Treasurer Josh Frydenberg has acknowledged escalating trade tensions with China are very serious, but insists Australia will dig itself out of the coronavirus economic slump.

Mr Frydenberg argues household spending – rather than exports – will drive Australia’s economic recovery.

“Consumption is 60 per cent of GDP so consumption is absolutely key,” he told reporters in Canberra on Wednesday.

Mr Frydenberg said while net exports shrunk during the past three months, the economy still managed to grow by 3.3 per cent.

However, Australian exporters heavily reliant on China have been brought to their knees by deteriorating trade ties.

China has slapped huge tariffs on Australian wine and barley and launched strikes against seafood and timber.

If China stopped buying Australian coal and iron ore, the national economy would crumble to pieces.

Appearing before a parliamentary committee, Reserve Bank governor Philip Lowe said there were economic consequences from trade tensions with China, but would not speculate on the extent.

He noted the two countries’ central banks maintained a productive relationship.

Jennifer Westacott from the Business Council of Australia said strained relations with China were “very tricky” but the government was handling the situation well.

Ms Westacott said Australia needed to practice “principled realism”.

“We’ve got to keep our principles – our sovereignty, our security – and the realism is of course the reality that we do need to continue to trade with China. It’s a very important market,” she told 2GB radio.

The trade tensions have been exacerbated by a diplomatic dispute over propaganda shared by a senior Chinese official.

The doctored image depicted an Australian soldier holding a bloodied knife to the throat of an Afghan child.

US ambassador Arthur Culvahouse blasted China for spreading “disinformation through fabricated images and disingenuous statements”.

Mr Culvahouse said Australia responsibly investigated and disclosed war crime allegations against special forces soldiers in Afghanistan.

“The PRC would do well to follow Australia’s example and disclose to the world all it knows about the origin of the COVID-19 virus,” he said.

“And the world can only wish that the Chinese Communist Party were to bring the same degree of transparency and accountability to credible reports of atrocities against the Uighurs in Xinjiang.”

Prime Minister Scott Morrison has appealed directly to Chinese Australians to insist bitter relations between Canberra and Beijing have nothing to do with them.

“Our Chinese Australian community will continue to play an important role in ensuring we remain a successful, multicultural nation,” he posted to WeChat.

Mr Morrison also used the post to take a swipe at China for its reaction to alleged war crimes by Australian soldiers in Afghanistan.

“Where there are alleged events that have taken place that require action, well we have set up the honest and transparent processes for that to take place,” he said.

“That is what a free, democratic, liberal country does.”

Australia’s key intelligence allies have also criticised China for pushing its provocative and antagonistic propaganda post.

Meanwhile, hundreds of politicians from 19 countries are urging their citizens to drink Australian wine this December to show Chinese President Xi Jinping the world will not be intimidated by bullying.

Australia’s agriculture and trade ministers have met with winemakers to draft an appeal against the Chinese trade sanctions.