It’s no exaggeration to say that Australia finds itself in a tough position. It’s managing to expertly steer clear of the choppy waters of the ongoing United States-China trade war. With China being Australia’s largest trading partner, accounting for 26 percent of the nation’s total two-way trade last financial year, the implications of this geopolitical struggle are profound. The stakes are high, as Australia must balance its economic interests while facing pressure from the US to align with its trade policies.
This is a very challenging time. In value terms, China makes up more than 30 percent of all of Australia’s exports—over $212.7 billion worth. The increasing pecking order of discord between Washington and Beijing jeopardizes this massive economic partnership. Australia, unfortunately, is stuck in the middle. With both superpowers slapping on tariffs and trade barriers, Australia now has to walk a tightrope in order to defend its economic interests.
Economic Dependence on China
Australia’s economy, especially its labor market, has been artificially inflated through the high value of its trade with China. The country can also point to a sizable trade surplus with its largest trading partner. This surplus is largely driven by iron ore exports, which are critical to steel production. While this trade relationship has been a great driver of economic prosperity in both countries, it now leaves Australia highly exposed as geopolitical tensions swell in the Indo-Pacific.
The pressure from the US is a complicating factor on top of that. As the US government pushes Australia to take a stand—either inside or outside the tariff wall—the ramifications for Australian businesses and consumers could be severe. The Australian government is under increasing fire to settle key issues. These decisions have the potential to influence the country’s economic development strategy for decades into the future.
Australia is actively working to break China’s monopoly on critical resources, particularly rare earths, which are essential for various technologies. This big, hairy, audacious goal is a sign of Australia’s need to diversify its economy and reduce vulnerability to their only major trading partner. Dismantling this monopoly will require major investments of both time and money, all while geopolitical tensions could worsen day by day.
Domestic Economic Challenges
The sea change hitting Australia goes beyond the new international trade picture. When Prime Minister Anthony Albanese assumed office, he inherited an economy grappling with rising inflation—the worst global inflationary outbreak in half a century—and a painful series of interest rate hikes. Australian families are already under extreme cost of living pressure. All while families are facing the most difficult time to stretch their dollar.
Albanese’s government will have to tread a fine line here, balancing the demands of international trade relations with growing domestic economic discontent. The country’s federal deficit is huge, and productivity is going in the wrong direction. As the government considers fiscal stimulus measures, the potential benefits from a massive US stimulus program could be a double-edged sword. Though effective at offering immediate assistance, such actions would further damage Australia’s global reputation and economic rebound.
As inflation bites deeper into everyday issues for Australians, every move the government makes from here on out will be watched with a hawkish eye. Economists warn that the combination of rising costs and interest rates could lead to further economic instability if not managed effectively.
The Future of Iron Ore Exports
Australia’s iron ore exports are a few short steps from irreversible calamity. The production from the new Simandou mine in Guinea is poised to lead this change. Scheduled to start production within half a year, this new mine would make Australia a significant player in the world iron ore market.
With shipments from Simandou starting in earnest early next year, Australia’s dominance in the iron ore export market could take a major hit. This new competition would drive prices down further. It will further hit Australian exporters who have historically relied on China’s hunger for our iron ore. For Australian officials, staying on guard and being attuned to these currents will be necessary for protecting Australia’s economic interests.
Worse still, the continuing trade war threatens more than just Australia — it threatens the global economy. The economic harm of the tariffs that the US has imposed is significant, impacting US markets as well as those of other countries. As countries are forced to face these economic realities, Australia’s position becomes harder and harder to defend—especially under the current Cold War-influenced environment.
