Impact of US-China Trade War on Domestic and Global Economy

This article examines the impact of the ongoing trade war between the US and China on the domestic and global economy. It summarizes a report by KPMG and analyzes the subsequent development of the trade disagreement. The article also discusses three different scenarios modeling the trade escalation and their potential consequences.

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Executive Summary
The unfair trade practices followed by China led US to restrict import from China. President
Donald Trump has imposed series of tariff on billion dollars of good imported from China. In
return, China has retaliated by imposing tariff on goods that US exports to China. The
imposed tariff by both nations destroyed the trade relation between the two nation. In an
attempt to evaluate the likely impact of trade escalation KPMG modelled three different
economic scenarios and summarized the results in its last published report. The paper
produces a brief summary of KPMG report and examines further development of trade
disagreement and its likely consequence on domestic and world economy.

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Table of Contents
Introduction................................................................................................................................3
Key findings of KPG report.......................................................................................................3
Subsequent development of trade disagreement between China and US..................................5
Three scenarios modeling trade disagreement...........................................................................5
1. Limited Escalation, no contagion.......................................................................................6
2. Full escalation, no contagion..............................................................................................6
3. Full escalation, full contagion............................................................................................7
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
The most recent and significant incident contested globally is the ongoing trade battle
between China and US. The battle began since president Trump’s complaints regarding the
unfair trade practices of China in 2016. In 2017, US conducted an investigation on trade
policies of China (bbc.com, 2019). In 2018, US imposed a tariff on imported goods from
China. In reaction to the imposed tariff Beijing retaliated by implementing similar kind of
policy. So far, US implemented three round of tariff on China’s goods worth above $250
billion. The import duties ranging between 10 percent and 25 percent imposed on a variety of
industrial and consumer goods (Li, He & Lin, 2018). The report aims to summarize a
published report of KPMG regarding continuous trade battle between two of the world’s
leading economies. After the publication of KPMG report, there are subsequent development
of events affecting US –China trade relation. These developments are analyzed in light of
three different scenarios as developed by KPMG.
Key findings of KPG report
In last year August, KPMG published a report in order to evaluate critically aspects
related to trade battle between US and China. Globally, U.S and China are considered as two
of the largest economies in terms of both economic size and power. In the last held trade
discussion between the two nations in Washington DC, the respective ministry failed to
resolve the trade disputes. The standard trade theory explains beneficial effect of trade on
welfare of both economies. The good trade relation not only benefits the two participating
nations but also have a positive influence on other nations across the world (Rynne, 2018).
The chief economist of KPMG, Brenden Rynne has examined the impact of US – China trade
war on the domestic and global economy. The economic modelling done by KPMG has fund
that protectionist measure in the form of tariff would have a severe damaging effect on

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internal and global economy if the trade tension results in all out trade war globally where all
nations impose a uniform tariff on imported goods.
Estimation as published in the report suggested that in situation where the trade
escalation remain limited only between US and China, the impact on global GDP would only
blow -0.5 percent. In situation where the contagious effect of trade war spread across other
nation global economy would be damaged to a large extent with an estimated contraction of
global GDP by above 3 percent (Lau, 2018). There are several other nations such as
Australia, Japan and countries in European Union those are vulnerable to the trade war
between China and US. Rea GDP of Australia is expected to account of loss of GDP by 0.5
percent. For Japan and countries in European Union, GDP would be declined by 1 percent in
comparison to situation before the trade tension. KPMG has predicted a situation of no loss
and no gain for nations across the world. The position of Australia is same as other nations
that is neither gaining nor losing from trade war (theconversation.com, 2019). The economist
at KPMG critically evaluates development of trade tension, effect of limiting already
occurred action, planning for future and consequences if trade war spreads globally. A fear of
all out trade war was started to develop since the publication of first report of KPMG. US
imposed a tariff of 25 percent on imported goods from China worth US$34 billion in July
2018. After that, another round of tariff was imposed on goods valued US $ 16 billion. China
then retaliated by imposing similar kind of tariff on US import. Impact of the trade escalation
has been evaluated by developing three alternative scenarios. The first scenario descries the
condition of limited trade escalation between US and China and no contagion. Second
scenario depicts the possible consequences full escalation and no contagion. The third
scenario finally captures the situation of full escalation and full contagion. The report has
predicted possibility of an all-out trade war. This will result in a recession in the global

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economy causing world GDP to decline by 4.6 percent over 5 years. For Australia, the
recorded loss in GDP would be $36 billion.
Subsequent development of trade disagreement between China and US
Since publication of KPMG report and its likely prediction on trade disagreement
between China and US, series of events occurred affecting the trade relation. After imposing
second round of import tariff, US president threatened to introduce another round of tariff for
goods valued above USD 267 billion (Lau, 2018) After this announcement, US invited China
with a proposition to restart the trade deals as before tariff imposition on China’s good valued
USD 200 billion. US in this month confirmed the list of goods imported from China on which
tariff has been implemented. US designed a tariff structure with an initial rate of 10 percent
and it would then have proposed to increase to 25% by January. As a reaction to this, China
imposed tariff on imported goods from US that valued US$60 billion (scmp.com., 2019) Both
China and U.S introduced third round of tariff on September 24. US then introduced a tariff
on goods imported from China having a total worth of USD 250 billion. China then again
retaliated by imposing similar import tax on US good worth USD 60 billion. In association of
China’s Vice Premier and US’s Treasury secretary, the trade discussion between the two
nations resumed on November 9. At the dinner held on 1st December, 2018 US and China
agreed to take a temporary break from the ongoing trade escalation. The agreement specified
that either of the two nation would neither increase the tariff rate nor impose any new tariff
for the next three months. After the agreement, China reduced the imposed tariff on autos and
resume Soybean imports from US. US and China their trade talks on February 1, 2019 at
Washington. In the discussion, the US President expressed some positivity about trade deals
between the two nations in future. Depending on the trade discussion and in view of the
progress in the trade deal, President Trump has set an extended deadline for the tariff to 1st
March.

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Three scenarios modeling trade disagreement
In the KPMG report, there are three possible scenarios used to model the trade
escalation between China and US. The subsequent development of trade disagreement can be
evaluated using the three possible circumstances.
1. Limited Escalation, no contagion
This implies a situation where the two nation does not impose same rate of tariff on
all goods. The situation where US imposed a tariff of 25 percent for goods worth $50 billion
and a tariff rate of 10 percent on goods worth $200 billion (De Graaff & Van Apeldoorn,
2018). China similarly imposed a rate of tariff of 25 percent on US goods worth USD 200
billion and a rate of tariff of 10 percent on rest of the goods imported from US. Such kind of
trade escalation with no contagion effect has only a limited impact on the economy of both
nations. Trade escalation with no contagion effect also has a relatively smaller impact on the
world economy (Buckley & Wee, 2018) The accounted GDP in Australia and that in EU
would likely to decline by 0.29 percent and 0.22 percent respectively.
2. Full escalation, no contagion
Full trade escalation depicts a scenario where both U.S and China impose 25 percent
tariff on import. The relatively high and uniform tariff rate would likely to have a larger
effect of domestic economy as well as on the world economy (Tankersley & Bradsher, 2018).
Unlike the previous scenario GDP of Australia in this case is likely to contract by 0.37
percent. By the contraction of domestic economy of US and China, Australian business firms
operating in these market will be adversely affected (Noland, 2018). They are likely to face a
contraction of demand. As against the adverse effect, trade escalation might bring a favorable
condition for some specific sectors of Australia.

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3. Full escalation, full contagion
This refers to the extreme condition where all nations impose similar kind of tariff
resulting in a situation of all-out trade war. The complete contagious effect of the incident
spread across different economies. In Australia, this would directly impact investors’
confidence causing S&P/ASX index to decline sharply (afr.com, 2019). Resulted increase in
price level from the import tariff would lower demand reducing business profitability. This
ultimately would lead to a condition long lasting global recession.
Conclusion
The KPMG report finds that trade escalation is not beneficial for any nation. There
are neither any gainers nor any losers of US – China trade war. The initial impact of trade
war was felt by the domestic economy of US and China in terms of a contraction in aggregate
output. The impact however is no limited only to US and China. The effect spreads globally.
Australia, Japan and countries in EU are likely to suffer from the trade war. Among three
different scenarios modelled by KPMG, the worst condition is when the trade escalation takes
the form of an all-out trade war. Under this, there is possibility of a global recession which is
likely to last for a considerably long time.

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References
afr.com. (2019). Australia at risk from US-China trade war. Retrieved from
https://www.afr.com/news/economy/trade/australia-at-risk-from-uschina-trade-war-
20180918-h15imp
bbc.com. (2019). US-China trade war in 300 words. Retrieved from
https://www.bbc.com/news/business-45899310
Buckley, C., & Wee, S. L. (2018). Responding to Trump, China Plans New Tariffs on US
Goods. New York Times, 22.
De Graaff, N., & Van Apeldoorn, B. (2018). US–China relations and the liberal world order:
contending elites, colliding visions?. International affairs, 94(1), 113-131.
Lau, L. J. (2018). A Better Alternative to a Trade War. China and the World, 1(02), 1850014.
Lau, L. J. (2018). The China-US Trade War and Future Economic Relations. The Chinese
University Press.
Li, C., He, C., & Lin, C. (2018). Economic Impacts of the Possible China–US Trade
War. Emerging Markets Finance and Trade, 54(7), 1557-1577.
Noland, M. (2018). US trade policy in the Trump administration. Asian Economic Policy
Review, 13(2), 262-278.
Rynne, B. (2018). Trade wars: There are no winners. Retrieved from
https://home.kpmg.com/au/en/home/insights/2018/08/trade-wars-no-winners.html
scmp.com. (2019). China says it has made ‘new progress’ in trade war talks. Retrieved from
https://www.scmp.com/economy/china-economy/article/2179293/china-says-new-
progress-has-been-made-us-trade-war-talks

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Tankersley, J., & Bradsher, K. (2018). Trump hits China with tariffs on $200 billion in goods,
escalating trade war. New York Times.
theconversation.com. (2019). Why there will be no winners from the US-China trade war.
Retrieved from https://theconversation.com/why-there-will-be-no-winners-from-the-
us-china-trade-war-109822