent over 5 years, with a loss of $36bn. The European Union and Japan will be affected less than Australia.

In the scenario where the trade war between the US and China escalated to a 25 percent tariff on all goods traded between them, both countries would end up with GDP 1 percent lower, but with China faring worse over time. Australia’s GDP would be cut by 0.5 percent.

The lesson from KPMG’s modelling is that no country would win from a global trade war and every country would lose. Even in the event of a full-blown trade war between the US and China, it is in the best interests of other countries to stay out of it. Policymakers in Australia and other nations would be well advised to resist the political pressure to impose or increase tariffs on goods imported from the US and China as they seek new markets.

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