Recent research by Capital Economics indicates that worsening trade ties with China could cause the Australian economy irreparable damage and prevent it from returning to pre-pandemic levels of growth even after the coronavirus crisis is brought under control. China, which is Australia’s most important trading partner, has been heightening trade tensions by imposing tariffs on imports such as wine and barley and suspending imports of beef from Australia.

If China imposes more tariffs on imports, the Australian economy could experience a more severe contraction – even as it suffers due to the damage caused by the pandemic and lockdowns. So far, tariffs have already hit nearly 25% of Australian goods and services exported to China, contributing around 1.8% to its economy.

Senior economist Marcel Thieliant observes, “That figure could rise to around 2.8% of GDP if China targeted other products for which it isn’t hugely dependent on Australian imports. While Australia should be able to divert some shipments to other countries, the escalating trade war is another reason why Australia’s economy will never return to its pre-virus path even once the pandemic has been brought under control.”

The research report suggests that China could be considering more tariffs on imports of gold and alumina from Australia. The trade tensions so far are already expected to bring down Aussie GDP by 1.5% of its pre-pandemic levels by the end of 2022, and any more trade restrictions by China could also drive a greater decline in its economic performance.