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Australian and global economies would suffer recession from a trade war

Economies would suffer recession from a trade war

The Australian and global economies 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.

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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.

Brendan Rynne, Chief Economist, KPMG Australia said: “The lesson from our 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.”

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 percent 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.

Brendan Rynne said: “Far from winning an all-out trade war – the third scenario we examined – the US would experience a recession and a cumulative loss of GDP of 4.6 percent over 5 years.”

“In this scenario, 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,” he said.

By contrast, the KPMG Australia modelling finds that in the first scenario – where the US-China trade war was confined to those two countries, and 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 second 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 new paper builds on KPMG Australia’s previous report, The Re-emergence of Protectionism, released in April 2018, which looked at a hypothetical scenario of all countries participating in a trade war with tariffs increasing on current levels by 5 percent or 10 percent on either all manufactured goods or all tradable goods. That paper was prepared when the trade war between China and the US was still at very early stages: there were public statements and threats of action, but little had actually happened.

This new report assesses what has happened since April and the consequences of: (i) the trade war being limited to the actions that have already occurred (ii) the effects of the further actions currently planned; and most seriously of all (iii) if the trade war spreads to the wider world.

Ian Welch
Associate Director, KPMG
0400 818 891
iwelch@kpmg.com.au

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