Analyzing US-China Trade Disagreements: Impact on Australia's Economy

This report examines the implications of the US-China trade war on Australia, as prompted by a KPMG report published in 2018. The report summarizes the key findings of the KPMG analysis, which modeled the potential economic impact of the trade disagreements, including job losses, wage reductions, and national income cuts for Australia under various scenarios. It further discusses the subsequent developments in the US-China trade disagreements since the report's publication, outlining the progression of tariffs and trade talks. The analysis then places these developments within the context of the three scenarios modeled by KPMG: a limited trade war, an escalating trade war, and a fully escalated trade war with contagion, assessing the differing levels of impact on Australia's GDP and overall economy. The report concludes by emphasizing the adverse effects of trade protectionism and the benefits of free trade for the global economy.

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Table of Contents
Introduction................................................................................................................................2
Summary of KPMG report.........................................................................................................2
Subsequent development of US-China trade disagreement.......................................................3
Scenario analysis........................................................................................................................5
Scenario 1...............................................................................................................................5
Scenario 2...............................................................................................................................6
Scenario 3...............................................................................................................................7
Conclusion..................................................................................................................................7
References list............................................................................................................................9

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Introduction
The ongoing trade escalation between US and China attract a great amount attraction
of economists due to its impact on domestic and global economy. The trade war began as US
president Donald Trump implemented a large tariff on different imported goods of China.
The economic rationale as given by President Trump behind the imposition of tariff was to
design a fair trade deal for supporting the economy of US. The policy focuses on encouraging
consumers in United State to use goods that are produced within the economy (assets.kpmg,
2018). Several rounds of tariff retaliations have already been done by both the nation. This
paper aims to summarize the key findings of KPMG report related to the impact of trade war.
Along with this, the paper analyzes the progress so far made in the trade disagreement.
Moreover, impact of the trade escalation has been discussed considering three separate
scenarios.
Summary of KPMG report
World’s two largest economies, the China and US, are engaged in trade war since
2018. Many rounds of trade talks initiated to resolve growing economic tensions between two
countries. The consequences of tariff imposition impacted the economies of both countries.
To reduce the trade gap US imposed 25% tariffs on China’s 128 categories of goods worth
US$34 billion and later it imposed another 25% tariff on Chinese goods worth US$16 billion.
In response, China also imposed retaliatory tariffs of same amount on US imports. If the two
countries continued 25% tariffs on all products traded then the GDP of both countries would
be lower by 1% than the GDP without tariff imposed (Berthou, 2018). The series of tariffs
imposed by US and China on each other created negative impact on the economies of both
the country as well as the world. The trade war between US and China will impact the world
economy if other country also started tariff imposition. The effect of tarde war on global

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economy will be below -0.5% of world GDP and the entry of other country in trade war will
contract world GDP by greater than 3%.
The US economy witnessed recession and over five years annual growth rate would
1% slower due to trade war. While, China’s economic growth will reduce to 4% per annum
and it will be less than 5% per annum for almost five years. The escalation of the trade war
impacted Australia significantly with a loss of around 60,000 job, lower real wage about $16
per week and loss of almost half-a- trillion dollars national income over ten years. Joinig of
other countries in the trade war may resist the negative impact (Ross, 2016). The country
mainly affected as the China uses Australian goods as intermediate inputs in its production
process and it provide many services exports in tourism and education to China. The GDP of
Australia will be 0.3% lower after fiver years and it will incur loss of A$36 billion real GDP
over a decade. The continuous trade war escalation will result in real GDP loss of Australia
by almost 0.5%.
US imposed trariffs on goods import such as aluminium and steel from the Canada,
EU and Mexico. They also imposerd retaliatory tariffs on US. However, the impact of trade
war would be less severe on Jpaan and European Union than Australia.
Subsequent development of US-China trade disagreement
The disagreement between the two nations started in June 28, 2016 as Trump
announced to counter balance the unfair trade offence at Pennsylvania and posed a threat to apply
tariffs in sections 201 and 301. In 31st March 2017, Trump approached for two orders showing a
fall in stock index of 0.23 percent. One required tighter tariff and anti-subsidy and dumping
trade (Glaser & Flaherty, 2018). While the former with a review the causes of U.S. trade
deficits. In their first meeting on 7th April, 2017 U.S. President Trump and Chinese President

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Xi Jinping discussed an agreement of trade talks for 100 days. However, the two nations
failed to reduce the deficit even after 100 days of talk (Huang et al., 2018).
In 14 August, 2017 Trump called for “Section 301” as an allegation of property theft
against Beijing. This section offers on behalf of trade law of 1974 to United States, for
enforce its rights held under trade agreements with net benefit about a percent. Trump did not
stop there as he threatens to put a huge fine due to acquisition of IP theft on 17 January,
2018when the profit value was 0.94 percent (Mark, 2013).
In 22nd of January, 2018 Trump prescribed a tariff against import of all washing
machines and solar panels giving a positive value of 0.81 percent in the stock market. In
March8, a 25 percent tariff was introduced on steel imports and 10 percent on aluminum on
all suppliers (Stokes, 2018). In opposition to that, China reacted by imposing 25 percent tariff
only on U.S. products. The tug of war between the nations worsened as Trump publicly
announced tariff rate of 0.25 of Chinese import of 50 billion dollars with an S&P 500 worth
of 1.26 percent. Similarly, China responded with a tariff of 50 billion dollars on U.S.
commodities in order to take revenge.
In the month of February this year, a trade discussion had been held by United State
in Washington. In the meeting President Trump indicated some optimism related to the trade
deal. Considering progress in the trade deal, Trump declared an extension of tariff deadline
till March 1.
The trade talks resumed again since June, 2019 (Wong & Koty, 2019) On August 6,
2019 companies in China suspended purchase of new agricultural products made in United
State.

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Scenario analysis
Scenario 1
Figure 1: Impact of a limited China-US trade war, no contagion
(Source: assets.kpmg, 2018)
The US imposed 25% tariffs on products imported from China worth US$50 billion
and later it extended another 10% tariffs on some Chinese goods worth US$200 billion. In
response, China imposed 25% retaliatory tariffs on goods imported from US worth US$50
billion and another 10% tariffs on remaining goods imported from US (Handley & Limao,
2017). The impact of trade war on GDP of china would be around 0.61% lower on 4th year
while, the GDP of US would be lower up to 0.58%. The effect is limited and small on US and
China as well as on world with respect to the tariffs imposed. However, Australia will suffer
a loss of GDP of up to 0.29% on 5th year because of trade war. The projected present value of
Australia’s real GDP losses is at A$36 billion with respect to next decade. Before half of
recovries of losses, EU will witness loss of GDP of about 0.22% on 4th year. The world
economy will recover over 0.1% loss of GDP after 10 years and on 4th year loss of world
GDP would be about 0.4% (Liu & Woo, 2018).

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Scenario 2
Figure 2: Impact of an escalating Chian-US trade war, no contagion
(Source: assets.kpmg, 2018)
The US imposed tariffs of 25% on all the goods imported from China and China also
imposed same amount of tariffs on all the goods imported from US. However, the effect on
the other countries are very less. The escalating trade war between US and China would
lower down GDP of both countries. In 2021, the projected loss of GDP of china would be
around 1% than without trade war (Ciuriak, 2019). In case of US the loss of GDP would be
greater than 0.9% in 4th year. Here, the effect of trade war will spread in Australia. The GDP
of Australia will be lower to almost 0.5% and above 4th year, it would be less affected with
estimated A$58 billion losses of real GDP. After 4 years, loss of GDP of EU and world
stands at 0.37% and 0.6% respectively. After 10 years, world GDP would recover up to 0.2%
less.

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Scenario 3
Figure 3: Impact of an escalating US-China trade war, full contagion
(Source: assets.kpmg, 2018)
In case of full escalation of trade war all the countries will apply 15% tariffs on all the
goods imported. The US will hit significantly with lower GDP of 5.3% and China will loss
GDP of around 6% after a decade (Gordon, 2017). After a decade Australia and the EU will
witness loss of GDP of about 3.5% and 2.0% respectively. Finally, estimated GDP loss of
world would be almost 3.8%.
Conclusion
The trade war between China and United State in recent year has become the most
debated topic across the globe. Related to this issue, KPMG on August 2018 published a
report discussing impact of the trade protection measure. The report concluded that restrictive
trade policies like tariff ultimately benefits no nations. There is in fact adverse effect on the
participating countries and other nations across the globe when the countries retaliate fully.
The report discussed three possible scenarios. The first one is where there is limited measure

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of trade escalation without any contagion. The second is full trade escalation without any
contagion. The worst scenario is when there is full escalation along with full contagion.

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References list
assets.kpmg. (2018). Trade Wars: There are no winners. Retrieved 10 August 2019, from
https://assets.kpmg/content/dam/kpmg/au/pdf/2018/trade-wars-no-winners.pdf
Berthou, A., Jardet, C., Siena, D., & Szczerbowicz, U. (2018). Quantifying the losses from a
global trade war. Banque de France ECO Notepad, 19.
Ciuriak, D. (2019). A Trade War Fuelled by Technology. Opinion, January, 11.
Glaser, B. S., & Flaherty, K. (2018). Hurtling Toward a Trade War. Comparative
Connections: A Triannual E-Journal on East Asian Bilateral Relations, 20(1).
Gordon, P. (2017). A Vision of Trump at War: How the President Could Stumble into
Conflict. Foreign Aff., 96, 10.
Handley, K., & Limão, N. (2017). 13 Trade under TRUMP policies. Economics and Policy
in the Age of Trump, 141.
Huang, Y., Lin, C., Liu, S., & Tang, H. (2018). Trade Linkages and Firm Value: Evidence
from the 2018 US-China'Trade War'. (Huang, Lin & Tang, 2017)
Liu, T., & Woo, W. T. (2018). Understanding the US-China trade war. China Economic
Journal, 11(3), 319-340.
Mark, C. K. (2013). China and the world since 1945: an international history. Routledge.
Ross, R. J. (2016). After the Cold War: Domestic Factors and US-China Relations: Domestic
Factors and US-China Relations. Routledge.
Stokes, D. (2018). Trump, American hegemony and the future of the, liberal international
order. International Affairs, 94(1), 133-150.

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Wong, D., & Koty, A. (2019). The US-China Trade War: A Timeline - China Briefing News.
Retrieved 10 August 2019, from https://www.china-briefing.com/news/the-us-china-
trade-war-a-timeline/