Canada and EU to bear brunt of US trade wars

A study by KPMG shows how Canada, Australia, the UK and the EU will be affected by US protectionist policies if countries respond by raising tariffs on imported goods. The US's protectionist stance on tariffs could cause economies such as Canada, the UK and the EU to tip into recession, according to economic modelling by KPMG Australia. The firm took four scenarios to gauge how countries around the world might react to US tariffs on imported goods, ranging from a 5 to a 10 percentage point increase in tariffs on all goods (primary and manufactured) or just manufactured goods.

The report – The Re-emergence of Protectionism – found there would be substantial impacts, even in the mildest scenario. It predicted that, if tariffs of just 5 per cent were applied only to manufactured goods, then the Australian economy would contract by more than 0.8 per cent, equivalent to AU$15 billion and 130,000 full-time employment (FTE) position.

Free trade key to economic growth

However, Canada, the UK and the EU will fare even worse – their economies would shrink by 3.4 per cent, 2.1 per cent and 3 per cent respectively, tipping them all into recession. In contrast, there would be little effect on the US economy, with a modest decline of just 0.37 per cent.

A more robust reaction to trade tariffs – a 10 per cent tariff hike by all countries on primary and manufactured goods – would lead to a global recession similar to that triggered in 2008, according to KPMG. Global economic growth would fall by around 3.3 per cent. KPMG Australia's chief economist Brendan Rynne, commented: “Our modelling confirms that trade liberalisation is key to economic growth and demonstrates how potentially damaging protectionism is... 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 report highlights the following key points:

• Openness and trade liberalisation are now regarded as key components of a nation's economic growth and well-being. KPMG modelling shows that tariff retaliation would significantly damage global growth.
• Trade liberalisation can be seen as a cooperation strategy, whereas trade protectionism can be considered a defection strategy. Since the middle of the 20th century the world has been broadly playing a mutual cooperation strategy in the game of international trade. Unsurprisingly, living standards have been rising throughout that period as trade barriers declined and economies opened up.
• The latest, high-profile trade protectionism action has been the signing of a memorandum by the President of the United States on 22 March 2018 to consider the imposition of tariffs on the importation of Chinese goods and restrict investment in domestic companies in industries or technologies ‘deemed important’ to the United States.
• China's Commerce Ministry immediately responded to this proposal by announcing that should the potential escalation in trade restrictions by the US materialise, China would impose a 15 percent tariff on 120 US products, including fresh fruit, dried fruit, nuts, wine, ginseng, and steel pipes worth just under $US1 billion in annual trade. Further, China would impose a 25 percent tariff on eight products, including pork and recycled aluminium, which would impact about $US2 billion in trade, and it would also remove existing tariff concessions on US steel and aluminium.
• This latest action is in addition to the recent imposition by the US of a 25 percent ad valorem tariff on steel and a 10 percent ad valorem tariff on aluminum imported into the US from all countries, except Australia, Europe, South Korea, Canada, Mexico, Argentina and Brazil (who will instead have import quotas applied to exports of steel and aluminium into the US), from 23 March 2018.