Last Friday, Australian time, the US placed another US$16bn worth of tariffs on imported goods from China. The real possibility of tariffs on a further US$200bn of Chinese imported goods into the US remains a far more significant risk to global economic conditions.
So given these rising tensions what should Australia and other countries do? The simple answer is – do not get involved.
KPMG Australia’s new paper Trade Wars: There are no winners finds that if the current US-China trade dispute escalated into an all-out global trade war – involving a substantial number of other countries introducing protectionist measures, such as a 15 percent tariff on imports – then Australia’s economy, along with the global economy, would be seriously damaged.
Our paper models three scenarios:
- Limited escalation, no contagion: the restriction of the current trade war between the US and China to already-announced tariff increases between those two countries only
- Full escalation, no contagion: a step-up in aggravation between China and the US – an escalation of tariffs to 25 percent between the two countries only
- Full escalation, full contagion: an all-out trade war, where a substantial number of other countries joined in and raised tariffs by 15 percent.
In the first scenario – what has already happened –- the KPMG Australia modelling finds the negative impact on the world economy will be kept to below – 0.5 percent of global GDP. Australia’s GDP will be cut by 0.3 percent over five years, with a loss of A$36bn, while the European Union and Japan will be affected less than Australia.
In the second scenario, China and the US would end up with GDP 1 percent lower, but with China faring worse over time. Australia’s GDP would lower by 0.5 percent.
However, it is this last scenario that is the real worry. The US, far from ‘winning’ in an all-out trade war, would experience a recession and a cumulative loss of GDP of 4.6 percent over five years. China, while not falling into recession, would see its economic growth rate slow to just 4 percent per annum and would stay below 5 percent per annum for around five years; China’s worst economic growth performance in almost three decades.
China’s cumulative GDP loss over five years, compared to a situation where there was with no trade war, would be approximately 5.3 percent.
The world economy would contract by more than 3 percent. Over a 10 year period under this scenario the Australian economy could lose up to A$475 billion of Real Household Disposable Income, which would cost some 60,000 jobs and push down real wages for the average Australian worker by $16 per week.
Our new paper builds on KPMG Australia’s previous report, The Re-emergence of Protectionism, released in early 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.
In the last five months, events have unfolded quickly – and worryingly.
The lesson from our modelling is that in the event of a full-blown trade war between the US and China, it is in the best interests of other countries not to escalate their activity within it.
Policymakers in Australia and other nations would be well advised to resist pressure to impose or increase tariffs on goods from the US and China that might be seeking new markets following their displacement from those respective markets.
Simply, there are no winners in trade wars.