Of beef and barley: Why China and Australia are feuding—and what it means for the U.S. trade war

May 19, 2020, 11:21 AM UTC

China dealt a blow to Australian farmers when it confirmed it will place an 80.5% tariff on Australian barley imports starting Tuesday, China’s Ministry of Commerce announced on Monday.

The tariffs escalate already-high tensions between China and Australia that began in April when Australia called for an independent probe into the origins of the coronavirus that first emerged in Wuhan, China.

Both sides argue publicly that the trade spat is just that: a lingering disagreement about barley prices that stretches back to 2018. That rhetoric reflects the traditional nature of Beijing-Canberra relations, which have long separated trade from politics. But now, as Australia casts a global spotlight on China for its role in the coronavirus pandemic, there’s unmistakable spillover between the two.

“Trade tensions will escalate if China perceives that Australian actions or policies could damage its interests and international standing,” said Hans Hendrischke, professor of Chinese business and management at the University of Sydney Business School. And that’s the case “with the COVID-19 inquiry.”

A two-track relationship

Australia and China have a strong bilateral trading relationship. China is Australia’s biggest trading partner; around a quarter of Australia’s total imports come from China, and more than a third of all its exports go there. Australia, meanwhile, ranks 13th in China’s export destinations, and sixth among its import sources.

Australia and China have operated with a “two-track relationship” in which political tensions are kept from tainting commerce and trade, said James Laurenceson, director of the Australia-China Relations Institute at the University of Technology Sydney.

Sowing of Barley in Victoria As China Slaps Duties on Australia's Crop
Barley silos at a grain facility in Victoria, Australia, on May 18, 2020. China slapped anti-dumping duties on Australian barley for five years as diplomatic tensions escalate between the two trading partners.
Carla Gottgens—Bloomberg via Getty Images

The two have butted heads politically in recent years, including recent run-ins over military exercises in the South China Sea and concerns about Chinese state influence at Australian universities. In 2018, when Australia banned Chinese telecommunications company Huawei from participating in the country’s 5G rollout, China’s ambassador to Australia, Cheng Jingye, called the ban “a sore point” and criticized the Australian government for “discrimination against the Chinese company.”

The last visit to China by an Australian Prime Minister was in 2016, and current leader Scott Morrison, who assumed office in 2018, has not received an invitation to visit his counterpart in China—an illustration of the enduring iciness within the countries’ diplomatic relations.

But even with those political spats, the bifurcated model has meant the economic relationship between China and Australia has “continued to go from strength to strength,” Laurenceson said. Australia’s exports to China grew 26% year over year in 2019, and its imports from China rose 15%.

But the trade restrictions of the past few weeks have “really raised this question again of whether that two-track approach is sustainable in the long term,” Laurenceson said.

China’s new tariffs will apply to $980 million to $1.3 billion worth of barley. The duties could cut Australian farmers off from the lucrative Chinese market, where they sell the cereal grain at a premium to beermakers. Australian barley prices have dropped 20% to 30% since the tariffs were announced, the Australian Broadcasting Corp. reported.

Besides the barley tariffs, China suspended meat imports from four Australian slaughterhouses, and Cheng, the ambassador, called the proposed inquiry into the origins of the coronavirus “politically motivated.”

“Maybe ordinary people [in China] will say ‘Why should we drink Australian wine? Eat Australian beef?’” Cheng told the Australian Financial Review in an April 26 article.

Around 30% of exported Australian beef goes to China. The four suspended slaughterhouses represent 20% of Australian beef exports to China; the other 80% of exports are proceeding as normal.

Operations Inside Bindaree Beef Ltd. As China's Money Could Help Kill Two Cows Every Minute in Australia
A holding paddock at a Bindaree Beef facility in Inverell, Australia, in 2016. The China-Australia spat has touched Australia’s massive beef industry as well as its barley sector.
Carla Gottgens—Bloomberg via Getty Images

But, Laurenceson said, it would be unwise for China to ramp up the conflict.

“China’s reputation globally is under a lot of pressure at the moment, so I don’t think it really serves China’s interests to be using trade as a weapon to punish countries for political disputes,” Laurenceson said.

Nor would Beijing want to engage in a protracted trade dispute that might harm economic growth. Chinese commerce minister Zhong Shan said on Monday that China is facing “unprecedented challenges in foreign trade this year” owing to a drop in global demand sparked by the coronavirus pandemic.

“Trade is mutually beneficial by definition. If trade stops, yes, it hurts Australia, but it hurts China as well,” Laurenceson said. “It’s pretty hard not to suspect that this is an example of some politics spilling over into the economics, but given its limited scale, I’m more interpreting it as a bit of a shot across the bow—a bit of a warning—rather than China seriously setting out to inflict major economic damage on Australia.”

The two countries have complementary economies and “a degree of mutual dependence” that China wants to maintain, Hendrischke said.

China depends heavily on Australia’s reliable supply of raw materials—Australia supplied 62% of China’s imported iron ore in 2019, and 40% of China’s liquefied natural gas comes from Australia—and consumer goods that are in high demand from its growing middle class. Australia also serves as a “testing ground” for Chinese companies planning to enter Western markets, and as “a training ground for China’s global elite,” Hendrischke said. (One in every 10 Australian university students is a Chinese national.)

“China has been careful to flag the recent tariffs as technical issues and not as political sanctions,” and there’s a “big difference” between the two, Hendrischke said. Political sanctions are an official statement that “relations have been damaged across the board,” while technical trade issues like the beef and barley export barriers “can be resolved behind the scenes [and] withdrawn at any time if the two sides reach a consensus.”

The U.S. role

A notice on the China Customs website posted on May 14 said China will start importing barley from the U.S., fueling speculation that U.S. barley could replace Australian barley exports to China, though Hendrischke said these speculations are “premature.”

Such a move would benefit the U.S. economically but would damage American standing in Australia, Laurenceson said. “If it’s seen that the U.S. is actually taking advantage of Australia’s dramas with China, that will cause some pretty serious reevaluation of the U.S. relationship in Australia.”

The U.S. and Australia have a long-standing security alliance that ties the two countries together in their political scrutiny of China. “If you look at Australian foreign policy over the last few years it’s probably become more closely aligned to the United States,” Laurenceson said.

In April, Australia participated in military exercises with the U.S. in the South China Sea near waters jointly claimed by China and other countries, as the U.S. criticized China’s territorial claims as “bullying behavior.”

Australia also concurred with U.S. actions in 2018 when it barred Huawei and ZTE, another Chinese telecom equipment company, from taking part in its 5G rollout. Hendrischke called the ban a “spillover” from the U.S.-China disputes.

“While China has no illusions about Australia’s commitment to its allies, it is signaling to Australia what actions are perceived as provocations,” namely the COVID-19 inquiry effort, Hendrischke said.

China’s trade dispute with the U.S., in turn, might well temper China’s trade actions toward Australia in the long run.

“I still don’t think China’s keen to open up multiple fronts of a trade war when, of course, China’s main focus is the trade war with the United States,” Laurenceson said.