Squeezed by China's Tariffs, Australian Farmers Cultivate New Markets

By Rhiannon Hoyle | Photographs by Philip Gostelow for The Wall Street Journal

SYDNEY--Alan Sattler had been in his tractor for three hours one morning last May, sowing hundreds of kilograms of barley seeds in Western Australia's arid wheat belt, when he received a text from his grain broker. China, his biggest market, was placing a punitive tariff on Australian barley.

Mr. Sattler surveyed his 8,000-acre farm where he had already planted 2,500 acres of barley. He called the broker. "Now what are we going to do?" Mr. Sattler implored, preceding his question with "a few interesting swear words."

Australia's barley farmers were China's first target in a trade dispute that has since broadened out to commodities including coal, wine and rock lobsters. China was angered by Australian Prime Minister Scott Morrison's call for an international investigation into the first outbreak of Covid-19 in central China, which it saw as meddling by a foreign government.

The trade dispute has cost the country's barley farmers, who had previously exported up to 70% of their crop to China. Still, the industry has mostly weathered the tariff impact, with barley exports increasing and very few bankruptcies, showing that trade pressure has limits on certain industries. Many of the tactics they are using to survive are now being copied by other exporters, such as Australian winemakers and salmon farmers.

Total barley exports are forecast to rise by 64% in the 12 months through October 2021. Traders have pursued sales in other big markets such as the Middle East, although that has come with a painful trade-off: Middle Eastern consumers mostly use barley for livestock feed, not to make beer, and typically pay less.

Farmers are also switching from barley to crops such as wheat, a trade that China doesn't dominate. They have sought a unified response, such as by supporting Australia's challenge of the barley tariff at the World Trade Organization, to prevent divisions that China could exploit.

Australian barley exports to China were worth around $1 billion annually before Beijing alleged that farmers were subsidized to sell at unfairly low prices and imposed the 80.5% tariff, according to analytics firm IHS Markit. Many farmers had poured profits into developing barley varieties sought by Chinese maltsters and brewers.

Other industries have also expanded by feeding China's industrialization and its increasingly affluent middle class. China buys roughly 80% of Australia's iron ore, and it was the top customer for Australian wine, beef and timber before trade tensions escalated. Australia was a popular destination for Chinese tourists and students before the pandemic closed national borders.

A decade ago, China accounted for less than a quarter of Australia's exports. China's share is now roughly 40%. The pandemic has increased Australia's dependency, as China's recovery has outpaced other major economies.

Australia isn't alone in its dependency on China. In 2001, when China joined the World Trade Organization, more than 80% of countries with publicly available data recorded more trade with the U.S. than China, according to Australia's Lowy Institute, a foreign-policy think tank. By 2018, two-thirds of countries were trading more with China than the U.S.

Beijing has increasingly used that growing economic heft as leverage to achieve its foreign-policy aims. Over the past decade, China has used so-called coercive diplomacy 152 times, affecting 27 countries as well as the European Union, according to an August report by the Australian Strategic Policy Institute, a government-backed security think tank. It said 113 of those cases had occurred since the start of 2018.

"Current trade disruptions with China, be they related to meat, barley, lobster or timber, are not isolated incidents," said Rex Patrick, an upper-house lawmaker not aligned with Australia's mainstream parties. "Rather they are a deliberate pattern of punitive measures with the Chinese Communist government putting politics ahead of fair trade."

Australia has been the most heavily targeted by China's coercive diplomacy, ASPI said. Before Mr. Morrison's call for a probe into the pandemic's origins, Australia had banned Chinese telecom firms Huawei Technologies Co. and ZTE Corp. from its next-generation 5G mobile network while also criminalizing foreign meddling in domestic policies that many considered to be aimed at China.

As trade ties soured, China has criticized Australia for raising obstacles to trade. "Since 2016, the Australian government has launched 25 antidumping and antisubsidy investigations against Chinese products," a spokesperson for China's Embassy in Australia said in December.

Beijing had fulfilled its obligations under a free-trade agreement with Australia, the spokesperson added.

How Australia's barley industry weathers Beijing's backlash could offer lessons to countries that anger China and are hit with punitive tariffs. Farmers like Mr. Sattler took a hit to profits, but were able to cultivate other buyers for their barley harvest before switching to other crops.

"A mate of mine said, if you were sitting on the front porch you would have heard 3,950 augers being transferred from barley to wheat" the day the tariff was announced, said Mr. Sattler, 52, a fourth-generation farmer.

Mr. Sattler will cut his barley program by half this year, although he cites crop rotation as well as soft prices for the change.

South Australian producer Andrew Barr plans to cut barley's share of the farm he inherited from his father to 20%, from roughly one-third last year. It will be the least space allocated to the grain in his 20 years on the farm.

Another tactic employed by Australia's barley industry has been to cultivate markets from the Middle East to Japan and Southeast Asia, and even as far away as Mexico, reducing its vulnerability to future trade spats even if China's tariff is lifted. Traders project Saudi Arabia will become Australia's largest market this year.

"We are happy to sell to them, and it has gotten us out of jail this season," Mr. Barr said. "But it's not what I hope the long-term solution is."

Mr. Barr wants the industry to scout maltsters in Korea, Japan, Vietnam, Thailand and India. Those markets pay a premium for high-quality barley and are closer than the Middle East, meaning freight costs would be lower.

Already there are signs that other industries are copying such moves. Treasury Wine Estates Ltd., facing Chinese import tariffs on wine of 169%, plans to ship wines allocated to China to other Asian countries as well as to the U.S. and Europe. The company will also increase marketing in those places.

"We were straight on the phone to the barley guys to talk to them about their experiences, get their advice on how to deal with it and the approach to take," Tony Battaglene, chief executive of Australian Grape & Wine Inc., an association of grape growers and wine producers, said of China's tariff on Australian wine.

Even industries so far spared by Chinese restrictions are responding. Huon Aquaculture Group Ltd., an Australian fish farmer, decided early last year to ship salmon to the U.S. that had been earmarked for China and said it expects to cut sales to China more to diversify away from that market.

These strategic shifts won't be easy or quick as exporters face strong competition, and not all businesses can adopt an identical playbook. Farmers can switch between crops with relative ease.

Australia began consultations with China on Jan. 28, the first step in WTO settlement proceedings. Trade Minister Dan Tehan said Canberra is considering next steps, including whether to request that a WTO panel adjudicate.

For Australia, a commodity like barley makes up a fragment of its economy. "It's huge for a barley farmer," AMP Capital chief economist Shane Oliver said of the tariff. "But it hasn't been a disaster for Australia."

So far, markets targeted by China account for only about 1% of Australia's gross domestic product, he said.

For many, the reordering of markets away from China has long been overdue, even if it brings short-term pain for exporters.

John Blaxland, a professor of international security and intelligence studies at Australian National University, said Australia's trade relationship with China had reached an inflection point that was reminiscent of the U.K.'s decision in the 1970s to join the European Union. Back then, Australia had been forced to reorient its trade efforts away from Britain.

"We have gravitated toward the biggest prize over the past two decades: China," Prof. Blaxland said. "In doing so, we have overlooked opportunities closer to home."

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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  02-25-21 0544ET
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