A study by the economic research company Capital Economics suggests that Australia’s economy has been hit hard by escalating trade tensions with China, and growth may “never return” to pre-virus levels, even when the pandemic is over.

China, which is by far Australia’s largest trading partner, was the recipient of 39.4% of exports of goods and 17.6% of exports of services between 2019 and 2020, the company indicates in a note.

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According to its chief economist, Marcel Thieliant, Australia’s GDP could contract further if Beijing continues to rack up tariffs on other Australian imports. For its part, in early December, Canberra launched a World Trade Organization (WTO) investigation into Chinese trade taxes, which were increased by more than 80% in spring 2020.

Goods and services already in the firing line make up nearly a quarter of Australia’s exports to China, constituting 1.8% of its gross domestic product, the company claims.

“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”

the report added.

Tensions between the two nations have grown in recent years, largely started after Canberra banned the rollout of 5G networks by Chinese tech companies Huawei and ZTE. Relations soured further after Australia called for an international investigation into the origins of the coronavirus outbreak in April, prompting accusations from Beijing that Australian lawmakers were acting on Washington’s orders.

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• WTO allows US to impose duties on European exports in response to Airbus subsidies
• WHO to launch Second Response Plan against Covid-19
• Hong Kong GDP has begun collapsing at its highest rate
• Japan to send “surveillance aircraft” to the Middle East

According to Capital Economics, Beijing could impose more restrictions, including exports of gold, alumina (a raw material used in the industrial sector) and a “wide range of smaller items.”

“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”

Thieliant said.

Overall, the country’s GDP could fall short of pre-pandemic levels by about 1.5% by the end of 2022, while additional trade restrictions by Beijing could further widen that deficit. However, the pain could be mitigated if “Australia finds other destinations for its exports,” the economist concluded.