What Do China’s Recent Tariffs on Australian Barley Mean for Our Economy?

The impact of China's tariffs on barley on the Australian economy.

Insights

What has happened?

On the 18th of May, the Ministry of Commerce of the People’s Republic of China announced that it will be implementing tariffs on Australian barley for the next five years, effective from May 23rd. This occurred shortly after China also announced it would cease imports of beef from four major Australian abattoirs.

The official reasoning behind the implementation of such tariffs provided by the Ministry of Commerce is that they are a response to their belief that Australia dumps its barley on foreign export markets, i.e exports barley at a price lower than our domestic price level that makes it impossible for the barley industry in foreign economies to compete, and that the Australian Government subsidises its barley industry. Thus, there are two specific tariffs involved; a tariff established as a part of China’s anti-dumping policy amounting to 73.6%, and a tariff established as a part of China’s anti-subsidy policy amounting to 6.9%. Therefore, the total percentage value of the tariffs on Australian barley is 80.5%.

On behalf of the Australian Government, Senator and Trade Minister Simon Birmingham has denied the accusations of dumping and the provision of subsidies.

However, there is speculation that the tariffs are actually a response to Australian Prime Minister Scott Morrison expressing his agreement with the notion that there should be a formal investigation into the origins of COVID-19.  This alternative strand of reasoning has been publicly rejected by both Australian and Chinese representatives.

Syllabus Links

Trade Flows

China is Australia’s largest export partner, and on average, approximately 50% of Australian barley exports flow to China. Therefore, the implementation of a tariff as extensive as 80.5% will most likely decrease the level of Australian export volumes and thus trade flows. This potential downward pressure upon export volumes and trade flows would decrease the overall production of barley and subsequently Australia’s Gross Domestic Product and economic growth. With respect to the aggregate demand equation, AD = C + I + G + (X-M), the external component (X-M) is likely to fall. In fact, the implementation of these tariffs is expected to cost the Australian Grain Industry at least $500 million AUD per year. In more standard economic conditions, this cost may not have been a significant factor influencing growth. However, considering the pressure placed by COVID-19, which is expected to plunge Australia into recession, and the added fact that pre COVID-19 the economy was already experiencing an alarming slowdown (which some economists argued emulated a transition to secular stagnation), the tariffs will most likely have a greater negative impact on growth rates than usual due to this vulnerable and uncertain economic climate. According to theoretical tenets of the business cycle, this fall in production results in a fall in employment as labour is a derived demand, and a related fall in employment would exacerbate the current unemployment problem; the COVID-19 economy and its restrictions have seen slashes to employment across all sectors with unemployment rising to 6.2%.

Depreciation

In China being Australia’s largest export partner, as highlighted in the above section, the Australian economy is heavily reliant upon China. Therefore, the implementation of protectionist policy which diverges extensively from the free trade relationship the two economies have formed and facilitated up until this point is likely to reduce foreign investor confidence in the Australian economy. In doing so, demand for the Australian dollar will most likely shift to the left in the future and thus catalyse a depreciation in the AUD as indicated below. 

Shifting of demand for AUD to the left resulting in depreciation of AUD

Although a depreciation would make Australian exports on the foreign export market more inexpensive, which in standard economic conditions, has the ability to increase export volumes, production and thus output in other Australian industries, it is likely that COVID-19 will prevent the accrual of this benefit. Although Australian exports would be cheaper, demand for exports across the globe is contracting due to the COVID-19 pandemic as seen in the prediction that world trade will fall at a percentage value between 13 and 32%. This can be attributed to the notion that when economic downturn occurs, world trade contracts extremely quickly as governments attempt to salvage their own economy and welfare and hence become more internally focused. This notion is historically supported; in all recent economic downturns, as per the mid 1970s, early 1980s and the Global Financial Crisis, world trade contracted so quickly that it exceeded the contraction of Gross World Product. Therefore, it is unlikely that a more inexpensive price of Australian exports driven by a depreciation in the Australian dollar will translate to greater export volumes, production and output.

Microeconomic Reform

The unprecedented implementation of tariffs from our largest trading partner has raised concerns and pleas for the Australian economy to reduce its reliance upon China. The extent of this reliance is further reflected in what can be considered a direct correlative relationship between the state of China’s economy and the state of the Australian economy. This direct correlation is embedded in the fact that immediately after the USA implemented tariffs on steel against China in 2019, a protectionist policy that did not directly involve Australia in any way, the value of the Australian dollar fell from 0.70USD to 0.68USD as a result of a fall in foreign investor confidence. A diversification of trade direction would require a related shift in the trade mix to adhere to the demand of new export partners. Such changes in trade direction and mix require the implementation of microeconomic reform by the Australian government rooted in education and training which would allow the labour force to acquire the skills required to effectively produce what is demanded. This would catalyse the diversification of Australia’s narrow export base which has commodities as its centrepiece. This narrow export base has been deemed to be more fragile than expected as reflected in our economy that continues to plunge against the backdrop of COVID-19. However, the likelihood of this reform occurring in the short to medium term is low as the key priority of the government is to battle the impending recession as effectively as possible via macroeconomic policy.

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