US-China trade tensions spell trouble for Australia

Trump 2.0 is in full swing and is already causing 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 United States protectionism, especially as most of his 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. Access to the market has significantly impacted how Canberra’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.

Coal imports

What about now? When China banned Australian coal imports in 2020, many assumed the industry would be devastated. Yet it was not. 

It found other buyers. In 2021, China accounted for less than 1% of its coal exports, even as Australia’s total increased by US$19 billion. By 2023, the trade had resumed but China still accounted for only 8% of Australian coal exports, less than half the share in 2020.

If Canberra 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 total exports and China’s share of the market globally.

Energy is crucial to the country’s trade with Beijing, but its most important commodity is by far iron ore. In 2023, China purchased 84% of Australia’s US$85.4 billion iron ore exports. It accounted for 23% of total exports in 2023. 

Finding alternative buyers would be difficult as China purchased 69% of global iron ore exports in the same year.

Australia’s third largest export is petroleum gas, with a 13% share of its export mix. China, the world’s largest importer, accounts for just under a third of these exports. 

The world’s second-largest economy 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% share. Canberra’s trade surplus with Beijing accounted for 4% of its GDP. 

The trade surplus with China also accounted for 10% of GDP growth – measured in current prices – from 2023 to 2024. If it was to shrink or even fail to increase due to tariffs imposed by Trump, it would have a significant impact on Australia’s economy.

Canberra must also understand that the threat is not just tariffs or Trump. Political consensus on US-China economic relations is souring in Washington. Trump started the trade war with China in 2018, but President Joe Biden retained the tariffs after taking office. 

Big risk

While Trump sanctioned Huawei and proposed a ban on TikTok, Biden expanded these sanctions to the entire Chinese semiconductor industry and shepherded a TikTok ban.

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

The big risk for Canberra is increasing American demands on its allies to join efforts to decouple from China. 

This is happening in semiconductors already. Can we expect the US to demand Canberra to follow a path of decoupling from Beijing or else face sanctions?

Would that put at risk military partnerships such AUKUS and ANZUS? 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 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% 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 or foreign production. It could also significantly increase inflation, as new manufacturing would incur higher costs. 

Australia would struggle to afford these higher priced imports as foreign exchange earnings from commodity exports and mining investments would decline, ultimately lowering incomes.

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

Regional actors

Policymakers should also focus on deepening ties within the Asia Pacific to reduce 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 is key to navigating the ramifications of great power tensions.

Madison Cartwright is a Senior Lecturer in International Political Economy and Convenor for the Politics and International Relations Undergraduate Programme at the University of New South Wales in Australia.

This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.