The two largest economies in the world, the United States (US) and China, are waging an escalating trade war with each other. The latest round of trade talks between the two countries, held in Washington D.C. in late August, failed to resolve the economic tensions between the US and China.
Modelling by KPMG Economics, in Australia, (‘KPMG Australia’) shows that as this scenario progresses from one of relatively open trade between the two countries to one of restricted trade, the economic consequences for both the US and China are negative, and the follow-on impact to the global economy is also detrimental.
This report looks at what has happened to date - what has already been legislated and enacted – and then assesses three scenarios:
- Limited escalation, no contagion: the restriction of the current trade war between the US and China to already announced tariff increases
- 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% between the two countries
- Full escalation, full contagion: what would happen if a substantial number of other countries joined in and raised tariffs by 15%
The macroeconomic modelling shows that if the trade war is contained just to the US and China the negative impact on the global economy can be kept to be below -0.5% on world GDP, but if other countries enter the fray and the trade war escalates, world GDP is likely to contract by more than 3%. This trade war contagion scenario would cause a major downturn in the global economy.
An even more pessimistic scenario, where risk premiums rose sharply and financial markets over-reacted, could result in a major global recession.
Far from winning an all-out trade war, the US economy would endure a recession and annual growth rates almost 1% slower over five years.
An all-out trade war would hit China hard. Its economic growth rate would slow to just 4% per annum and would stay below 5% per annum for around five years. This is well below official targets and would be China’s worst economic growth performance in almost three decades.
An escalation of the trade war would also be extremely serious for Australia. Its impacts would last almost a decade, with an estimated loss of national income of nearly half-a-trillion dollars over 10 years, or the equivalent of losing just over 40% of last year’s household disposable income. Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker.
The modelling by KPMG Australia confirms the best strategy for the rest of the world is to resist the political pressure to join a US-China trade war, despite the likelihood there may be increased domestic pressures to protect local industries from any displaced US and Chinese products looking for a new market.
In a limited trade war between the US and China, where the tariff increases are restricted to those already announced and foreshadowed by the US, Australia’s GDP would be about 0.3% lower after five years and we would incur a real GDP loss of A$36 billion over a decade. This is mostly due to the reliance of Australian commodities as intermediate inputs in the production process in China, and the likely loss of services exports in education and tourism to China.In a limited trade war between the US and China, where the tariff increases are restricted to those already announced and foreshadowed by the US, Australia’s GDP would be about 0.3% lower after five years and we would incur a real GDP loss of A$36 billion over a decade. This is mostly due to the reliance of Australian commodities as intermediate inputs in the production process in China, and the likely loss of services exports in education and tourism to China.