The risks to Australia of a US-China trade confrontation

After meeting in Geneva last week, the US and China significantly de-escalated their trade war. 

Having attempted to coerce Beijing into offering policy concessions by massively increasing tariffs on Chinese goods to 145%, Washington backed down. 

As Scott Kennedy, a China expert at leading American think-tank the Center for Strategic and International Studies, remarked, “This is 100% a retreat by the US, not a Chinese cave”. 

China never saw a trade war as being in its interests and had only increased tariffs on American goods in retaliation. So, after Washington retreated, Beijing was happy to step back too. 

The “Liberation Day” tariffs that President Trump announced on 2 April now stand at 10% for China. This is the same level that applies to Australia. 

True, the agreement reached in Geneva was technically a 90-day “suspension” of escalated tariffs by both sides. 

But this is the same pause that the Trump administration also quickly extended to other countries it initially hit with ramped up tariffs.  

Tariffs levied on Chinese goods by the first Trump and Biden administrations remain in place. Trump also imposed a separate 20% tariff on China at the beginning of his second term as retribution for allegedly facilitating the supply of precursors for the drug fentanyl. 

Still, it did not take long for the exorbitant tariffs that Trump imposed last month to hurt America more than China. 

Sure, some Chinese exporters suffered a financial hit, but the US side faced a more toxic domestic political challenge brought on by businesses and consumers reckoning with higher prices and empty shelves. 

When the US-China trade war was seemingly spiralling out of control, there were two buckets of risk for Australia.

The first risk was that a damaged Chinese economy would demand less Australian goods and services. 

With 30% of Australia’s exports going to China last year, Treasurer Jim Chalmers offered the wry observation that, “Australia’s got a lot to lose from a trade war between the US and China”. 

But prior to the de-escalation, there was little evidence to suggest that China’s economy broadly was slowing sharply. That’s no surprise: these days, only one in ten of China’s export dollars owes to the US market. 

And as the Reserve Bank of Australia noted, if a more dramatic slowdown were to materialise, a stimulus package from Chinese authorities could be expected and the Australian dollar would also depreciate, cushioning the blow to the local economy. 

Now that US tariffs on Chinese goods have been slashed, the risk of negative spillovers from China’s economy to Australia has diminished even further. 

The second risk was that as the big players began behaving badly, the multilateral, rules-based trading system overseen by the World Trade Organization (WTO), and upon which Australia relies to protect its interests, would break down. 

But while the rules may not have constrained Washington’s unilateral and power-based instincts, the economic reality dealt by the sheer scale of China’s economy and its integration into global markets has. 

China eclipsed the US as the world’s largest trader of goods more than a decade ago. Nowadays, there are 112 economies that trade twice as much or more with China than the US. For Australia, the ratio is more than triple. 

And smaller players have overwhelmingly opted not to retaliate against the tariffs that the Trump administration has imposed on them. Prime Minister Anthony Albanese explained that doing so would be “a form of economic self-harm” and only see “slower growth and higher inflation” in Australia. 

In other words, the bulk of world trade continues to proceed much as it has previously. 

Relatedly, there is limited evidence to date that countries are willing to depart from core WTO principles, like imposing discriminatory tariffs and non-tariff trade barriers, to curry favour with Washington. 

Last month, US Treasury Secretary Scott Bessent flagged that when considering tariff relief and security guarantees the Trump administration would look more favourably on countries willing to curb their trade ties with China. 

Reflecting on the proposition, and prior to the recent federal election, Albanese remarked that, “It would be extraordinary if the Australian response was ‘thank you’ and we will help to further hurt our economy”.

Post-election, and beginning his second stint as Australia’s Trade Minister, Don Farrell used even stronger language: “We want to do more business with China. We’ll make decisions about how we continue to engage with China based on our national interests and not on what the Americans may or may not want”.

Now that China has forced an American retreat and even staunch US security allies like Australia are holding their ground, countries in Northeast and Southeast Asia are also better placed to call Washington’s bluff or only offer token concessions. 

That said, Australia’s other AUKUS partner, the UK, has done the rest of the international community no favours by being an exception and announcing an agreement with the US that appears to involve preferential access for some of its companies to the American market. 

Australia’s diplomacy should be laser focused on standing in solidarity with Asia-Pacific neighbours to prevent such short-sighted behaviour from spreading. 

Then it would be the US facing a stark choice: beyond 90 days, either relent or else simply accelerate its own marginalisation in the region that both China hawks and doves agree is the world’s most important. 

Professor James Laurenceson is the Director of the Australia-China Relations Institute at the University of Technology Sydney.