Sydney - Australia's biggest state defied the federal government Monday and instituted what free-trade advocates called a "made in China" ban.

The New South Wales state government has granted local firms preferential treatment when they tender for government contracts.

Goods from Australia will be treated as if they were 20 per cent cheaper than they actually are when comparing them with foreign products.

"This is not about China or any one nation, except Australia," New South Wales Premier Nathan Rees told reporters. "It's about protecting Australian jobs through a difficult period."

The Daily Telegraph newspaper headlined the policy as a "ban on China," warning that the effective trade barrier would invite retaliation.

Foreign Minister Stephen Smith said "this is not the time for Australia to retreat to protectionism."

China is Australia's biggest trade partner and its factories are traditional suppliers of capital items like train carriages and police uniforms while its companies are bidders for building contracts.

Canberra was unhappy when the United States considered putting a buy-local clause in stimulus package bills passing through Congress. Critics argue it would be hypocritical for the federal government to support buy-local measures in its own jurisdiction.

Paul Ritchie, spokesman for the New South Wales Chamber of Commerce and Industry, said the move to protect local firms was a backward step.

"This policy has all the dangers and all the hallmarks of actually increasing government costs at a time when they can't afford it," Ritchie said. "What will ultimately happen is that citizens will pay for it with higher taxes."(dpa)