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World—China-US tariff impasse risks a costly global trade war

The announcement of a number of trade measures by both the US and China presents a risk to global economic growth. The Trump administration first levied tariffs on steel and aluminium imports, and threatened to impose tariffs on US$50b of Chinese imports and restrict Chinese investment in US companies. China responded by levying additional tariffs on US$3b of US imports, with a threat to impose additional tariffs on US$50b of US goods. President Trump then raised the stakes with the threat to impose tariffs on an additional US$100b of Chinese goods. Most recently, China announced tariffs against US sorghum imports (US$957m last year).

There is still time to negotiate a bilateral deal. But it is helpful to keep threatened tariffs in perspective. First, US$203b of exports is equivalent to just 1.7% of China’s GDP, or 1% of US GDP. Second, Australia’s contribution to Sino-US trade—which includes Australian exports that feed into supply chains and in turn Sino-US trade—is equivalent to A$6b or 0.4% of Australia’s GDP. This is lower than Korea, South East Asian economies (ASEAN) and Japan (Chart).

It is too early to tell whether current tensions will escalate. However, KPMG has modelled the potential fallout from a hypothetical global trade war, which sees all countries raise tariffs by 10 percentage points across all goods. This hypothetical concludes the scenario would cost Australia’s economy A$33b (1.9% of GDP) and 285,000 jobs. Yet unlike Canada and most European countries, Australia would narrowly avoid recession.

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