Section One: Economic issue and definitions
The global economic issue I have chosen to investigate is the Trump Tariffs and the associated economic fallout from retaliatory tariffs. Note all monetary figures are expressed in USD as is the prevalent trade currency.
Tariffs are generally used to protect industry within a country by adding a cost to different classes of imports from other nations. That is to encourage local production or the use of local resources over cheaper imports. President Trump in January 2018 adopted such economic policy. A tariff of 30-50% on solar panels and washing machines to protect national industry, thus creating more jobs for American citizen, a major focus of his presidential campaign. Trump’s tariffs however did not stop there. On May 8th, 2018 Trump went further with the introduction of further tariffs on Steel (25%) and Aluminum (10%) for most countries including Australia. Trump continued the extension of tariffs on June 1st, 2018, to include the European Union, Canada and Mexico, at which time Australia and Argentina were given exemptions. July 6th, 2018, saw the introduction of 25% tariff leveled against 800 categories of goods imported from China worth $50 billion, sparking a “trade war”. Other nations, such as Canada imposed matching tariffs upon American goods. July 6th, 2018 saw China implement tariffs equivalent to the $34 billion to counteract tariffs imposed on them by the US.
Definitions:
Tariff: a tax or duty to be paid on a class of imports or exports.
Retaliatory tariffs: tariffs imposed to pressure another country into removing its own tariffs or making trade concessions.
Trade war: a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.
Government policy: a declaration of a government's political activities, plans and intentions
Stakeholder: a person with an interest or concern in something, especially a business (in this report a country)
Real Wages: income expressed in terms of purchasing power as opposed to actual money received. (adjusted for inflation)
Section Two: Importance to Australia and Global Economy
The importance of this issue regarding Australia is simple, not only do exports contribute in a profound way to the Australian GDP but to the global economy in general. Though Australia has been deemed exempt from the Aluminum and Steel tariffs their effects upon our largest trading partner: China could be detrimental to our economy in the long run.
Overall our exports of steel to the US being minor, $400 million aluminum and steel combined, totaling roughly 5% of America bound exports, it would appear that the Trump tariffs, if they applied would cause little to no direct hardship. This is incorrect. As a country, we rely heavily upon exports particularly to China for economic growth. Exports account for roughly one fifth of our total economic output, and with our economy being particularly sensitive to the economic scene in China, if the impact of broader tariffs on Chinese growth is negative we will feel the impact.
The tensions between the world’s two largest economies (USA and China) will hit Australian exporters and consumers, with fears a trade induced economic shock could crimp global demand, hitting farmers, miners and manufacturing suppliers alike. Two of our largest exports; resources and education being particularly exposed, a falling Chinese dollar weakening its buying power, thus discouraging Chinese parents from sending their children to Australian Universities, and a slowing economy reducing demand for steel and coal Australia is particularly vulnerable.
KPMG (Klynveld Peat Marwick Goerdeler) an accounting firm modeled the best-case scenario for the current “trade war”, where tariffs do not escalate beyond the current threats from the white house, would see Australia’s GDP projected to be 0.3 per cent lower by 2022. This would represent a $36 billion dollar drop in economic growth over five years. It is worth noting that this model relies upon the US-China trade war playing out in isolation with no further contagion. If other countries were to join the fray KPMG expects the results to be devastating to the Australian economy.
"Its impacts would last almost a decade, with an estimated loss of national income of nearly half-a trillion dollars over 10 years, or the equivalent of losing just over 40 per cent of last year’s household disposable income," KPMG economist Brendan Rynne found. "Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker."
KPMG also found that a full-blown trade war would see US GDP fall by 6% over a decade, costing millions of jobs around the world. KPMG also warned that an Australian deal for some industries might not be enough to stave off an economic downturn if other countries started to put up walls.
John Tang, a senior lecturer at the Australian National University’s school for economics also warned that though “Right now, it’s just steel and aluminum, but it can very easily become much more…. This could threaten the stability of global markets” (March 7th 2018)
The initial reaction to the imposition of tariffs on steel and aluminum were regarded positively by shareholders of Bluescope Steel an Australian company with an almost instantaneous increase in share prices following Trump’s announcement of tariffs. This was due to their operations in the US, and investors identifying the opportunity for increased profits for U.S. production. However, the bigger hazard to Australia is that the American tariffs could force other steel makers in other countries affected to send more product to Australia, reducing profits for Australian steel manufacturers.
Section Three: Economic factors and influence
The economic factors which will have the largest effect on the issue are undoubtedly; Government policy and taxes (in this case tariffs)
Government policies such as these will necessitate Australia and other effected countries entering into negotiations with countries such as the US and China. Negotiations would need revolve around seeking exemptions for certain products being exported from Australia such as Minerals and fuels which accounted for 45.5% of total exports in the financial year 2016-17 and contributed $252 billion to the Australian economy. Putting this into perspective Australia’s total GDP for this period was $1.323 trillion meaning minerals and fuels accounted for a significant 5.25% of Australian GDP.
Tariffs introduced by the Australian government may impact the trade-war if they were to be leveled against the U.S. Attach is often the best form of defense and would seek to send the message that; Trump’s tariffs are unwelcome in the global community and are destroying comradery between nations. Australia’s largest imports from the US are listed below, the total amount of US imports to Australia is $22,827 million USD.
Section Four: Stakeholders
Stakeholders in this issue are all members of the global community, but a handful shall be focused upon; Canada, South Korea, China and Brazil. Australia shall not be focused upon due to its stake being addressed in sections two and three;
Canada; U.S. neighbor to the north, Canada, stands to lose the most because of the steel and aluminum tariffs. According to the study, the Canadian economy will see losses around $2 billion, far outpacing all other countries on the list. Canada was the United States’ second-largest trading partner in 2017, according to data from the Bureau of Labour Statistics (America), accounting for more than 16% of the United States’ overall trade. So far, in 2018, Canada and China comprise the largest percentages of the country’s total trading volume, at 15.1% apiece. The chart below is from an American perspective but provides insight into the levels of trade between Canada and the US. All figures are in Millions of USD. The table indicates that American imports from Canada were greater than their exports
Brazil; Following Canada, Brazil is the second potential biggest loser. The country could lose more than $651 million because of the U.S. tariff policy. In 2017, Brazil accounted for 1.7% of the United States’ overall trade percentage. So far, this year, the South American country ranks at 14 among the United States’ top 15 trading partners. Though the table below indicates that the US’ exports to Brazil were greater than imports the effect that the new tariffs have on Brazil’s main export; Iron would be profound.
China; The country, with who overall trade tensions with the U.S. are escalating, could take a hit of $554.2 million from steel and aluminum levies alone. The bulk of the losses will result from the 25% tariff on aluminium. Aside from tariffs on steel and aluminum, the Trump administration has imposed tariffs on $50 billion worth of Chinese goods. China has responded with levies valued at an equivalent amount on American-made imports. This week, Trump threatened to impose duties on another $200 billion worth of Chinese goods, intensifying fears of a trade war escalating between the world’s two largest economies. The US is shown to import far more from China than it exports, this is largely due to the relatively low cost of production for products made in China. The overall effect the tariffs will have on Chinese economy is enormous. The greatest concern for China is their reliance of the export of manufactured goods. The market for these goods is not easily transferable.
South Korea; U.S. ally South Korea could be down as much as $554 million, with most losses resulting from the 25% steel tariff. So far, this year, South Korea ranks seventh among the United States’ top 15 trading partners. The US is again shown to import more than it exports in this case. Steel being one of South Korea’s main exports means that they, as a nation will be effected severely by US tariffs. Tariffs again have the strongest impact when the reliance on exports is greater than the reliance of imports.
Section Five: Global effects
The possible impacts upon Australia as mentioned in Section Two are:
Lowers levels of growth for Australian GDP, as a direct result of American tariffs upon China, our largest trading partner, reducing the Chinese Yuan’s buying power and thus reducing demand for Australian Schooling as well as Australian minerals. As stated by KPMG a trade war between China and the US could result in Australia’s GDP reducing by 0.3 percent by 2022. Figures ares based upon the assumption that the trade war does not escalate beyond current levels from both China and the US.
KPMG further stated that; "It’s (the trade-war’s) impacts would last almost a decade, with an estimated loss of national income of nearly half-a trillion dollars over 10 years, or the equivalent of losing just over 40 per cent of last year’s household disposable income," KPMG economist Brendan Rynne found. "Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker." The loss of Jobs and the fall of real wages would also see the standard of living of Australians greatly decrease affecting the nation.
In short the impact of Tariffs is far reaching and can if well placed cripple an economy particularly one which is reliant on it’s exports to the country imposing tariffs, in this case the U.S.
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