Economist fears global trade war would be worse than 2009 global recession

A fully fledged trade war would hurt those who might retaliate more than the US, said Brendan Rynne, KPMG chief economist.

The economist asserted that a global trade war would be worse than many imagine, tipping much of Europe, the UK and Canada into recession and costing as many as 285,000 Australian jobs in an economic shock likely to last longer than the global financial crisis.

Even a modest barrage of retaliatory measures against the Trump administration by target countries such as China would see Australia’s economy shrink as trade flows are squeezed and global demand is suppressed, according to economic trade modelling by KPMG.

A more dramatic round of tit-for-tat actions that would raise tariffs on goods by an average of 10 percentage points would trigger a 1 per cent fall in Australian gross domestic product and wipe out more than half the employment gain of the past 12 months, the firm found.

“While this scenario results in a GFC-like impact, the world economy would probably take even longer to recover, given the increased levels of protectionism compared to a decade ago,” said Brendan Rynne, KPMG Australia chief economist.

The findings come as China detailed how it would hit back at President Donald Trump’s move to impose tariffs on steel and aluminium imports, as well as another $50 billion in technology goods.

On Monday Beijing slapped tariffs of up to 25 per cent on 128 US products such as pork, wine and other agricultural imports, striking at America’s rural heartland that is seen as a political base for Trump.

China’s finance ministry said in a statement that the move was a “legitimate action adopted under WTO rules to safeguard China’s interests”.

KPMG found that a 5 percentage point increase in tariffs by all countries on manufactured goods would wipe 1.3 percentage points from global growth, which the IMF expects to reach almost 4 per cent this year.

That scenario would see the UK, Canada and EU succumb to recession and trim Australian GDP growth by 0.8 percentage points.

If countries retaliate with even stronger measures, taking tariffs higher by an average of 10 percentage points, the global economy would face a “severe recession”, on par with the 2009 collapse, and shrink GDP by 3.3 per cent.

Rynne warns the world stands at the start of a new trade “game” that will test the willingness of the world’s leading economies to resist being drawn into an ever-deepening cycle of trying to make the other trade partner worse off.

“Just like in the ‘prisoners dilemma’ – where one player adopts a first mover ‘defection’ strategy, such as the US has done with its steel and aluminium import tariffs – the negative impact it feels from any trade escalation is small relative to the other players.

“This outcome is also reinforced by the relatively large size of the US economy and the fact it has the lowest initial tariff level.”

KPMG’s modelling shows that while all countries lose under the tit-for-tat scenarios it has studied, the US loses by considerably less than the others.

“There is a disproportionate level of damage for Canada and the EU27 nations – their economies are adversely affected by 8.5 times and 7.5 times as much as the US economy. For the UK the ratio is 5.3.

“This indicates those countries simply cannot afford to get into any sort of trade war with the US.”

The findings are based on a so-called general equilibrium model of the world economy, in which data for 57 industries was aggregated into manufacturing and services sectors, and 141 countries were folded into 10 countries or regions that are the main US trade partners.

Rynne says that while the level of damage from a full-blown trade war is comparatively small for Australia compared to other economies, it threatens to undermine the basis of four decades of rising living standards.

“We are a case study in the benefits of free trade,” he said.

“In 1973, when we joined the then-GATT reduction of tariffs, we were a relatively poor country, after decades of inward-focused trade policy.

“Within 40 years, exports and imports had tripled as a proportion of our GDP, as formerly protected domestic industries had to reform to survive under global competition, while other sectors which had a comparative advantage thrived.

“Our analysis shows that a hostile global trade environment would see Australia’s hard-fought gains from trade liberalisation being eroded.”