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28 August 2018

Brendan Rynne, KPMG Chief Economist, examines the current trade war between the US and China and assesses the consequences if it stays limited or expands globally.

The domestic and global economy would be severely damaged if current US-China trade disagreements escalated into an all-out global trade war, new economic modelling by KPMG Australia, has found.

Involvement by a significant number of other countries in a trade war would cut Australian national income by approximately half a trillion dollars over 10 years – the equivalent of 40 percent of last year's total household disposable income. Around 60,000 jobs would be lost, and real wages pushed down by $16 per week for the average worker, KPMG Australia's paper Trade Wars: There are no winners, finds.

Globally, the effects of a substantial number of other countries introducing protectionist measures such as a 15 percent tariff on imports would be very significant. The world economy would contract by more than 3 percent.

The study models three scenarios:

1. Limited escalation, no contagion: the restriction of the current trade war between the US and China to already announced tariff increases.

2. 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 percent between the two countries.

3. Full escalation, full contagion: an all-out trade war, where a substantial number of other countries joined in and raised tariffs by 15 percent. This is close to the levels occurring now between US/China and US/Rest of World with respect to steel and aluminium.

The report shows that far from winning an all-out trade war, the US economy would experience a recession and a cumulative loss of GDP of 4.6 percent over 5 years.

While China would not fall into recession, its economic growth rate would slow to just 4 percent per annum and would stay below 5 percent per annum for around 5 years – China’s worst economic growth performance in almost three decades.

China's cumulative GDP loss over 5 years, compared to a situation where there was with no trade war, would be approximately 5.3 percent.

By contrast, the KPMG Australia modelling finds that in the scenario where the US-China trade war were confined to those two countries, and were restricted to current announced measures, then the negative impact on the world economy would be kept to below -0.5 percent global GDP.

Australia's GDP will be cut by 0.3 percent over 5 years, with a loss of $36bn. The European Union and Japan will be affected less than Australia.

In the scenario where the trade war between the US and China escalated to a 25 percent tariff on all goods traded between them, both countries would end up with GDP 1 percent lower, but with China faring worse over time. Australia’s GDP would be cut by 0.5 percent.

The lesson from KPMG’s modelling is that no country would win from a global trade war and every country would lose. Even in the event of a full-blown trade war between the US and China, it is in the best interests of other countries to stay out of it. Policymakers in Australia and other nations would be well advised to resist the political pressure to impose or increase tariffs on goods imported from the US and China as they seek new markets.

28 August 2018

The Australian and global economies would be severely damaged if current US-China trade disagreements escalated into an all-out global trade war, new economic modelling by KPMG Australia has found.

Involvement by a significant number of other countries in a trade war would cut Australian national income by approximately half a trillion dollars over 10 years – the equivalent of 40 percent of last year’s total household disposable income. Around 60,000 jobs would be lost, and real wages pushed down by $16 per week for the average worker, KPMG Australia’s paper Trade Wars: There are no winners, finds.

Globally, the effects of a substantial number of other countries introducing protectionist measures such as a 15 percent tariff on imports would be very significant. The world economy would contract by more than 3 percent.

Brendan Rynne, Chief Economist, KPMG Australia said: “The lesson from our modelling is that no country would win from a global trade war and every country would lose. Even in the event of a full-blown trade war between the US and China, it is in the best interests of other countries to stay out of it. Policymakers in Australia and other nations would be well advised to resist the political pressure to impose or increase tariffs on goods imported from the US and China as they seek new markets.”

The study models three scenarios:

1. Limited escalation, no contagion: the restriction of the current trade war between the US and China to already announced tariff increases.

2. 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 percent between the two countries.

3. Full escalation, full contagion: an all-out trade war, where a substantial number of other countries joined in and raised tariffs by 15 percent.

Brendan Rynne said: “Far from winning an all-out trade war – the third scenario we examined – the US would experience a recession and a cumulative loss of GDP of 4.6 percent over 5 years.”

“In this scenario, while China would not fall into recession, its economic growth rate would slow to just 4 percent per annum and would stay below 5 percent per annum for around 5 years – China’s worst economic growth performance in almost three decades. China’s cumulative GDP loss over 5 years, compared to a situation where there was with no trade war, would be approximately 5.3 percent,” he said.

By contrast, the KPMG Australia modelling finds that in the first scenario – where the US-China trade war was confined to those two countries, and restricted to current announced measures – then the negative impact on the world economy would be kept to below – 0.5 percent global GDP.

Australia’s GDP will be cut by 0.3 percent over 5 years, with a loss of $36bn. The European Union and Japan will be affected less than Australia.

In the second scenario – where the trade war between the US and China escalated to a 25 percent tariff on all goods traded between them – both countries would end up with GDP 1 percent lower, but with China faring worse over time. Australia’s GDP would be cut by 0.5 percent.

The new paper builds on KPMG Australia’s previous report, The Re-emergence of Protectionism, released in 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.

This new report assesses what has happened since April and the consequences of: (i) the trade war being limited to the actions that have already occurred (ii) the effects of the further actions currently planned; and most seriously of all (iii) if the trade war spreads to the wider world.

Ian Welch
Associate Director, KPMG

https://home.kpmg.com/au/en/home/media/press-releases/2018/08/australian-and-global-economies-would-suffer-recession-from-a-trade-was-28-august-2018.html

Donald Trump's trade war will cost Australia's economy at least $36 billion

Australia is bracing for a $36 billion economic hit as Donald Trump prepares to unleash his biggest strike yet in a trade war with China, with warnings a further escalation could cost thousands of local jobs.

Trade Minister Simon Birmingham called for calm, telling the superpowers to uphold the international order or risk derailing the global economic recovery.

"Australia urges all parties to respect the long established rules of international trade and to avoid action that could ultimately damage their economies and those of other nations," he said.

"Our best form of defence against such trade tensions is to continue to open new doors for Australian businesses and exporters."

Mr Trump could raise tariffs on $US200 billion worth of products ranging from selfie sticks to clothing, after the US President signalled he would act as soon as a consultation period closed on Friday afternoon Australian time.

Beijing responded sharply, threatening to increase tariffs on some of the $US150 billion worth of goods imported from the US each year.

“If the United States, regardless of opposition, adopts any new tariff measures, China will be forced to roll out necessary retaliatory measures," China's economic ministry spokesman Gao Feng said.

The tensions between the world's two largest economies will hit Australian exporters and consumers, with fears a trade-induced economic shock would crimp global demand, hitting farmers, miners and manufacturing suppliers.

Two of Australia's largest exports - the resources and education sectors - are particularly exposed, with a falling Chinese currency weakening its buying power, discouraging Chinese parents from sending their children to Australian universities, and a slowing economy reducing demand for iron ore and coal.

A best-case scenario modelled by KPMG, where tariffs would not escalate beyond the current threats from the White House, would see Australia’s GDP projected to be 0.3 per cent lower by 2022. This represents a $36 billion drop in economic growth over five years.

This modelling relies on a US-China trade war playing out in isolation with no further contagion. If other countries joined the fray, KPMG expects the results to be devastating.

"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," KPMG economist Brendan Rynne found.

"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."

Former Labor trade minister Craig Emerson urged countries such as Australia not to get sucked into the fight.

"The temptation for any government will be to put up tariffs or to initiate anti-dumping procedures against a potential flood of cheap US and Chinese imports," he said. "That simply escalates the trade war with potential catastrophic consequences for the world economy."

Former White House chief strategist Steve Bannon - who was influential in driving Mr Trump's anti-China election strategy - told the ABC this week that the US should be prepared to weather a trade war-induced recession to bring back manufacturing jobs lost to China.

"Recessions come and go," he said. "I think workers understand and particularly people that back Donald Trump."

KPMG found a full-blown trade war would see US GDP fall by 6 per cent over a decade, costing millions of jobs around the world.

Australia's ambassador to the US, Joe Hockey, former prime minister Malcolm Turnbull and former foreign minister Julie Bishop were instrumental in lobbying the Trump administration for an Australian exemption for steel and aluminum tariffs.

KPMG warned that an Australian deal for some industries may not be enough to stave off a downturn if other countries start putting up their walls.

"We can't stress strongly enough that as this progresses this becomes more and more material," said Mr Rynne.

https://www.smh.com.au/politics/federal/donald-trump-s-trade-war-will-cost-australia-s-economy-at-least-36-billion-20180907-p502dr.html

Australia's economy is at risk of becoming collateral damage in the escalating US-China trade war, economists warned, after President Donald Trump confirmed China would be punished by tariffs on $US200 billion of US imports.

China is expected to swiftly retaliate against Mr Trump's 10 per cent tariffs, leaving Australia's export-dependent economy vulnerable to a slowdown in commerce between its two largest trading partners.

The Reserve Bank of Australia's monetary policy minutes published on Tuesday, based on its September 4 meeting, said "significant tensions around global trade policy" represented a "material risk" to the global economic outlook.

Shiro Armstrong, an economist specialising in Asia at the Australian National University, said with Mr Trump also threatening to impose tariffs on Japanese cars, Australia's top three export markets were on the brink of entering a risky international economic clash.

"We could quickly descend into a contagion of a global trade war where every country retaliates tit for tat," Dr Armstrong said.

Even if we do not get tariffs directly levied on us, we'll suffer significant consequences."

Mr Trump dramatically escalated his tariff war with Beijing, slapping a 10 per cent impost on roughly $US200 billion ($279 billion) of imports that will rise to 25 per cent within months unless China capitulates.

The trade tensions spooked investors. The local S&P/ASX 200 index fell 23.5 points, or 0.4 per cent, to 6161.5 on Tuesday, following Wall Street's weak market close as anticipation of the tariffs rose in late trading.

The Australian dollar initially fell after Mr Trump unveiled the tariff package, before the currency later rallied.

Economic modelling by KPMG suggests the local economy would be about 0.5 per cent smaller over four years if the trade war between the US and China escalated to a 25 per cent tariff on all goods traded between them.

Brendan Rynne, KPMG Australia chief economist said rising tariffs by the US and China would raise prices and reduce consumption by the two countries.

"That could ultimately feed through to reduced demand for our exports," Mr Rynne said.

"Australia needs to be quite cautious about the escalation in trade tensions, because we could start to suffer more broadly as this ratchets upwards."

The tariff escalation could cost 3.5 million jobs in China and 0.83 per cent of its GDP, Citibank economists estimated.

The tariffs would stoke US inflation, the bank said.

The 10 per cent tariff will take effect on September 24, and remain in place until the end of the year, before rising on January 1 to 25 per cent.

Mr Trump also warned that any retaliation by China to the latest attack would "immediately" trigger preparation into tariffs on another $US267 billion in imports.

China's commerce ministry said in a statement on Tuesday that Beijing has no choice but to retaliate, but did not detail any actions it would take. Top Chinese officials reportedly convened an emergency meeting.

While the latest announcement covers a vast array of agribusiness, technology, consumer electronics and toys, Mr Trump's ultimatum would ultimately see the equivalent of a tax on every item imported into the US by the world's second-largest economy and Australia's number one trading partner.

Alarm among businesses is intensifying throughout the US, China and beyond. They fear that doubling down on trade sanctions will end up damaging the global recovery and eventually whip back at the US economy, which is currently enjoying a sweet spot.

Mr Trump, whose Republican Party is under pressure ahead of the November mid-term elections, has shunned appeals from businesses in the US for restraint, and is now directly challenging China to either backdown or face even tougher measures.

The president believes the US is being unfairly treated because it has a massive trade deficit with China, and is subjected to the forced transfer of intellectual property as the cost of doing businesses in the country.

"We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly," Mr Trump said late on Monday (Tuesday AEST).

"But so far, China has been unwilling to change its practices."

Trade and Investment Minister Simon Birmingham said one in five Australia jobs were dependent on exports and Australia would continue to push for countries to follow the international trade rules on tariffs and subsidies.

"Tariffs ultimately result in consumers paying more and disruptive trade practices ultimately hurt economies, rather than help them," he said on ABC Radio.

Mr Birmingham said the Morrison government would protect local producers by enforcing anti-dumping laws to ensure below-cost Chinese goods are not diverted into the Australian market.

Analysts expect China to respond swiftly with retaliatory tariffs on $US60 billion worth of US goods, with officials in Beijing saying on Monday the country would take "necessary measures" to safeguard its legal rights.

America has already imposed tariffs on $US50 billion of Chinese imports, triggering matching measures from Beijing.

Brookings Institution trade expert David Dollar said the fact that the administration's "globalists" managed to talk Mr Turmp down to 10 per cent from the planned 25 per cent complicates China's next step as it is "a kind of concession".

"The obvious compromise for China is to proceed with the $60 billion but with tariffs no higher than 10 per cent and to accept the talks but come with low expectations and no concessions," he said.

Another round of bruising tit-for-tat tariffs has dashed hopes of Washington and Beijing returning to negotiating table any time soon, even after the Trump administration offered last week to resume talks.

China has also sought to open new avenues towards a resolution, inviting Wall Street bankers to meet senior officials in Beijing this week to build momentum for a backdown by Mr Trump.

In his latest statement, Mr Trump said China was still refusing to change its practices - "and indeed recently imposed new tariffs in an effort to hurt the United States economy".

"As President, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself.

"My Administration will not remain idle when those interests are under attack."

Mr Trump said China has had "many opportunities to fully address our concerns".

"Once again, I urge China's leaders to take swift action to end their country's unfair trade practices," he said.

"Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection."

Thomas Block, a policy analyst at Fundstrat in Washington DC warned the latest developments may not be enough to get China back to the negotiating table.

"Trump may not have exit strategy," Mr Block said.

"The President's experience with negotiations is centred on real estate where if you don't get the property you move on with another property.

"The trade war with China is more complex, and an exit strategy may not be as simple as looking for another location for a casino or golf course."

Treasurer Josh Frydenberg said in a statement "no one wins from a global trade war."

"We believe that our interests are best served by a rules-based order and strong alliance relationships.

"Australia's strong and growing economy is an example to the world of the benefits of free trade and investment.

"Our plan for a strong economy has seen us sign the Trans-Pacific Partnership and trade agreements with China, Korea and Japan opening new markets for Australian farmers and businesses."

Reserve Bank of Australia governor Philip Lowe has periodically warned of the economic risks of a trade war.

https://www.afr.com/news/economy/trade/australia-at-risk-from-uschina-trade-war-20180918-h15imp

14 December 2018

An over-reaction by nervous financial markets to an escalating US-China trade war could seriously damage both countries economically and reduce world GDP by 3.5 percent, new economic modelling by KPMG Australia reveals.

Australia, which would inevitably be caught in the crossfire, would be severely damaged by the fallout, the report, After the truce: what happens if the trade war spooks financial markets? says. Its GDP losses over a decade would run to an estimated AUD$423bn, and household income losses would total AUD$522bn.

The US would plunge into recession, with its GDP cut by more than 5 percent, while after a decade, China’s GDP growth would be more than 6 percent below the level it otherwise would have been.

Other major economies would fare slightly better than the US in the shorter term, but their recovery from the financial market meltdown would be slower. Europe’s GDP after two years would be cut by an estimated 3.2 percent, and overall global GDP more than 3 percent lower than it otherwise would have been.

In its previous trade war reports*, KPMG Australia has assumed rational behaviour by financial markets, but the new paper models the consequences of a market meltdown – which could be triggered if equity and debt markets lost confidence in the rules-based global trading system as the trade war continued to escalate and spread to other countries.

Brendan Rynne, KPMG Australia Chief Economist, said: “Financial markets could take fright about an expected reduction in future economic growth and the inflationary impacts of an ongoing trade war. This could take the form of a spike in risk premiums, sharp sell-offs in equity markets and a major tightening of credit conditions. We are already beginning to see signs of this.”

“Australia and China would weather a financial market meltdown better than most in the shorter term, but the total impact on Australia of a full trade war exacerbated by a financial market meltdown would be grave. Our new modelling confirms the lessons from our previous studies - no country wins from trade wars, and it is every nation’s interests not to get drawn in.”

The scenario modelled by KPMG Australia involves the imposition of 25 percent tariffs on imports of all goods between China and the US (which could happen after the current 3 month truce runs out, unless the two countries can reach an agreement) with a substantial number of other countries responding by applying 15 percent tariffs on their imports of goods.

Added to this, the following assumptions are made relating to financial markets:

• 
  The term premium on long-term government bonds for the major economies increases by 50 basis points for the first year before reverting back to equilibrium over the next year.

• The spread between corporate and government bonds for the major economies increases by 50 basis points for the first year before reverting back to equilibrium over the next year.

• The spread between lending rates to households and government bonds for the major economies increases by 50 basis points for the first year before reverting back to equilibrium over the next year.

Brendan Rynne said: “A financial market meltdown of this type - even if it is short lived - has the potential to have large negative impacts on the real economy and seriously exacerbate the impacts of the ongoing trade war. In this scenario, our modelling shows the US economy would be plunged into a deep recession lasting more than a year. We must hope a wider trade agreement can be reached by the main players in 2019.”

https://home.kpmg.com/au/en/home/media/press-releases/2018/12/financial-market-ober-reaction-to-trade-was-would-cause-huge-economic-shocks-14-december-2018.html