A new report by KPMG, titled Trade Wars: There are no winners, has called on Australia to stay out of the trade dispute between China and the US.
The two superpowers have been imposing tit-for-tat tariffs on imported goods from either country that has cast a cloud over emerging markets, soured investor sentiment and seen the end of the ‘synchronised global growth’ narrative.
KPMG’s report presents three scenarios for the outcome of the trade war between US and China: one where the escalation is only “limited” and remains between US and China; and a second where the trade dispute is fully escalated, but still sees no contagion to other countries.
The third scenario presented modelling results from an outcome where the trade war had been fully escalated and had also spread to other countries, with all nations applying tariffs of 15 per cent to imported goods.
Source: KPMG
Under this scenario, KPMG estimated that the world economy would potentially incur “significant damage” and suffer a cumulative loss of 3.5 per cent GDP after five years.
“An all-out trade war would plunge the global economy into recession. If financial markets got the jitters and over-reacted to such a trade war, all bets would be off and a global recession would occur.
“Even conservative modelling suggests that an all-out trade war would inflict a prolonged recession on the world economy,” the report said.
China would be hit hardest, with an estimated loss of “almost 6 per cent” per cent GDP after ten years under this scenario. This would mean the nation’s worst economic performance in nearly 30 years.
However, the US would not be spared either, and would see its GDP fall by 5.3 per cent a decade on.
“Far from winning an all-out trade war, the US economy would endure a recession and annual growth rates almost 1 per cent slower over five years.”
Australia would see a 3.5 per cent fall – or $364 billion – in GDP across ten years, while the EU would see GDP drop by 2 per cent.
The report indicated that worst-case scenario of the trade war would have “extremely serious” consequences 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 per cent 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.”
KPMG said it was in the “best interests” of Australia, as well as other nations across the world, to resist pressure to participate in the US-China trade spat as it would “do much more harm than good to their own economies”.
“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.”
