Effect of Trade War on Global Economy: A Focus on Australia

This paper discusses the effect of the trade war between the USA and China on the global economy, with a focus on Australia. It summarizes a report by KPMG, assesses subsequent developments in the trade disagreements, and analyzes three scenarios modeled by KPMG.

Running head: TRADE WAR
TRADE WAR
Name of the Student:
Name of the University:
Author Note:

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Executive summary
This paper has discussed the effect of trade war between the USA and China, two most
important and powerful economy of the world, on the global economy mostly focused on the
economy of Australia. This report is purely based on the report published by KPMG which
has analyzed the effect of this trade war on the global and Australian economy and predicated
three most important scenarios. This report has summarized the report, discussed the situation
after the report was published and detailed the three scenarios in the ground of the recent
growth of the war between China and US.

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Table of Contents
Introduction:...............................................................................................................................4
Summary of the KPMG report:..................................................................................................4
Assessment of subsequent developments in the US-China trade disagreements.......................5
Three scenarios modelled by KPMG in its report......................................................................6
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Introduction:
The aim of this particular paper is to discuss the effect of trade wars between two
most economically powerful countries of the world namely China and the US. Trade war
relates to nation executes tariffs on the shares on the imports as well as foreign nations
retaliate with the similar methods of trade protectionism. Due to this reason, the trade war
between any important countries can reduce the global trade. Trade war is the way of
protecting the domestic industry of a state and create scope for jobs there (Pwc.com.au.
2018). It is the method of utilizing tariffs for gaining competitive advantage of the domestic
manufacturers of that product. This report will be discussing the summery of the key findings
of the KPMG report and media coverage, assessment of subsequent developments in the US-
China trade disagreements and analysis of three scenarios modelled by KPMG in its report.
Summary of the KPMG report:
The news published in KPMG on 28th august 2018 by Brendan Rynne, the chief
economist of the paper. He has examined the current trade war between the US and China
and found out whether this trade war would be limited to the national market of China and
US or effect the global business. Undoubtedly, both these countries are two most important
markets of the world and highly depend upon the regulations and economic policies of each
other (Rynne, 2018). This is due to the fact that these countries depend upon the raw material
collected from various regions, cheap yet skilled labors, research and development process,
investments and many other aspects of successful business. Their price will be lower in
comparison. As the consequence, they will get more orders from the local customers.
According to Rynne, (2018), this trade war between China and the US is capable to
fact the global economy. The news was published in august 2018 hence the idea that trade
agreements between these two nations has been understood in terms of the level of effect in

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Australia. According to this news, as many other significant countries are associated with this
trade war between china and US, their involvement would bring down the global economy in
such a position that the country like Australia also cannot survive the blow. The prediction
states that this trade war would cut the national income of Australia by half a trillion dollars
over a decade which is equivalent to the 40% of the total household disposable income. This
news also produces that the country will lose 60,000 jobs and the real wages would be pushed
down by 16$ per week for the average worker. This is not only the situation predicted by
KPMG but also predicts on the effect of trade war in the global economy. As mentioned in
this publication, a huge number of other countries which are highly dependent upon the
business of US and China would be suffering.
Assessment of subsequent developments in the US-China trade disagreements
Since the report by KPMG was published, after this predication in August, many
changes have taken place in the global economy and Australia have resulted in both
advantage as well as disadvantage due to this trade war. In the issue of The Sydney Morning
Herald published in 7th September 2018 that Australia will cost its economy at least $36
billion in this trade war (Bagshaw, 2019). It relates to the trade insecurity in the country and
hope for the superpowers to remain clam as well as uphold the international order and risk
derailing the international financial recovery. In this issue, the tension between these two
countries have been described here the economics ministry of China has threatened to
increase tariff on the $US150 billion worth of goods imported to China by the US every year.
In this regard, it can be stated that the situation of Australia’s business including agriculture,
mining and manufacturing world be devastated (Bagshaw, 2019). Two of the largest export
of Australia like the education sectors and resources sectors have been exposed particularly
as the fall of Chinese currency has weakened Australia’s purchasing powers and discouraging

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the Chinese students to visit the Australian university along with slowing of economy by
reducing demand for coal and iron ores.
According to the news published in The Guardian in the 19 September 2018 issue,
Australia’s financial growth has been predicted to be suffering a grave setback because the
exporters of the country have risked their business by being caught up in this trade war
between China and the US. As China has retaliated with the tariffs on the 60 billion dollars of
the US goods by following the US $200 billion hit on the Chinese important. This news has
captured that Nikkei index of Tokyo to jump by 1.3%, the Shanghai composite up by 0.3%
and ASX 200 of Sydney to rise by 0.4% (Farrer, 2019). Similarly as mentioned in The
Socialist in 22 October 2018 publication, the situation between US and China’s trade
agreement had gained its full potential. The aim of Trump to engage the attraction of the US
customers for the local goods have been enhanced for the first time. Now in the case of
Australia, as the government has committed to support the free trade, has been mostly
affected by the trade war (Thesocialist.org.au, 2018). It is quietly aping Trump with the motto
of Australia first policy. In order to save itself from the negative effect of trade war, the
country has following trade protection method by going against the free trade commitment.
However according to this paper, for the problem of trade war and its effects in the global
economy, the disadvantages of the capitalism has been pointed out (Thesocialist.org.au,
2018).
Three scenarios modelled by KPMG in its report
As modelled by KPMG, the three scenarios have perfectly reflected in the global
economy. These three scenarios are Limited escalation, no contagion, full escalation, no
contagion and full escalation, full contagion. Starting from the situation of enmity initiated by
the US president for tariff increment, the situation was not as pathetic as the only effect was
limited to Chinese business. In the second scenario, the China as an act of revenge had done

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the same to protect the Chinese goods in both the US market as well as within the country.
Thus, the effect was more or less limited to the US economy and that of China. However,
recently¸ the situation has become so serious that this issues of trade war has affected the
domestic as well as the global economy.
This is due to the fact that the countries highly dependent upon the goods and
business of the US cannot stand the situation as they are feeling pressure for this trade war.
For instance, some of the countries of Europe coming under Eurozone have followed the
same method of incasing tariffs for Chinese goods. This has affected China in a negative way
and this is engulfing the entire world for taking sides of either China or the US. The
prediction of KPMG has pointed out that the effect of this trade war between China and the
US will lead the US to face recession with lose of GDP by 4.6% within 5 years but China will
not fact this type of blow. There will be no recession in China only they will be facing slower
economic growth by 4 percent per annum. In this regard, the Australian economy will be cut
by 0.3% over the next 5 years and losing 36 billion dollars (Rynne, 2018). It also predicts that
the economic situation Japan and the Europe Union will be less affected that that of Australia.
Conclusion:
Therefore, it can be concluded that the trade war has not limit itself between the
countries like US and China but also paralyzed the economy of the many important countries
of the world. The report by KPMG has focused on the effect of trade war in Australia. It has
affected the trade of the large MNCs, by reducing their revenue worldwide, production of
goods and export import system. In long run, the trade war can cost jobs that depresses the
economic growth for all the countries associated. This triggers the cause of inflation as tariffs
increase the price of imports.

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References:
Bagshaw, E. (2018). Donald Trump's trade war will cost Australia's economy at least $36
billion. Retrieved from https://www.smh.com.au/politics/federal/donald-trump-s-
trade-war-will-cost-australia-s-economy-at-least-36-billion-20180907-p502dr.html
Farrer, M. (2018). Australia's economic growth at risk as US-China trade war escalates.
Retrieved from https://www.theguardian.com/business/2018/sep/19/australias-
economic-growth-at-risk-as-us-china-trade-war-escalates
Pwc.com.au. (2018). US-China trade war not all bad for Australia. Retrieved from
https://www.pwc.com.au/press-room/2018/us-china-trade-war-not-all-bad-for-
australia.html
Rynne, B. (2018). Trade wars: There are no winners. Retrieved from
https://home.kpmg/au/en/home/insights/2018/08/trade-wars-no-winners.html
Thesocialist.org.au. (2018). Trade war: How will it impact Australia?. Retrieved from
https://thesocialist.org.au/trade-war-impact-australia/