US-China Trade War: Implications for Australia

Running Head: US-CHINA TRADE WAR IMPLICATIONS 1
US-CHINA TRADE WAR: IMPLICATIONS FOR AUSTRALIA
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US-CHINA TRADE WAR IMPLICATIONS 2
US-China Trade War: Implications for Australia
Executive Summary
Today’s world of business has become more globalized (Holton, 2011). Many nations
have realized the value of international trade and have encouraged and assisted their domestic
firms to enter into it. International trade involves stiff competition and only those businesses
which adopt sound micro and macroeconomic policies end up surviving. It’s the wish of many
nations that their international businesses outdo others in order to reap the larger portion of the
international trade benefits. Due to this, many nations formulate various policies to assist their
businesses to perform well in the international market. Some of the policies formulated may be
unfair as they may aim at taming trading activities for businesses from other nations. This may
lead to trade war as the targeted businesses’ nations may retaliate to counter their competitor’s
unfair actions. A trade war between nations eventually leads to a loss in both nations as no one
gains from trade war in the long run (Trebilcock, Howse & Eliason, 2013).
This report analyzes the effects of a trade war between the United States and China to
other nations especially the Europe region and Australia and to the entire world. The report was
published by KPMG which is among the largest firms in the world offering professional services
during the year 2018 in August. From the report, it is clear that the trade war between the United
States and China would just result in lose not only to Australia and the Europe region but also in
the whole world. The report comes into its conclusion by analyzing three scenarios namely the
Limited escalation, no contagion scenario, the Full escalation, no contagion scenario and the Full
escalation, full contagion scenario. From the report, the United States imposed tariffs on steel
and aluminum from various nations such as Europe Union, Canada, and Mexico, and all these
nations retaliated and imposed a similar percentage of tariffs on the United States products. The
United States imposed 25 percent tariffs on the Chinese products whilst China, on the other
hand, imposed a similar percentage of tariffs on the United States products. Further threats from
either nation continued after their meeting at Washington D.C failed to reach an agreement. The
United States also doubled tariffs on Turkish steel and aluminum from 20 percent to 50 percent.
Turkey retaliated and announced tariffs ranging from 50 percent to 150 percent on the United
States products which included rice, cars, and alcohol. All these scenarios led to a trade war with
the worst being between the United States and China. The results of the escalated trade war have

US-CHINA TRADE WAR IMPLICATIONS 3
been modeled by KPMG using the three scenarios mentioned above and the results are as
follows.
Scenario one of Limited escalation, no contagion involves the United States applying
tariffs of 25 percent on $50 billion Chinese imports and an addition of 10 percent tariffs on
$200billion Chinese imports. On the other hand, China imposes tariffs of 25 percent on $50
billion American imports and an addition of 10 percent tariffs on all American imports. The trade
war here does not spread to other countries. From the scenario, the trade war acts of the two
nations would have a small effect on their gross domestic product with China recording a
decrease of 0.61 percent in GDP and the United States recording a 0.58 percent decrease in GDP.
Australia would record a GDP decrease of 0.29 percent, the European Region 0.22 percent
decrease in GDP and the entire world 0.4 percent. All these results are recorded after 4 years.
Scenario two of the full escalation, no contagion involves both nations applying tariffs of
25 percent on all their goods traded but this does not spread to other nations. From this scenario,
China would record an increased GDP loss by 1 percent while the United States records an
increased GDP loss by 0.9 percent. Both Australia and the European region GDPs would
decrease further by 0.5 and 0.37 percent respectively. The world GDP would decrease further by
0.6 percent. These results would be seen after four years
Scenario three of full escalation, full contagion involves the United States and China
applying tariffs of 15 percent on all their trade goods and this spreads to the entire world. From
the scenario, the world GDP would decrease by 3.8 percent, GDP for the US would decrease by
5.3 percent, GDP for China would decrease by 6 percent, GDP for Australia would decrease by
3.5 percent and GDP for the European Union would decrease by 2.0 percent. These results would
be seen after 10 years.
In a nutshell, from the three scenarios modeled by KPMG, trade war between the United
States and China would lead to loss to all nations and the entire world hence decreasing the gross
domestic product of all the nations and that of the entire.
KPMG Background Information