Trade Wars: Impact and Consequences

This report examines the impact and consequences of the US-China trade war, including different scenarios and their potential outcomes. It highlights the negative effects on the global economy and emphasizes that trade wars are detrimental to all countries involved. The report also provides insights into the economic modeling conducted by KPMG Australia.

Running head: TRADE WARS
Trade Wars
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Executive Summary
The US- China trade war has escalated into a full brown trade war. The two countries
have escalates their trade wars to a 25% tariff on all the goods traded between China and US.
The economic pain worsens significantly for everyone globally if the protectionist measure
imposed escalate into a trade war. This report focuses on the impact or and the consequences
into limiting actions that have occurred. It shows what is planned in the pre-determined trade
wars between the two countries and the most serious reason is the trade war spread in the
wider world.
The global and domestic economies would be damaged if the US-China trade war escalated
into a full disagreement as has been found by KPMG report on new economic modelling.
There are no winners in the trade wars. The KPMG study models three scenarios which
include the
 Limited escalation with no contagion;
 Full escalation with no contagion.
 Full escalation and full contagion; this will be an all-out trade war, where other
countries joined in and have raised the tariffs by 15% or more. This is as witnessed in
the trade war between the US/ China and US/ the rest of the world regarding
aluminum and steel.
Introduction
A number of countries have introduced the protectionist policies and measures such as
the 15% tariffs on imports which is very significant. With this protectionist measures, the
world economy would shrink or contract by more than 3%. For an average worker in the

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world, real wages per week would be pushed down by $16 while more than 60,000 jobs are
lost (Balistreri, & Hillberry, 2017, April). The Australian national income would be cut by
more than half a million trillion in ten years due to the trade wars. The involvement of trade
wars by other countries would significantly reduce the world’s trade value. The KPMG report
shows that apart from the US winning in the trade war, it would experience a recession and a
GDP loss of 4.6% in 5 years. China would however face a decline in the rate of economic
growth to just 4% and thereafter decline by more than 5% indicating Chinas worst economic
growth in over three decades. It would however not fall into recession (Bichler, & Nitzan,
2018).
The KPMG Australia by contrast modelling finds a situation where the china-US trade
wars were confined to only these two countries and were restricted to the current measures
announced. The negative impact on the global economy would be held below the -0.5% on
the global scale GDP. The Australian GDP will be reduced by 0.3% over the last 5 years.
This will be a loss of $36 bn. Japan and the European Union will be less affected than
Australia. Chinas cumulative loss over 5 years where there are no trade war would be 5.3%.
In a trade disagreement between US-China, there would be trade war that would escalate to a
25% goods that have been traded between China and US (Carballo et al, 2018).. Both the US
and China would end up with a GDP of 1 % or lower with China faring worse over a period
of time. The GDP of Australia would be cut by 0.5% annually over the next 5 years. The
KPMG Australia modelling report suggest that no country would out rightly win in the trade
wars and most of the countries globally would lose (Collie, 2019). Even in the event of a
trade war that is full brown between the two economic giants, it would be best for other
countries to stay away from the war. Australian policy makers and law makers from other
countries globally would be well advised to stay away from political pressure to increase
tariffs or impose tariffs on the goods that are imported from China and the US when they are

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in a competition to seek new markets (Lang, & Heasman, 2015).The KPMG Australia
economic model is simulated in the KPMG-MACRO. The macro model splits the world
economy into 60 or more countries.
Scenario A: limited escalation with no contagion
The results of modelling are shown as a percentage of standard deviations from a
scenario of absolute trade war. Scenario 1 suggest that there is limited escalation and no
contagion modelling results for scenario 1. The Chinese economy would suffer 0.61% decline
in its GDP within the fourth year while the US would suffer damage of up to 0.58%
(Petersmann, 2019). Australia real GDP losses an estimated A$36 billion. European union
loss would be at 0.22% while that of Japan would be at 0.32%. world GDP would decrease to
about 0.4% in year 4 before slightly improving to over 0.1% lower after the tenth year.
Scenario B: Full escalation with no contagion
The model shows a full escalation of the trade war to over 25% tariff applied to all
goods but no contagion to any other country globally (Soderbery, 2018).. If the trade war is
only confined to china and the US, it would amplify GDP losses. China GDP would be 1 %
lower in 2012 while the US GDP would be 0.9% lower in the fourth year. Australia GDP
would be almost 0.5% lower even in the absence of direct involvement in the trade war.
Australia economy would lose an estimated A$58bliion in the next decade. European Union
economy loss would be given at 0.37% after 4 year (Trappey et al, 2016). The global GDP
would be 0.6% lower in four years and would only recover to over 0.2% in 10 years.
Scenario 3: Full escalation and full contagion.

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A full escalation in trade war between china and the US in this model will ensure that
all other countries effect a 15% tariff on imports. There is a spill over to the rest of the world
with the escalating trade wars. The United States would fare worse than the rest of the world
with its GDP being around 5.3% lower than previously had the trade war not occurred. China
however would be worse hit with a GDP loss of over 6% shed after a decade. Australia would
shed an approximately 3.5% of its GDP after 10 years while the European Union would be
least affected only having a decline of 2% over the decade. The cumulative gross domestic
product as reported by KPMG Australia has an estimated loss of 3.6% globally after five
years. A spill in effects of trade wars between China and the US to the rest of the world
would cause a significant damage to the global economy. A recession would be the aftermath
of this all out trade war in the global economy (Vashchilko, 2017). The world’s global
economy would lose by 3.8% with an all outright trade wars.
Scenario 1 Scenario 2 Scenario 3
Description China and US impose a
15% tariff on each
goods with no policy
changes across the
world
Same as Scenario
one except there is
25% increase in
bilateral tariffs
All other countries
impose a 15% tariff
due to spill over of
china-US trade war
Cumulative
percentage loss of
GDP after 5 years.
Australia -0.3% -0.5% -2.4%
U.S.A -0.4% -0.7% -4.6%

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China -0.6% -1.0% -5.3%
In Australia, the value at present of Australian GDP over a decade in scenario 3 would
be an estimated A $ 363 Billion. These values are conservative values. The real GDP in
income disposable in Australia would be at $ 474 billion. The trade war would be
accommodated in an orderly manner. The Australian national income would be cut by more
than half a million trillion in ten years due to the trade wars. The KPMG report shows that
apart from the US winning in the trade war, it would experience a recession and a GDP loss
of 4.6% in 5 years (Wallin, & Åström, 2018).
Conclusion
No country fully benefits from a trade war. However, there are varying degree of
effects ion all the three scenarios. However, the most brutal to the world economy would be
scenario 3. Full escalation and full contagion would plunge the world economy into
recession. According to KPMG report it would be better if the world does not involve itself
with the Chinese- American trade wars. According to the KPMG Australia economic
modelling, in the event of a full blown trade war, all other countries would have their
economies dip significantly if they involve themselves with the war. The Australian national
income would be cut by more than half a million trillion in ten years due to the trade wars.
The KPMG report shows that apart from the US winning in the trade war, it would
experience a recession and a GDP loss of 4.6% in 5 years. The involvement of trade wars by
other countries would significantly reduce the world’s trade value. China would however

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face a decline in economic growth rate to just 4% and would decline by more than 5%
indicating Chinas worst economic growth in over three decades. It would however not fall
into recession.

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References
Balistreri, E. J., & Hillberry, R. H. (2017, April). 21st Century Trade Wars. In XX GTAP
Conference, Purdue USA.
Bichler, S., & Nitzan, J. (2018). Trump's Trade Wars Threaten US Foreign Investment. Real-
World Economics Review Blog.
Carballo, J., Handley, K., & Limão, N. (2018). Trade cold wars and the value of agreements
during crises. VoxEU. At: https://voxeu. org/article/trade-cold-wars-and-value-
agreements-during-crises.
Collie, D. (2019). Trade Wars under Oligopoly: Who Wins and is Free Trade
Sustainable? (No. E2019/4). Cardiff University, Cardiff Business School, Economics
Section.
Lang, T., & Heasman, M. (2015). Food wars: the global battle for mouths, minds and
markets. Routledge.
Petersmann, E. U. (2019). THE 2018 TRADE WARS AS A THREAT TO THE WORLD
TRADING SYSTEM AND CONSTITUTIONAL DEMOCRACIES. Trade, Law and
Development, 10(2), 179-225.
Soderbery, A. (2018). Trade elasticities, heterogeneity, and optimal tariffs. Journal of
International Economics, 114, 44-62.
Trappey, C. V., Trappey, A. J., & Wang, Y. H. (2016). Are patent trade wars impeding
innovation and development?. World Patent Information, 46, 64-72.
Vashchilko, A. (2017). Effects of trade wars on Belarus. V Applied Economics
Quarterly, 63(1), 81.

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Wallin, E., & Åström, E. (2018). " Trade wars are good, and easy to win": A study of
Trump’s steel tariffs and international trade.