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Tariff retaliation would significantly damage global growth: KPMG Economics report

Tariff retaliation would damage global growth

Retaliation by the rest of the world to any US tariffs would cause economies such as Canada, the UK and the EU 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.

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In a report, The Re-emergence of Protectionism, arguing for the retention of the free-trade policies which have seen world average per capita real income rise from less than US$4000 in 1950 to more than US$15,000 now, KPMG Economics models four scenarios:

  1. A 5-percentage point increase in tariffs by all countries on all manufactured goods.
  2. A 5-percentage point increase in tariffs by all countries on all goods, primary and manufactured.
  3. A 10-percentage point increase in tariffs by all countries on all manufactured goods.
  4. A 10-percentage point increase in tariffs by all countries on all goods, primary and manufactured.

 

Even in the least-worst scenario, the impacts would be substantial. The Australian economy would contract by more than 0.8 percentage points - the equivalent to AU$15 billion and 130,000 full-Time Equivalent (FTE) jobs. The second would see Australia’s GDP contract by 1 percent, equal to AU$18 billion or 150,000 FTE jobs.

Other countries’ GDP would be hit still harder in the first scenario – Canada’s economy would shrink by 3.4 percent, the EU’s by 3 percent and the UK’s by 2.1 percent – all of them would tip into recession. By contrast the US’ own economy would emerge relatively unscathed, with a modest 0.37 percent decline.

The most serious scenario would be a 10 percent tariff hike by all countries on primary and manufactured goods – this would lead to a global recession similar to the scale to the one associated with the Global Financial Crisis. Under this scenario we would see global economic growth fall by around 3.3 percent, which would result in Australia’s economy declining by AU$35 billion or 285,000 FTE jobs.

While this scenario results in a GFC-like impact, the world economy would probably take even longer to recover, given the increased levels of protectionism compared to a decade ago.

Brendan Rynne, KPMG Australia Chief Economist, said: “Our modelling confirms that trade liberalisation is key to economic growth and demonstrates how potentially damaging protectionism is. Recent WTO statistics show that over the past 12 months, import-facilitating measures have been more than twice the size of import-restricting actions. This proves that countries know the importance of trade openness.

“Our modelling shows that countries would be wise to consider how to respond to any import tariffs implemented by the US. While all countries lose under these scenarios, the US lose by considerably less than others do.

“There is a disproportionate level of damage for Canada and the EU27 nations – their economies are adversely affected by 8.5 times and 7.5 times as much as the US economy. For the UK the ratio is 5.3. This indicates those countries simply cannot afford to get into any sort of trade war with the US.

“For Australia, the level of comparative damage would be smaller. But we are nonetheless a case study in the benefits of free trade. In 1973, when we joined the then-GATT reduction of tariffs, we were a relatively poor country, after decades of inward-focused trade policy. Within 40 years, exports and imports had tripled as a proportion of our GDP, as formerly-protected domestic industries had to reform to survive under global competition, while other sectors which had a comparative advantage thrived.

“Our analysis shows that a hostile global trade environment would see Australia’s hard-fought gains from trade liberalisation being eroded.”

* Using our Computable General Equilibrium (CGE) model of production and trade KPMG Economics has estimated the impact to the global economy of different retaliatory scenarios associated with countries choosing to escalate their response to the introduction of import tariffs on steel and aluminium by the US. This is the same analytical framework utilised by the US Department of Commerce to calculate the level of tariff needed to restore the US steel industry to 80 percent capacity utilisation rate.

For further information

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au
 

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