Report

The re-emergence of protectionism

Modelling the potential consequences for the Australian economy

3 Apr 2018
Description

Openness and trade liberalisation are now regarded as key components of a nation's economic growth and well-being.

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 1970’s, 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.

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2018
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