MGT530 International Business - Trade War between China and US: Insight of KPMG Report

Introduction

United States (US) and China has entered into a trade war by imposing tariffs on imported goods of two countries. The imposition of tariff has restricted trade between these countries and this trade war can escalate to affect the global economy. The underlying essay has carried out analysis of KPMG report on trade war between China and US by mentioning that there are no winners in the trade war. Firstly, the summary of report has been provided by highlighting the scenarios which are used for modelling the economic effect of trade war. Additionally, the discussion is carried out on the recent developments on trade war between China and US by maintaining close focus on scenarios modeled in KPMG report. 

Summary of the KPMG Report

As consequence of trade war between US and China, the trade between two countries is restricted mainly, which has not only influenced the economies of two countries but is expected to present disastrous effects on global economy as well. This war has started based on US imposition of tariffs on Chinese imports and China has retaliated through imposition of same amount of tariffs on US imports. The retaliation escalates trade war and the trade restrictions through tariffs have fostered inflationary drivers within countries, which will result in high interest rates and thus economies of these countries will be shattered (Chen, 2018). The report of KPMG Australia has maintained focus on the notion where other countries can be influenced by the trade war of China and US and the way their industries might make efforts to save themselves from price influx of trade war (KPMG, 2018a). It has been noted that if other countries will participate in the trade war, then national income of Australia will reduce by half trillion dollars. The study has viewed effect of trade war in three scenarios;

Scenario 1 - Limited escalation, no contagion: This model focuses on tariffs which are currently imposed by US and China, encompassing tariffs on no more than US$200 billion (KPMG, 2018a). This limited escalation will only cause limited effect on GDP of these China and US. Likewise, the effects on economic conditions of other countries will be even smaller, such that Australia will lose around 0.29% of its GDP in year 5 (KPMG, 2018b). 

Scenario 2 - Full escalation, no contagion: In the full escalation scenario, 25% tariffs are imposed by US and China on all imported goods and there is no contagion effect on other countries. This full escalation will cause substantial decrease in GDP of China and US, such that China will have 1% less GDP and US will have 0.9% less GDP (KPMG, 2018b). Additionally, the effect on other countries will also be noticeable, such that Australia will have 0.5% GDP as result of full escalation.