It’s the trade dispute that has soured relations between Australia and China and threatens a $500m a year blow to the Australian economy.

But what is at the heart of China’s decision to slap 80% tariffs on Australian barley exports? And will Australia follow through on its threats to go to the trade umpire to challenge the decision?

How important is China to Australia’s barley industry?

China is the largest export market for Australian barley, where it is used to make beer and feed livestock, so the tariffs are likely to bring significant pain to the industry.

China imported 2.5m tonnes of barley from Australia last financial year, which is down from a peak of 5.9m tonnes in 2016-17, but still very significant. Industry data show China made up more than half of Australian barley exports in 2018-19. The next biggest export market was Japan, with 746,000 tonnes, while other (much smaller) destinations were Vietnam, Thailand, South Korea and the Philippines.

The Australian grain industry has warned the new tariffs will at the very least disrupt, but more likely completely halt, shipments of barley to China because the impost will drive the price up to prohibitive levels.

“It is estimated this dispute could cost Australian grain industry and notably rural and regional economies at least $A500m per annum,” a statement issued by Australian grain industry groups said.

Pat O’Shannassy, the chief executive of Grain Trade Australia, warned that the impact would be broad and “there will be additional reverberations through regional economies”.

Why is China imposing tariffs on Australian barley?

There has been a lot of speculation about the role of Australia’s strong advocacy for an independent investigation into the origins and early handling of the coronavirus outbreak, a stance that has attracted strong pushback from China, which interpreted it as a political “manoeuvre” against Beijing.

But the official reasons for the tariffs are much more mundane, and stem from investigations China launched in late 2018.

Australia’s trading practices have “caused material injury” to China’s domestic barley industry, according to two determinations published by China’s commerce ministry on Monday. The main issues cited are “dumping” – when a product is sold at a lower price overseas than it is in the country where it is produced – and government subsidies.

Which companies are named?

China’s commerce ministry has specifically named four companies, including the Iluka Trust, a family farming business in the south coast of Western Australia whose crops include barley, canola and wheat. The named companies are Kalgan Nominees Pty Ltd, JW & JI Mcdonald & Sons, and Haycroft Enterprises.

Industry sources have told Guardian Australia these are farming businesses that represent just a small subset of the country’s barley growers.

Even though those four farming businesses are named in the anti-dumping announcement, China’s move also applies broadly to “all others” – and is levied at the import stage of the process. Any companies importing barley from Australia will pay the same 73.6% duty from 19 May onwards. In addition, a tariff of 6.9% will be applied across the board based on claims the Australian industry gained an unfair advantage from government subsidies.

How long will the exporters be affected?

The new tariffs are to be imposed for a period of five years starting from 19 May 2020 – although there is a provision for affected parties to seek an interim review.

How has the Australian government responded so far?

The Australian government and the industry strongly reject the Chinese commerce ministry’s recent findings on dumping and subsidies.

The trade minister, Simon Birmingham, said, for example, it was “completely ridiculous” for the Chinese government to consider measures such as Murray-Darling Basin infrastructure upgrades as a type of subsidy to barley exporters, when the bulk of the barley production was in Western Australia and South Australia and involved dry-land farming.

But what are Australia’s options?

In the first instance, the Australian government will keep trying to lobby the Chinese government to cancel the tariffs. It plans to spend the next couple of days talking with the Australian farming sector and industry to work out the next steps.

Birmingham said it was “very disappointing that China has, to date, refused to schedule minister-to-minister discussions” as this would be the best way to resolve disagreements.

But if there is no breakthrough, he has made clear that the government would “reserve our rights” when it came to seeking to having the dispute resolved through the World Trade Organization.

The agriculture minister, David Littleproud, said the government was “serious” about the possibility of going to the WTO, noting it had previously taken Canada to the global trade umpire over wine and had taken India to the body over sugar.

What are the downsides of a WTO referral?

Taking action through the WTO is not a quick fix, because such disputes can drag on for years and the top appellate body’s functioning has been under strain as the US has blocked appointments.

The freeze had led Australia to work with China and the European Union in recent months to set up a temporary mechanism to rule on disputes, replicating the WTO’s top umpire’s functions.

China has been the third most active member in the WTO’s dispute settlement system, having been involved in 65 disputes between 2002 and 2019. In two-thirds of those disputes, China was the respondent, according to analysis by the Center for Strategic and International Studies (CSIS).

China had a high-profile victory late last year when an WTO arbitrator ruled China could impose tariffs on up to $3.6bn of American goods over a US failure to abide by anti-dumping rules.

But according to the CSIS ChinaPower Project, Beijing has a “mixed record of compliance with WTO dispute rulings” because in some cases it has found creative ways to demonstrate legal compliance “while sidestepping the spirit of certain decisions”.

What other factors could be behind the move?

The move comes amid broader tensions over Covid-19, but the Australian government says it takes at face value the Chinese government’s claims that there is no link.

There is, however, increasing attention on China’s announcement last week that it would immediately allow barley imports from the US, which was seen as a measure to meet commitments in the first phase of Beijing’s trade deal with Donald Trump.

In January, China pledged to buy an extra $US200bn of American farm products and other goods and services over two years.

On Tuesday the opposition leader, Anthony Albanese, called on the government to seek clarity from the US about the arrangements “and whether that has disadvantaged Australia”.

The move last week was framed by Chinese state media as a potential problem between Australia and the US, with the Global Times asking: “If US agricultural products take over Australia’s share in the Chinese market, then who is the antagonist of Australian businesses, China or the US?”

However, the US produced just a third as much barley as Australia did in 2018, according to data compiled by the Food and Agriculture Organization of the United Nations. And China’s own domestic barley output is small: 1.5m tonnes a year, compared with 9.3m tonnes in Australia in 2018.

China imported a total of 8.9m tonnes of barley in 2017 – indicating it heavily relies on barley sourced from overseas rather than its small domestic market.