China has slapped an 80 per cent tax on all barley grain imported from Australia. Some say it is retaliation for Australia's push for an inquiry into the origins of COVID-19. But others in the international trade community saw it coming and say the origins and potential ramifications of the dispute run much deeper.

One thing is clear: Australia has finally been engulfed by the global trade wars stirred up by US President Donald Trump, and Australian farmers are firmly in the firing line.

So, what has China done and why? What will it mean for the thousands of barley farmers with crops in the ground? And how do tariffs work?

What has China done?

In November 2018, China announced an investigation into whether the Australian government was unfairly subsidising our barley producers or whether they had engaged in "dumping".

Dumping is said to occur when exports are sold at a price below "normal" value, giving foreigners an unfair advantage against domestic producers.

The implication is that a nation is "dumping" its surplus product in a way that is against the spirit of free trade. However, countries often use the allegation as a guise to protect their local producers from cheaper imports.

Dumping is not illegal but the World Trade Organisation has guidelines about the practice. Most countries – including Australia – have "anti-dumping" processes by which governments can deem a foreign country to be engaging in unfair dumping and impose a tax on those goods to level the playing field for domestic producers.

China also makes the case that the Australian government gives unfair subsidies to our farmers, including drought support and the diesel fuel rebate.

Despite prolonged consultation with Australian farmers and our government, China's Ministry of Commerce has decided to apply a "countervailing duty" on barley imports from Australia.

What's a "countervailing duty"?

It's a tariff, by any other name. What's a tariff? Essentially a tax imposed by a government on goods or services imported from other countries. They are there to protect domestic suppliers – and jobs – from competition.

Tariffs were cut back dramatically during the reform era of the 1970s and 1980s. Economists don't like tariffs because they artificially allow less productive firms to survive, when those resources – of people and capital – would be better deployed doing other more productive things, which would produce higher investment returns and wages.

Tariffs also mean consumers pay higher prices on imported goods because the businesses that import the goods have to fork out for the tariff and tend to pass on the cost to consumers.

Another effect of tariffs is that consumers end up with less diversity in the products available to them because foreign producers don't bother trying to market their goods in a country if they know their goods won't be priced competitively. Instead, consumers tend to get whatever domestic producers make.

Much effort has been expended internationally through multilateral and, more recently, bilateral free-trade agreements to try to get rid of such taxes on trade.

Why barley?

China is Australia's biggest trading partner. We sent $63 billion worth of iron ore to China in 2018-19, $17 billion of natural gas and $14 billion of coal.

Of agricultural goods, beef is our biggest export to China, earning $9.5 billion, followed by non-beef meat ($5.2 billion), wool ($3.8 billion) and wheat ($3.7 billion).

Barley appears in 12th place on the list of our biggest agricultural, forestry and fisheries exports to China in 2018-19, earning $1.38 billion in that year, sitting below wine, cotton, fruit, sugar and wood.

Australian barley producers have become particularly reliant on China in recent years, partly because of a concerted trade push to that nation, and partly because China tends to pay high prices. Some Australian farmers have bred types of barley specially suited to the Chinese market.

China's share of our barley exports has risen from about 30 per cent a decade ago to between 60 per cent and 70 per cent, according to figures from the Department of Agriculture.

Just over 2.5 million tonnes of Australian barley was shipped to China in 2018-19, about 700,000 tonnes to Japan, 370,000 tonnes to Thailand, 350,000 to Vietnam and 100,000 to South Korea. This includes malting barley used for beer production and lower grade barley used for animal feedstock.

But China is the world's largest producer and consumer of beer and it sources its barley from a wide range of countries. By targeting Australian barley, China can make its point while also targeting a good for which its own domestic beer producers have other sources of supply.

What happens after the tariff is imposed?

China's decision is effective immediately. Some grain already on ships may be exempt. But it is unlikely Chinese importers will choose to buy much more Australian barley now that the price has effectively doubled. They will import from other countries.

Australia's barley exporters will try to sell their grain to other countries, mostly other south-east Asian nations, but they are likely to be forced to accept a lower price, given they suddenly have fewer potential buyers.

Farmers who have barley in the ground will suffer a financial loss – which the industry bodies representing the growers estimate at half a billion dollars a year.

Ultimately, farmers who survive will be forced to sow other crops to sustain a living.

Why has China done this?

Some commentators have linked the timing of this announcement to Australia's advocacy of an inquiry into the origins of COVID-19. It's not possible to know exactly what the Chinese motivation is.

But trade observers say China is playing a much longer game and the real grievance is Australian duties charged on Chinese steel imports.

"We slap massive anti-dumping duties on steel and aluminium. It's retaliation for that," says Stephen Kirchner, the program director of trade at the University of Sydney's United States Studies Centre.

It's true that Australia imposes its own "countervailing duties" on a wide range of imports, from Thai pineapples to Italian tinned tomatoes, in a bid to support our homegrown versions. Industries seeking protection from import competition apply to the Anti-Dumping Commission, which decides what level of duty to impose.

Kirchner says there has been bipartisan support from both sides of politics in recent years for ramping up such "anti-dumping" duties.

Despite Australia's free-trade agreement with China, large duties of about 140 per cent still apply to Chinese steel and aluminium products, including pipes imported to Australia. Industries with production facilities and employing workers in politically sensitive seats have proven particularly effective in lobbying the Australian government for such protections.

What can the Australian government do?

Agriculture Minister David Littleproud has downplayed the possibility of retaliatory tariffs on Chinese goods imported to Australia.

The government is actively considering taking an appeal to the World Trade Organisation, the international body that overseas trade disputes.

It is likely Australia would, after a prolonged investigation, win any appeal. But, while the tariff is to run for five years, the damage to farm incomes will already have been done.

And Kirchner warns that going to the WTO over barley would open the way for China to lodge counter-objections to Australian anti-dumping duties on Chinese steel.

"I think if we took them to the WTO they would probably lose the case. The problem is, I think, this is actually a carefully laid trap."

However, the barley industry argues China could bring action against steel duties at any time, and is urging the federal government to act by taking China to the WTO.

One thing is clear: the global trade wars that erupted with Trump's presidency and engulfed the world last year have finally arrived on Australia's doorstep. At a time of heightened economic uncertainty, policy makers will need to tread carefully.