Yahoo Finance After barley, what next? Australian industries exposed if China trade tensions persist
China’s decision to impose tariffs on Australian barley imports has highlighted how reliant some sectors are on Chinese demand, with wool producers now “particularly exposed” by the threat of a further escalation in trade tensions.
After the effective barley tariff of more than 80% was confirmed on Monday night, the agriculture minister, David Littleproud, declared “there is no trade war” with China, denying that the tariff – officially cited by China as a penalty for dumping – was linked to Australia’s push for an inquiry into the origins and handling of Covid-19 that had secured widespread international support hours earlier.
However, China experts predict more action from Beijing is likely, and warn that news of the barley tariff will send a message inside China that Australia is not a “friendly” or reliable country to import from and could impact the decision to buy Australian goods across several industries.
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An earlier ban China introduced on the importation of beef from four Australian abattoirs over alleged compliance issues is expected to affect about 35% of the projected $3.5bn worth of beef exports to China this year. With the effective halt to the $600m of annual barley exports to the country, agricultural bodies are paying close attention to the wool industry’s roughly 75% export reliance on Chinese demand.
Australia’s four largest exports to China – $63bn in iron ore, $16bn in natural gas, $14bn in coal and $12bn spent by international students studying in Australia – are not expected to be affected in the short term due to their size and the Chinese market’s reliance.
According to the Department of Agriculture, Australian producers exported about $3.16bn in unprocessed or “greasy” wool to China in 2018-19, which represents an even larger value and industry reliance on China than barley.
Wool exports have already suffered from a drop to a five-year low in sale prices because of a halt in demand outside of China during the Covid-19 pandemic – allowing Chinese buyers greater ability to dictate the prices they pay.
The president of Wool Producers Australia, Ed Storey, is confident a strong relationship with Chinese importers and recent investment in processing capability will stop the industry being targeted by Chinese trade restrictions. But Rural Bank’s chief operating officer, Will Rayner, told the Guardian the wool and barley industries were similar in their vulnerability to Chinese tariffs.
Rayner said that because China purchased more raw wool than the rest of the world combined, any tariffs “would have an immediate effect on Australian wool exports”.
“This would continue until tariffs were removed or a new market was found. While all Australian agricultural commodities rely to some extent on Chinese demand, the barley and wool markets are particularly exposed.
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“While prices would rise domestically in China if Australian wool was removed from the market [as with barley], the impact would be far more significant to Australian producers than Chinese consumers,” Rayner said.
Richard McGregor, a senior fellow at the Lowy Institute, said “there’s little chance” of Australia’s relationship with China getting substantially better in the near future.
“It’s pretty clear that the relationship has turned for the worst ... Australia has actually said businesses should diversify, and the Chinese will too.”
McGregor said that in light of the barley tariff and rising tensions, wholesalers and importers inside China “will now think there’s a risk of importing from Australia”.
“You’d have to expect that the importers would take the message onboard that Australia isn’t a friendly country,” he said, suggesting Chinese industries would begin diversifying their reliance on Australian goods. “Both sides have made it clear that that’s what they should do.”
While Australia has indicated it might take up the barley tariff decision with the World Trade Organisation, McGregor said trade restrictions would not “stop overnight” and “could get worse”.
He noted a potential intensifying of Australia China tensions that could arise from the South China Sea dispute and other areas of friction.
“There’s wool, there’s iron ore, education, tourism. China can interfere with them all,” he said, noting that imports related to construction, like iron ore, were less likely to be targeted.
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Weihuan Zhou, a senior lecturer at the University of New South Wales’ China International Business and Economic Law Centre, told the Guardian that further Chinese tariff and trade restriction decisions would likely prioritise ensuring local producers could still source the products they needed, but that “agriculture would be an obvious option” to explore.
“It’s really hard to tell which industry will be targeted next,” Zhou said, noting wine, wool and dairy exports could all be targeted.
“It depends on whether the bilateral relations will continue to sour. I’m not quite sure how much impact Australia’s view on Covid could continue to strain the relationship from here.”
Zhou also said that while the Chinese government could theoretically attempt to disincentive students from going to study in Australian universities, such a move was unlikely in the short term as it would “require a very obvious and significant government intervention” that would frustrate citizens and have “a serious impact on China’s reputation”.
