The Imminent Threat Of US-China Trade War: KPMG Australia Report

1.Read the full report and some of the Australian media coverage of its contents (refer Resources/ Assessment 1). Summarise the key findings of the report.  You may also search the internet for other commentary on on the report. 
2.Since publication of the report what have been the subsequent developments in the US-China trade disagreements? 
3.Discuss these developments in the context of the three scenarios modelled by KPMG in its report?

The Current US-China Trade Agreements

On 28 August 2018, KPMG Australia issued a report, Trade Wars: There are no winners, on economic demonstrating of the anticipated impact of the recent US- China trade disagreements. The Chief Economist of KPMG, Brendan Rynne observed the current trade war between two countries, US and China. The consequences are evaluated even if trade stays limited or expands globally. The current US-China trade agreements intensified into an all-out global trade war can severely damage domestic and global economy. The KPMG Australia has found the new economic modelling. The involvement of the substantial number of the countries in the trade war would reduce Australian national income by almost half a trillion dollars over the ten years. It is same to the 40% of last year’s total household disposable income. The report looks at what has happened to the date along with what has been legislated and enacted.

The globalization is driven by the technology, transportation and international cooperation. The economic, political and technological barriers to the international trade have collapsed globally in the recent years. The rapid globalization has lifted poverty in the emerging countries.  The globalisation is composed of the trade flows between rich countries and the East Asian region (The Financial Times, 2018). The other countries like Australia have been benefited from greater integration with China. The report of KPMG comprises the subsequent development in the US-China trade agreement. The scenarios modelled by KPMG are also discussed. Both US and China are the two largest economies in the world and are instigating a mounting trade war with each other. The trade talk took place between both the countries in Washington, D.C. The discussion failed to resolve the economic tensions between US and China. The KPMG Australia represented that as the scenario progressed due to the trade between US and China, it put negative economic consequences on both the countries. The follow on impact to the global economy is also damaging (Wise, 2016).

The US-China trade agreement aimed at globalisation to merge separate national markets into one huge global market place. It is a shift towards independent world economy. The Australian producers faced competitive advantage in penetrating the Chinese market. China is largest trading partner of Australia. Australia produces many of the things which China also sources from US (Hughes & Meckling, 2017). The exports that appear on the list of US goods will get to see 15-25% tariffs (The Two-Way, 2018). The enterprises in the Australia need to gain and increase production and prices of some goods to feed China’s enormous hunger. The Australian wine exports realised an overall increase of 15% in 2017 (The Two-Way, 2018). The Australia’s single largest wine export stand to 63% with the total value of 848 million as export to China. The US exported almost $80 million cost of wine to China in 2017. The custom duties of China for the US wines are 14% and the new tariffs increased to 29%. The wines from Australia are charged 0% custom duties (The Two-Way, 2018). Australia has been marketing aggressively in China. On the other side, Australia is the biggest competitor to US for exporting fruits to China (Ludwig & Wang, 2018). According to the Australian bureau of statistics, 40% of Australia’s fruits get shipped to China and Hong Kong (The Two-Way, 2018). It is an opportunity for the Australian farmers to insert products into the global markets. China imports scrap aluminium from US which is melted and changed in Chinese furnaces. China imposed 25% tariff on the US exports. Australia has viewed its exports of waste in the form of aluminium. The main waste of Australia’s export to China was waste metal and accounted to 31% of the value of exported waste metals (Teagarden, Von Glinow & Mellahi, 2018).

Impact of US-China Trade War on Australia

The US-China disagreement affect the enormous majority of the goods traded between the two countries. It leads to the unassertive proportion of the global trade. China offers a lot of market opportunities for the foreign investment. It offers economic growth offering access to the huge market and savings in the labor costs (Fogel, 2010). The caution should be given by the foreign companies to invest in China due to the differences in the political and cultural environment. It creates risk and poses uncertainty to the investor countries. On the other side, political forces in US are stable and are a great destination for the foreign investment. U.S is a largest economy in the world when it comes to nominal GDP. When it comes to social factors then US is the third most populous country and having more of aging population which can be a huge problem mainly in the supply of labour. U.S is a diverse country and shapes the socio-cultural factors. US have government structure and legal scheme in every state. The tariff measures are released by US comprising 25% tariff on the imported steel and 10% tariff on imported aluminium products. A proposed list of the Chinese origin products have been also released by US which is subjected to an additional 25% tariff. This list was circulated following U.S investigation under the Trade Act of 1974 (KPMG, 2018). It comprises 1300 HS codes and embraces aircrafts, mechanism, spacecraft, telecom, pharmaceutical and electronic appliances (Kolk, 2016).

In response to the US tariff measures, China decided to execute 15% tariff on the 120 products originating from US. It comprised products like fresh fruits, nut products, dry fruits, ginseng, wines and seamless steel pipes. The 25% tariff is also imposed on the eight U.S origin products comprising pork and related products, recycled aluminium and more. These additional tariffs were made effective from 2 April, 2018. China also intended to execute additional tariffs of 25% on the 106 products across 14 categories, comprising soybeans, chemical products, soybeans and more (KPMG, 2018). The operative date for these tariffs was not announced (Morris, 2017).

The US-China trade disagreement will have negative impact comprising increased duty cost and management risks for the organizations in both the countries who import and export the goods subjected to the tariffs (Meyer & Peng, 2016). On the other hand, the upstream and downstream enterprises can also be obstructed due to the increased tariffs borne by the suppliers. The additional tariffs are imposed centred on the country of origin of goods and not on the basis of the trading country. In this way, the determination for the US made or China made products are the significant matter under the disagreement of US and China.

Australian and Chinese Market Dynamics

There is no cohesive rule leading the determination of the country of origin among the different WTO member countries. The countries are free to govern their own rules of origin along with the preferential and non- preferential rules of source centred on the particular purpose. The non-preferential rule of source is applicable in the case of China-US trade agreement (Petri, et al. 2017).

The three scenarios modelled by KPMG are:

Limited growth, no contamination: The constraint of the current trade war between the two countries US and China has declared increase in the tariff. Both the countries have increased the tariff rate for each other.

Full growth, no contamination: What is now projected to take place between China and US as a next step, there will be a growth of tariffs to 25% between both the nations (KPMG, 2018). The imports and exports between both the countries will be accompanied by the high rate of tariffs than earlier due to the disagreement.  

Full growth, full contamination: In the all-out trade war, the significant number of countries has combined in and upturned tariffs by 15%. It is very near to the levels stirring now between US/China and US/rest of the world with reverence to steel and aluminium.

According to the report of KPMG, far from captivating an all-out trade war, the US economy will surely practice recession and an increasing loss of GDP of 4.6% over the five years. it is considered that China would not experience recession but the economic growth rate would slow to just 4% every year. It is also confirmed that the economic growth rate would stay below 5% per annum for coming five years. It is going to be China’s poorest economic growth performance in the 3 decades. The GDP of China paralleled to the situation when there was no trade war, it would nearly lead to the 5.3%. So, China would suffer from the GDP loss for the five years (KPMG, 2018).

The KPMG Australia found that the situation where US-China trade war were narrowed to those two countries and were constrained to the recent proclaimed actions. It can put adverse impact on the world economy and would kept -0.5% global GDP. As a result, Australia’s GDP will be amended by 0.3% over the 5 years with the loss of $36bn. It is observed that the European Union and Japan will be exaggerated less than Australia. In this situation, where trade war between the two countries US and China increased to 25% tariff on all the goods traded between both. Both the countries would finish up with 1% lower GDP but faring with China would poorer over the time. The GDP of Australia would reduce by 0.5% (KPMG, 2018).

Effects on Upstream and Downstream Enterprises

KPMG Australia has used the best strategy for the whole world by resisting the political pressure to join a US-China trade war. This strategy can be used to respond to the issues faced by both the countries. Despite there is augmented domestic pressure to protect the local industries from any displaced US and China looking for the new market. The trade war between the two countries, US and China lead to the tariff increased (Picciotto & Mayne, 2016). The Australia’s GDP is likely to be 0.3% lower over 5 years and loss of $36 billion would be incurred over the decade (The Two-Way, 2018). It is due to the reliance of Australian commodities as input in the production process in China (Zander, McDougall-Covin & Rose, 2015).

Conclusion 

As per the KPMG modelling, no country is going to triumph from the global trade war but every country is going to drop. Other countries are suggested to stay out of the events like full-blown trade war between the two countries US and China. The policymakers in Australia and other nations are suggested to battle the political burden in order to levy or increase tariffs on the goods imported from US and China as they search for the fresh markets. Doing so will ultimately harm to the own economies of the nations. The potential negative impacts of the importers/exporters in China and US are aimed to reduce by reducing the duty cost. The international trade contracts should be reviewed along with the considering renegotiating contract terms concerning responsibilities for duty, contract price and more. The additional duty cost can be reduced to consider cost unbundling opportunities. The US importers can also explore the capability to execute first sale for export regime. 

References  

Fogel, G. K. (2010). Business environment in China: Economic, political, and cultural factors. Lawrence Technological University.

Hughes, L., & Meckling, J. (2017). The politics of renewable energy trade: The US-China solar dispute. Energy Policy, 105, 256-262.

Kolk, A. (2016). The social responsibility of international business: From ethics and the environment to CSR and sustainable development. Journal of World Business, 51(1), 23-34.

KPMG, (2018). Trade wars: There are no winners. Retrieved March 25, 2018 from https://home.kpmg/au/en/home/insights/2018/08/trade-wars-no-winners.html

Ludwig, A., & Wang, Z. (2018). In Trade Trouble, China Sees North American Opportunity. The Wilson Quarterly, 42(3).

Meyer, K., & Peng, M. W. (2016). International business. Cengage Learning.

Morris, S. C. (2017). Trade and Human Rights: The ethical dimension in US-China relations. Routledge.

Petri, P. A., Plummer, M. G., Urata, S., & Zhai, F. (2017). Going it alone in the Asia-Pacific: Regional trade agreements without the United States. Peterson Institute for International Economics Working Paper, (17-10).

Picciotto, S., & Mayne, R. (Eds.). (2016). Regulating international business: beyond liberalization. Springer.

Teagarden, M. B., Von Glinow, M. A., & Mellahi, K. (2018). Contextualizing international business research: Enhancing rigor and relevance. Journal of World Business, 53(3), 303-306.

The Financial Times, (2018). Will the US-China trade war impact on global growth? Retrieved March 25, 2018 from https://www.ft.com/content/8c33d966-bc13-11e8-8274-55b72926558f

The Two-Way, (2018). Who Wins A U.S.-China Trade War? Maybe Australia. Retrieved March 25, 2018 from https://www.npr.org/sections/thetwo-way/2018/04/03/599081151/who-wins-a-u-s-china-trade-war-maybe-australia

Wise, C. (2016). Playing both sides of the Pacific: Latin America's free trade agreements with China. Pacific Affairs, 89(1), 75-100.

Zander, I., McDougall-Covin, P., & Rose, E. L. (2015). Born globals and international business: Evolution of a field of research. Journal of International Business Studies, 46(1), 27-35.