US-China trade war could derail global economy, OECD warns

As the US-China trade war heats up, experts warn of dire consequences for the entire globe. Photo / 123RF

The US-China trade war that has raged for the past year could cause a disastrous US$600 billion ($923b) blow to the global economy.

That's the grim assessment of the Organisation for Economic Co-operation and Development (OECD), which warned a further escalation of the crisis could impact a world economy already weakened by sluggish growth and uncertainty.

In a biannual report released yesterday, the renowned think tank predicted global gross domestic product would fall by up to 0.7 per cent by 2021, with uncertainty hitting advanced economies the hardest.

It expects the world's GDP to slow to 3.2 per cent in 2019 compared with 3.5 per cent last year and 3.8 per cent in 2017.

"Trade tensions have disrupted growth. With uncertainty high and confidence low, investment has suffered, and the manufacturing sector has taken a hit," OECD chief economist Laurence Boone said.

Bloomberg Economics has painted a similarly pessimistic picture, agreeing an "all-out trade war" would lower the global GDP by 0.6 per cent or "close to US$600b" relative to a "no trade war scenario".

And if the tariffs imposed by both the US and China earlier this month remain in place for the next two years, Bloomberg Economics predicts global GDP could be 0.3 per cent lower by mid-2021.

But according to Chris Richardson, director of Deloitte Access Economics, the news isn't all bad — especially for Australia.

"The basic thing to remember about trade wars is the two Ds — they are dumb, but they're not dire," he said.

"To be clear, there are beautiful win-win gains to be had from trade … including lifting a billion people out of poverty over the last decade and a bit.

"But now we are amid a lot of stupidity — it's that classic push and shove in the playground stuff."

Richardson said at the moment, the US-China trade war had not yet notably hurt the global economy, although global trade had started to shrink.

But he said Australia actually stood to benefit from the situation.

"Remember, for Australia, there is this weird side effect which is that, as China slows, they pump stimulus which leads to extra construction and extra demand for things like steel," he said.

"So, if anything, global trade wars and a slowdown in the global economy is actually good news for Australia because the world gives us a pay rise off the back of it."

He said Australia stood to "indirectly benefit" from Chinese stimulus, with Australian farmers and the mining sector (coal and iron ore) the main winners, and while the political blowback from the trade wars could negatively affect Australia, the economic repercussions were largely positive.

However, Richardson said the situation could get worse because "egos are involved" — although he said there was a risk of "overstating" just how bad it could get.

"There does remain the chance that if egos are kept under control, the damage to the world economy could still be smaller than people fear — it is dumb but it's not dire, and there's a chance of an outcome which is ultimately good for the world," he said, adding the situation could encourage China to open its economy further.

Trade war

For months now, US President Donald Trump and his Chinese counterpart Xi Jinping have been locked in an alarming trade war.

Earlier this month, it stepped up a notch after Trump increased tariffs from 10 per cent to 25 per cent on US$200b worth of Chinese goods.

China then retaliated by placing tariffs on US$60b of US imports.