The S&P/ASX 200 Index (ASX: XJO) has started the week slightly down, dropping 0.24% at the time of writing. Earlier this morning, we discussed how Treasury Wine Estates Ltd (ASX: TWE) share price was also taking a tumble this morning. Although Treasury shares have somewhat recovered at the time of writing, they were down as much as 4% in early trade today. The catalyst? China's Ministry of Commerce confirming there would be a 175.6% tariff on the importation of Australian wine for the next five years. Now officially, this tariff is meant to be an 'anti-dumping' measure.
But it's regarded as something of an open secret that it is actually a byproduct of the current freeze in Sino-Australian relations. Last year saw Australian exports of barley and other agricultural goods curtailed for similar reasons.
But is this only the start of the ASX's 'China problem'?
The ASX's 'China problem'
There are many, many ASX companies that would likely suffer if relations between Australia and China get any worse. Companies like A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB) have suffered from their daigu markets collapsing. Daigou trade involves customers buying products in bulk in Australia, and shipping them to China to be resold. The coronavirus pandemic was largely to blame for A2 Milk and Bubs' initial woes in this area. But it is very conceivable that the deteriorating diplomatic relationship would exacerbate the daigou problem.
The Sino-Australian relationship has now become a pawn in the far larger game of the Sino-US relationship. Earlier this month, Chinese and US officials held a fiery bilateral dialogue. It was the first contact between US and Chinese officials under the new Biden Administration. The US reportedly made re-engagement with Australia a primary condition of any improvement in their own relationship with China. In other words, global geopolitics is now a part of our economic relationship with China.
Suppose this hinders, rather than helps, Sino-Australian relations.
Things could get worse before they get better
Well, the ASX's China problem could get a lot worse. As most investors would know, the primary trade routes between Australia and China run on iron ore, coal, and other commodity resources.
If China really decides that it needs to send a message to the US or to us, this might be the next sector to feel the diplomatic heat. In this case, our biggest miners like BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG) could have a lot of trouble ahead. Imagine a 175.6% tariff on Australian iron ore… That would get every ASX investors' attention, I'd wager.
Even if international relations isn't your area of expertise, it's shaping up as a key flashpoint for ASX investors, whether we like it or not. So watch this space.
