What a Trade War Could Mean For You!

The term ‘trade war’ has been beaten to death this year.

The back and forth between the US and China has felt like a tennis match at times.

The US throws a new tariff at China, China responds by dealing another one to the US. And then we wait and see what the markets will do.

In the beginning, the markets responded with volatility. But as the war of words continued and not much else happened, the markets seem to have recovered. Talk of a trade war hasn’t destabalised the market as was initially expected.

Back here in Australia, it’s been a fight between our strongest ally and friend, and our largest trade partner.

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How will a trade war affect Australia?

So the real question for Australia is, how will we fare if a true trade war were to break out?

Well KPMG, a global accounting firm, auditor and professional services company, released a report this week arguing it won’t be a kind outcome for hard working Aussies.

But as KPMG put it, an ‘all out’ trade war doesn’t just include the US and China. There have been many countries that have been affected by the Trump administration’s tariffs on steel and aluminum.

Europe is unhappy with the tariffs that have been placed on them. Canada and Mexico are also unhappy.

US President Donald Trump however, believes the US have been hard done by for years. So no matter how many tariffs are going to be placed on them by their allies, they return with even harsher tariffs.

KMPG’s report details what would happen in Australia if a hostile trade war were to break out. They predict that GDP would be roughly 2.4% lower, and that’s just to start. As KMPG’s report states:

The present value of Australia’s real [inflation adjusted] losses over the decade is estimated at $364 billion

The present value of the loss in Real Household Disposable Income for Australia is estimated at $474 billion.’

Net disposable income is the amount of net income an individual has available after income tax to save, invest or spend.

So what does this mean for Aussie workers?

Well, it doesn’t look good.

If you were looking for a pay rise, then hope that a trade war doesn’t eventuate. KPMG expects that if a trade war were to happen, then your income could be cut by $16 per week. That’s assuming you keep your job! KPMG’s report also outlined that they believe that up to 60,000 jobs would be lost in the next decade.

KPMG Australia chief economist Brendan Rynne stated that no one could win from a trade war.

The lesson from our modelling is that no country would win from a global trade war and every country would lose

Even in the event of a full-blown trade war between the US and China, it is in the best interests of other countries to stay out of it.

Policymakers in Australia and other nations would be well-advised to resist the political pressure to impose or increase tariffs on goods imported from the US and China as they seek new markets.’

How could it affect global GDP?

Even if the trade war were to be carried out in an orderly fashion — highly unlikely — and the current tariffs continue on a modest trend, then US and Chinese GDP would still fall in four years by roughly 0.6%.

For Australia?

Around 0.3% over four years. This would mean a loss of $36 billion over the decade.

Below is a graph of projected cumulative losses worldwide from a US–China trade war:

MoneyMorning 21-06-18

Source: KPMG Australia
[Click to open new window]

As you can see from the graph above, the global impact would be significant.

Rynne told The Australian Financial Review, ‘This is a seriously bad situation if it escalates.’ He continued, ‘It’s a real concern that we have and it’s important that the global economy understands it’s not trivial.’

Rynne also expressed his concern for global growth:

What happens is that you get a reduction in trade between the US and China and that reduces the size of their economies, which in turn reduces tax receipts and increases government deficits, leads to rising local interest rates and lowers consumption’.

While many of us have brushed off the thought of a hostile US–China trade war, we now can’t deny that if it were to eventuate, it could have a devastating effect on global markets.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now to this report here.

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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