Renewed US–China Tensions Spell Trouble For Australia’s Economy – Analysis

Trump 2.0 is in full swing and it is already causing major anxieties for the global economy. Australia must navigate US–China tensions with careful consideration of its economic realities. Ongoing negotiations for exemptions from US President Donald Trump’s proposed tariffs on imported metals do not shield Australia from reinvigorated US protectionism, especially as most of Trump’s ire has been targeted at China.

While Australia’s trade relationship with China gets a lot of attention, its importance is not always fully grasped. Australia’s access to the Chinese market has significantly impacted how Australia’s political economy developed, creating path dependencies that are costly to break. The China-fuelled mining boom of the 2000s influenced the allocation of economic resources, raised its standard of living and affected its political culture. It has also shaped expectations on government dealings with issues like fiscal policy and economic prosperity that benefit from the booming Chinese commodity imports and deflationary exports.

What about now? When China banned Australian coal imports in 2020, many assumed that the industry would be devastated. Yet it was not. Australia found other buyers for its coal. In 2021, China accounted for less than 1 per cent of its coal exports, even as Australia’s total coal exports increased by US$19 billion. By 2023, trade in coal had resumed but China still accounted for only 8 per cent of Australian coal exports, less than half the share in 2020.

If Australia could adapt to losing the Chinese market for its coal, will Trump’s tariffs on China really be so bad? It is important not to draw the wrong lessons from this experience. Australia’s vulnerability lies in how much its exports rely on the Chinese market, the high share of these goods on Australia’s total exports and China’s share of the market for these goods globally.

Energy is crucial to Australia’s trade with China, but its most important commodity is by far iron ore. In 2023, China purchased 84 per cent of Australia’s US$85.4 billion iron ore exports. Iron ore accounted for 23 per cent of Australia’s total exports in 2023. Finding alternative buyers would be difficult — China purchased 69 per cent of global iron ore exports in the same year.

Australia’s third largest export is petroleum gas, with a 13 per cent share of its export mix. China, the largest importer of petroleum gas in the world, accounts for just under a third of these exports. China is a big importer of Australian services as well as goods. In the 2024 financial year, China was the largest importer of Australian education services, with a 24 per cent share.

Australia’s trade surplus with China accounted for 4 per cent of its GDP in the 2024 financial year. The growth in the trade surplus with China also accounted for 10 per cent of the growth in GDP — measured in current prices — from 2023–24. If the trade surplus with China was to shrink or even fail to grow due to tariffs imposed by Trump, it would have a significant impact on Australia’s economy.

Australia must also understand that the threat is not just tariffs or Trump. Political consensus on US–China economic relations is souring in the United States. Trump started the trade war with China in 2018, but president Joe Biden retained the Trump-era tariffs. Trump first sanctioned Huawei and proposed a ban on TikTok, but Biden expanded these sanctions to the entire Chinese semiconductor industry and shepherded a TikTok ban through Congress.

China is flexing its economic power too, imposing its own export bans on materials used in semiconductor manufacturing. Rising economic tensions between the United States and China is the new normal — and Australia is caught in the middle.

The big risk for Australia is increasing US demands on its allies to join efforts to decouple from China. This is happening in semiconductors already. Can we expect the United States to demand Australia to follow a path of decoupling from China or else face sanctions, risks to AUKUS and ANZUS or other forms of coercion? And what would that mean for Australia’s economy, standard of living and political stability? These are the questions Canberra should be considering.

Decoupling from China will be costly for Australia not just because of exports. If Australia and other US allies stop buying Chinese computers, toys or smartphones, where will they turn? China supplies 49, 60 and 59 per cent of global exports of these products respectively and dominates many other markets.

Of course, all of this could be manufactured elsewhere, but that would require substantial investment in domestic manufacturing or foreign production. It could also significantly increase inflation, as new manufacturing would likely incur higher costs. Meanwhile, Australia’s ability to afford these higher priced imports would weaken as foreign exchange earnings from commodity exports and mining investments decline, ultimately lowering incomes.

Despite the legitimate security concerns over China’s policies, Australia must be realistic about its economic vulnerabilities. The Australian government should embrace the ‘pragmatic’ approach that had previously characterised Australia’s foreign policy towards China.

Policymakers should also focus on deepening ties within the Asia Pacific to reduce Australia’s security reliance on the United States and economic reliance on China. Existing institutions, such as the ASEAN-centred Regional Comprehensive Economic Partnership, provide good mediums to engage with China productively. Cooperation with other regional actors which face common challenges is key to navigating the ramifications of rising great power tensions.