COVID, Barley and a most unusual Australia-China trade war

Australia and China are in a most unusual trade war. The two countries have spent the last year hitting each other with tariffs and even a few import bans. Things heated up last April when Australia backed an international inquiry into the origins of COVID-19, infuriating Beijing. In retaliation, China struck back at Australian barley, prompting Canberra to file a dispute at the World Trade Organization (WTO). Usual story, right? Wrong.

Like all WTO Members, Australia knew the Appellate Body (AB) was going to fall below quorum and cease operations. Intriguingly, Australia filed its dispute three days before the AB closed shop. This meant that if Australia won, China could strand the case in legal limbo simply by appealing. Was Australia’s filing a faux pas? No, it just might be clever enough to work.     

Canberra ushered in 2020 with temporary tariffs on Chinese aluminum, steel and paper. These actions weren’t terribly provocative. China didn’t challenge any of them at the WTO. But then Prime Minister Scott Morrison’s pushed for a probe into the coronavirus. This was a game-changer. China’s retaliatory strikes came swiftly. Australian exports of meat, barley, wine, coal, cotton, logs and lobsters were hammered by Chinese import measures, almost overnight. 

Australia kept pace with its own dizzying salvo of antidumping duties on various Chinese steel and related products. Canberra also named Vietnam in several of these investigations, but China was the unmistakable target. Australia’s Dumping Commission worked overtime through July.

Chinese retaliation escalated in the fall. Australian barley was scrutinized for health and safety concerns, and then banned, along with coal, logs and lobsters. Beijing urged Canberra to tone down its statements on COVID, Taiwan and Hong Kong. Australia insisted that it wanted to negotiate. 

That’s where things get interesting.

Australia went to the WTO on Dec.16. The case is puzzling for three reasons. First, Australia challenged China’s antidumping and countervailing duties, rather than Beijing’s use of health and safety standards, which triggered the ban on barley in August. A dispute over health and safety standards would have been much more politically provocative, greatly complicating negotiations.

Second, Australia filed at the WTO, not under the China-Australia Free Trade Agreement (ChAFTA). ChAFTA provides for consultations on trade remedies, as well as a high-level dialogue on these measures. Australia might thus have raised its concerns under ChAFTA, but instead the case was recorded as the WTO’s 598^th dispute since 1995.

Third, Australia asked for WTO consultations even though China could bring the case to a standstill by appealing the ruling. The AB fell below quorum a mere three days after this case was filed. Australia had no reason to expect that the AB would be unblocked in a year, which is the ideal timeline for a panel ruling. Was this filing a mistake? No. 

Australia and China both signed up for something called the Multi-Party Interim Appeal Arbitration (MPIAA). The arrangement was created by Canada and the European Union (EU) as a temporary work-around for the AB, built on a WTO process for alternative dispute resolution. If Australia prevails in its WTO case, and China appeals, the two countries will use the MPIAA in lieu of a functioning AB. 

This puts China in a political bind. A case under the MPIAA promises to get considerable attention, given the novelty of the mechanism. Moreover, a trade remedies case against China, especially Australia’s, which runs 26 legal claims, will be high profile, touching on several issues the U.S. and others see as central to WTO reform. China needs to return to the negotiating table to avoid having the case grab headlines like this. Worse, Australia could follow up with a health and safety dispute.

Beijing can exact a concession from Canberra. Australia’s volley of trade remedies at the start of 2020 didn’t help things. The two countries should address this under ChFTA. This would signal China’s commitment to the bilateral, and its willingness to work constructively under the Regional Comprehensive Trade Partnership (RCEP) and, likely one day, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), both of which include Australia as a member. 

The past year has taken an economic toll on Australia’s economic growth. Canberra’s case at the WTO, despite the shuttering of the AB, is a gesture that offers Beijing a chance to walk back a trade war it can’t politically win.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.