Chinese spinning mills have been told to stop buying Australian cotton and the industry could soon face tariffs of up to 40 per cent.
China is the biggest buyer of Australian cotton, considered the highest quality of all import origins, and the trade was worth about A$900 million ($637 million) during the 2018/19 crop year.
Relations between Beijing and Canberra have worsened in recent years, with China appearing increasingly willing to use a range of economic and political tools to demonstrate the cost of poor relations.
China's northern port of Dalian bans imports of Australian coal and caps overall coal imports from all sources to the end of 2019 at 12 million tonnes.
China has now started targeting cotton imports, Australian producers said on Friday, adding to an ever-expanding list of products targeted by Beijing as relations between the two countries continue to sour.
"The millers essentially get a quota they can import, and essentially they're being told they might not get their quota next year if they buy our cotton", an Australian government source, who was briefed on the matter by Australian officials in China, told Reuters.
China is Australia's top trading partner, buying more than 30% of exports from Down Under.
'Despite these changes to our industry's export conditions, we know Australian cotton will find a home in the worldwide market, ' said Adam Kay, Cotton Australia and Michael O'Rielley CEO and Australian Cotton Shippers Association chair.
"Impeding the ability of producers to compete on a level playing field could constitute a potential breach of China's global undertakings, which would be taken very seriously by Australia".
Two China-based cotton traders said many mills had received verbal instructions early this week or the last. The move will hit supply of top cotton grades.
China suspends barley imports from Australia's largest grain exporter CBH Grain after pests were found, and orders stricter inspections of Australian wheat and barley.
"The Australian cotton industry will continue having meaningful conversations with stakeholders to fully understand this situation, and we will continue working with the Australian government to respectfully and meaningfully engage with China to find a resolution", statement said in the release.