Australia’s Trade Challenges in 2025

Australia is facing economic headwinds from a variety of external factors which likely will have a significant impact on its growth. Some of those factors—China’s domestic economic situation especially—are beyond Australia’s ability to influence. But Australia retains some ability to influence U.S. bilateral trade policies and should focus on limiting any tariffs President Trump may seek on Australian exports.

Australia has enjoyed a largely uninterrupted streak of economic growth since 1991. This success is ascribed to liberalizing its domestic economy in the early 1990s and becoming ever more integrated into global trade. But global trade has evolved rapidly over the past few years and trade may change even more rapidly this year.

Since Covid roiled supply chains, there have been growing tensions in U.S.-China relations and the Chinese Communist Party (CCP) has made clear its preference for total control over economic growth. The result is that trade flows have begun shifting towards greater onshoring, nearshoring, and friendshoring. Additionally, the McKinsey Global Institute reports that “We’re seeing a continued trend of trade shifting towards geopolitically closer partners, with notable reductions in trade between economies at opposite ends of the geopolitical spectrum.” With China the destination for almost one-third of all Australia’s exports last year, this trend could exacerbate other structural problems for Australian exports to China such as a decline in Chinese investment in physical infrastructure and property development thereby decreasing demand for Australia’s biggest exports to China: iron ore and metallurgical coal.

From a geostrategic standpoint, the CCP will likely prefer imports from other commodity-exporting nations in order to gain greater influence in those economies. Output from mines in developing nations has ramped up after years of Belt and Road Initiative and related investments in the mining sector. This has resulted in Chinese-owned Indonesian nickel mining and smelting and South African and Brazilian iron ore mines taking a greater share of the Chinese market. Developing economies now account for the majority of China’s imports and exports, with ASEAN becoming China’s largest trading partner.

These trends are not the only challenges Australian exporters are likely to face this year.

President Trump has referred to himself as a “tariff man” and “portrays tariffs as a cure-all that can deter war, boost American manufacturing, protect jobs, and raise hundreds of billions of dollars to pay for childcare and tax cuts.” In his congressional confirmation testimony, Secretary of Treasury Scott Bessent said:

The American people should think about tariffs in three ways under the Trump administration. One will be for remedying unfair trade practices either by industry or country a la the Chinese tariffs on steel. Two, maybe for a more generalized tariff as a revenue raiser for the federal budget. Three, President Trump I think has added a third use of tariffs, as you say, as a skilled negotiator . . .

Given its significant trade deficit with the United States, Australia would likely avoid tariffs under the first of Bessent’s triad. However, the Trump administration is actively seeking to reduce the growing deficit in the U.S. federal budget even while lowering overall tax rates and has clearly identified tariffs as a partial answer to the resulting revenue gap. In his testimony, Bessent anticipates new universal tariffs on U.S. imports to start at 2.5 percent rising gradually, to perhaps as high as 20 percent. If this comes to fruition, Australia should not necessarily expect a waiver from these universal tariffs since the overall bilateral trade or security relationship would likely have no bearing on U.S. tariff decision making. During the first Trump administration, Australia was exempted from universal steel and aluminum tariffs because of these other factors.

Since Trump is always negotiating for more, he may use the threat of tariffs to force Australia to invest more in defense—up from the current 2 percent of GDP towards Trump’s stated goal of 5 percent he has said he expects from U.S. allies.

The United States was the fourth largest destination for Australian exports in 2023–2024, with Australian meat, wine, and other agricultural goods comprising most of the imports. If tariffs rose to a level that made these products uncompetitive with U.S.-produced substitutes, the impact on the Australian rural economy could be significant.

Australian officials might make the following arguments for exemptions from any new U.S. tariffs:

• The key geostrategic challenge both countries face is from China. If the Australian economy is weakened by U.S. tariffs, there will be less income available to the Australian government to invest in Australian defense.
• Under the AUKUS framework, Australia has already committed to investing $3 billion to augment U.S. shipbuilding capacity. Further, it will spend many billions more when Australia buys a series of Virginia-class nuclear-powered submarines from the United States. These are clearly major investments in U.S. industrial capacity from another nation. These commitments already stretch the Australian budget. Putting more pressure on the Australian economy will make it that much more difficult to afford these purchases.
• Australia is a key supplier of parts to Boeing (wings for the 787 Dreamliner aircraft) and for the F-35 fighter aircraft. There are no easily sourced substitutes, so tariffs would raise the price of these U.S. finished goods (and increase the cost to the U.S. taxpayer).
• The United States is trying to wean itself off reliance on China for processed rare earth minerals which are essential for a variety of high-tech goods including radar systems, missile guidance systems, electric vehicles, smartphones, wind turbines, and solar panels. Australia is a major source of these minerals and is investing in processing the minerals into metals, thereby helping break China’s near monopoly on this critical U.S. supply chain. Putting tariffs on these goods would simply give China more pricing power and make the United States even more reliant on China.
• Australia invests more in the United States than in any other nation. More than 31 percent of all Australian outward foreign direct investment goes to the United States and this amount has been growing at more than 10 percent annually over the last five years. A decline in Australian income due to tariffs would likely reduce the funds available to continue this rate of investment into the United States.
   

In 2024, the Australian dollar declined almost 5.5 percent against the U.S. dollar and 4.0 percent against the Chinese renminbi. This reflects both a deterioration in Australia’s terms of trade and outlook for trade given the situation outlined above. There is unlikely to be very much Australia will be able to do regarding its trade with China. It should therefore focus on efforts to limit the size and scope of any tariffs the United States may impose.

James Carouso is a senior adviser and chairman of the Advisory Council to the Australia Chair at the Center for Strategic and International Studies in Washington, D.C., and was chargé d’affaires to Australia from 2016 to 2019.