'There are no winners in a trade war' says KPMG Australia

The escalating trade war between the United States and China could play out in three distinct ways. A fizzle out, an escalation with a bit of international contagion or a full blown, all-out global trade war. In the first two cases, Australia will feel limited effects of the chaos, but in the third, the Aussie economy could be “seriously damaged.” It probably comes as no surprise then that the economists at KPMG Australia say that there are no winners in trade wars. 

The Big Four professional services firm released today an analytical study on the effects that a trade war would have on economies around the globe. The report predicted that in a worst-case escalation scenario, Australia would be worse off than the EU or Japan and lose an estimated A$475 billion of Real Household Disposable Income and upwards of 60,000 jobs.

Identified in the report titled “Trade Wars: There are no winners” are three scenarios which can play out. The first is similar to the current positioning of global affairs, with a 25% tariff being applied to $50 billion worth of goods and a further 10% on between $100-200 billion of other goods. Scenario two is a tit-for-tat 25% trade tariff on all goods between the world’s largest economies.

In the third scenario – where all countries apply a 15% tariffs on imports – the global economy would shrink by 3.8%. “A trade war between the US and China that spills over to the rest of the world has the potential to cause significant damage to the global economy. Even conservative modelling suggests that an all-out trade war would inflict a prolonged recession on the world economy,” states the article. 

Both combatants would be losers, with the US falling into recession, while China’s economy would decline to a growth rate of 4%. For China, this would indicate the lowest growth in the past three decades, with a cumulative GDP loss of -5.3% in real terms. The US, whilst technically in recession, would fare mildly better, with a cumulative GDP loss of -4.6%. After a decade, the US would be -5.3% worse off and China up to -6% all around.

Safe to say, that doesn’t sound good for either party. And with the US being Australia’s greatest ally and China being Australia’s largest trading partner, the Lucky Country is stuck in the middle. “An escalation of the trade war would also be extremely serious for Australia,” states the consulting firm’s report.

“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 report concludes by stating that the best option for the rest of the world – including Australia’s leaders – is to refrain from getting drawn into the dispute. “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.”

“Australia and other nations should resist pressure to impose or increase tariffs on goods imported from the US and China, since doing so would do much more harm than good to their own economies.”