![Donald Trump's trade policies were popular with his supporters.](/content/dam/images/g/s/x/c/j/i/image.related.afrArticleLead.620x350.gsz2aq.png/1480365806381.jpg)
![](/web/20161129144415im_/http://www.afr.com/content/dam/images/1/4/4/6/s/o/image.imgtype.afrAuthorAvatar.120x120.png/1426318722318.png)
Donald Trump's 45 per cent tariffs on Chinese exports to the United States would plunge the world into a deep recession, if China retaliated in kind and the rest of the world took protective action in a global trade war, new modelling shows.
But in the more likely scenario of a limited trade war between the US and China, Australia would gain slightly because trade losses would be offset by gains elsewhere as market gaps opened up, modelling by Janine Dixon of Victoria University's Centre of Policy Studies shows.
Within the Australian economy, agriculture, coal, oil and gas, metal ores and textile clothing and footwear manufacturing would decline, and food and beverage manufacturing, other manufacturing, services and housing would all gain.
Dr Dixon said she had read opinion pieces saying a US-China trade war sparked by the President-elect's policies would be a huge blow to Australia but "when you pick it apart there are so many little effects going on...the net effect is nothing".
![Australia would be a slight net winner if a trade war were contained to the US and China.](/content/dam/images/g/s/z/a/y/s/image.imgtype.afrArticleInline.620x0.png/1480316935655.png)
She said Australia should not panic, and "should not try to do anything about it". Mr Trump's policies would not even help American manufacturers much because their exports would be diverted to meet domestic demand if Chinese imports were discouraged, she said.
Melbourne University economist Ross Garnaut says Mr Trump's plan to slash US company taxes and ramp up defence spending would widen US budget deficits like former presidents Ronald Reagan and George W Bush "on steroids" in an opinion piece in The Australian Financial Review.
Moderation spurs rally
Stockmarkets and the US dollar have rallied strongly as Mr Trump has moderated his tone and some policies in the wake of his shock defeat of Democratic candidate Hillary Clinton in the presidential election.
But Professor Garnaut writes: "I don't want to spoil the party, but the Trump Presidency threatens US, global and Australian prosperity."
![Janine Dixon says Australia shouldn't panic about Trump's trade policies.](/content/dam/images/g/p/q/p/h/s/image.imgtype.afrArticleInline.620x0.png/1480316935297.jpg)
He writes that even if Mr Trump doesn't succeed in enacting his 45 per cent tariffs on China, he has legitimised protectionism at a time when the post-World War II upswing in trade and prosperity has stalled.
Dr Dixon's modelling shows that in the worst case of a full blow trade war, the US economy would contract by 3 per cent over about 10 years, China by 7 per cent, Australia by 4 per cent and the rest of the world by a massive 10 per cent.
"This is equivalent to a major recession, worth a couple of years of economic growth," Dr Dixon says in a paper to be presented to a Melbourne Economic Forum on the impact of Mr Trump's economic policies on Tuesday .
It assumes China will retaliate with 45 per cent tariffs on US exports to China and the rest of the world gets sucked in and imposes its own 20 per cent tariffs in the "beggar-thy-neighbour" style that led to the Great Depression in the 1930s.
![](/content/dam/images/g/s/z/f/m/s/image.imgtype.afrArticleInline.620x0.png/1480323548315.png)
Dr Dixon said it was unlikely, because even if Mr Trump implemented his full plan for 45 per cent tariffs, China would be less likely to respond with its own tariffs because of the damage this would do to China, and the rest of the world would have to break with the World Trade Organisation to raise tariffs.
China – the world's largest creditor, would be more likely to respond by withholding capital from the US government, which would hurt the US at a time when Mr Trump wanted to widen deficits to stimulate growth but not be as damaging to China and the rest of the world, she said.
The Melbourne Economic Forum is a partnership of Melbourne and Victoria Universities sponsored by the Australian Financial Review.
![China is unlikely to retaliate with its own tariffs because it would suffer most.](/content/dam/images/g/s/z/a/z/3/image.imgtype.afrArticleInline.620x0.png/1480316935432.png)