China Considers More Economic Pain for Australia on Virus Spat

China is considering targeting more Australian exports including wine and dairy, according to people familiar with the matter, in what would be a dramatic deterioration in ties as the key trading partners spar over the coronavirus outbreak.

Chinese officials have drawn up a list of potential goods also including seafood, oatmeal and fruit that could be subject to stricter quality checks, anti-dumping probes, tariffs or customs delays, the people said, asking not to be identified as the discussions are private. State media could also encourage consumer boycotts, they said, adding a final decision on the measures had not been made.

Australia, which is the world’s most-China dependent developed economy, has raised Beijing’s ire by calling for an investigation into the origins of the pandemic. President Xi Jinping’s government is sensitive to criticism of its handling of the outbreak and has a track record of using trade as a diplomatic cudgel, with South Korea, Japan and Taiwan all experiencing reprisals in recent years.

China has already barred meat imports from four Australian slaughterhouses for “technical” reasons, and slapped tariffs of more than 80% on Australian barley late Monday after a long-running inquiry. Any additional measures will depend on how Australia addresses China’s objections, the people said, adding Beijing doesn’t intend to publicly acknowledge any link between its trade actions and the calls for a virus probe.

Shares of some Australian companies that export to China sank on prospects for more trade disruptions. A2 Milk Co., which counts on China for about 40% of its sales, dropped as much as 3.9%, while Treasury Wine Estates Ltd. pared gains on the news.

China’s commerce ministry did not immediately respond to a request for comment and the office of Australian Trade Minister Simon Birmingham declined to comment.

Speaking at a briefing in Beijing on Tuesday, Chinese foreign ministry spokesman Zhao Lijian said the government’s barley investigation was conducted according to WTO rules. He also said China would back a resolution at the World Health Assembly later Tuesday that calls for a “comprehensive assessment” of the pandemic that differs from “Australia’s earlier proposal of a so-called independent global review.”

“We suggest the Australia side to go through the text carefully,” Zhao said. “If Australia is willing to change its course and give up the political manipulation of the pandemic, we will welcome that.”

China is Australia’s most important trading partner, with agricultural shipments alone totaling about A$16 billion ($10 billion) in 2018-19. While the big ticket items of iron ore, coal and natural gas that China needs to build and fuel its economy so far haven’t been mentioned, education and tourism could also be vulnerable to reprisals. Beijing’s ambassador to Australia last month suggested Chinese tourists and students may decide to boycott the nation.

As Australia slides toward its first recession in almost 30 years, the economic hit of more widespread trade measures couldn’t come at a worse time.

The impact “would be very keenly felt given we are in a global recession and Chinese demand is not only very large but a key source of relative strength in the global economy,” said Roland Rajah, an economist at Sydney-based think tank the Lowy Institute. “Finding alternative export markets is difficult in the best of times but virtually impossible right now.”

Any shift of focus to Australia’s mining exports “could signify a real escalation in tensions,” said Rajah, who previously worked at the Asian Development Bank and the Reserve Bank of Australia. “Not only because it is far more important to us, but because China itself would be paying a high price if they went down that path.”

China is Australia’s biggest overseas destination for wine and dairy, with shipments growing to $754 million and $564 million, respectively.

While Australia and China entered a free trade agreement in late 2015, tensions between the two nations have been simmering for years. Passing laws against foreign interference in 2018, Australia accused Beijing of “meddling” in its government, media and education system. Like the U.S., it has also banned Huawei Technologies Co. from building its 5G network on security concerns.

The Huawei ban was seen as the catalyst for China’s barley anti-dumping probe that began in 2018, and a slowdown of Australian coal shipments into Chinese ports. China also restricted canola imports from Canada after the nation detained a Huawei executive.

“China has been practicing economic coercion against many countries over the past 10 years,” said Rory Medcalf, head of the National Security College at the Australian National University in Canberra. “As we’ve seen with the barley tariffs, economic coercion is about applying short-term economic and political pain but it will be difficult for China to sustain such tactics against the wide range of countries that want the pandemic to be investigated. I don’t see that China can succeed in singling out Australia indefinitely on this issue.”

Shi Yinhong, an adviser to China’s cabinet and a professor of international relations at Renmin University in Beijing, said ties between the two nations were more likely to deteriorate than improve, given Australia’s foreign policy alignment with the U.S.

“If the Australian government’s rhetoric is still loud and it sticks to its current demands, China may take more severe countermeasures,” he said. “If the Australian government—mindful of its economic interests and opposition from the business community—steps back, China would not need to take such steps.”