Shifting Tides: Australia's China Strategy in 2025
It's China – and Trump - that will shape Australia's fortunes this year and beyond
With all eyes on US President Trump over the past month, the world’s second superpower has quietly slipped from global headlines. Until this week, when China’s DeepSeek unveiled its artificial intelligence (AI) model which rivals the advanced American AI, but at a fraction of their costs. The story triggered a meltdown of the US stock market and marked another milestone in the US-China tech race.
For Australia, it underlined how China's trajectory in 2025 will profoundly influence our economic and strategic prospects. Australia is a canary in the coalmine of the three forces of geopolitical change – fragmentation, competition and economic security. China is the main driver of these forces. It shapes our globally integrated economy and strategic geography.
2025 will be a testing year for Australia-China relations, as both Canberra and Beijing face a confluence of economic and political pressure points, amidst global geopolitical upheaval.
Economic interdependence under strain
China’s sluggish economy and the end of the commodities super cycle that has driven Australia’s iron ore trade with China spell trouble for our already slow-growth economy. China’s steel production is falling faster than expected. Just last week, Rio Tinto reported a 1% decline in its iron ore shipments. Australian grain producers are also pointing to a softening demand from China.
Stabilisation of the bilateral relationship and lifting of the remaining trade impediments delivered a bump to Australian exports in agriculture over the three years. But structural forces of urbanisation, free trade and middle-class expansion that fuelled Australian trade with China over the past four decades are giving way to a cycle of slower economy, economic security and protectionism.
Add to it Australia’s own ill-conceived policy to put a brake on another core export industry – international education, and two of our top four exports are under pressure.
In Washington’s shadow
Donald Trump will cast a large shadow on the Australia-China relations. Trump’s high-tariff trade policy is sending shockwaves across the global economy. Bilaterally, Australia is in a good place. We are close allies, a major buyer of US defence equipment, and run a trade surplus with the US.
But there are risks. Trump may put additional pressure on those US allies that continue to enjoy a healthy trade relationship with Beijing to be a part of his China-decoupling coalition. Washington might demand a more aggressive stance towards Beijing as a condition of continued strategic support, injecting further uncertainty into AUKUS. The new US Administration may choose to sharpen its approach to Taiwan and the South China Sea, which will force Beijing into an escalatory position.
In trade, Trump tariffs on China would drive down the demand for Australian commodities and exacerbate protectionism, further weakening our economic prospects. Conversely, Trump won’t hesitate to ignore the US allies’ interests, if they stand in a way of securing a grand bargain with Beijing. This will leave Australia trapped in China’s sphere of interest.
The biggest unknown remains Beijing’s strategy to withstand Trump, which will be a combination of appeasement, diversification, negotiation and retaliation. China’s toolkit could include an asymmetric punishment of the US allies and partners – especially those with close trade ties to China. Conversely, China may seek to drive a wedge between the US and its allies by offering market access and investment opportunities in exchange for neutrality.
Broken geopolitical promises
China has an important role to play in the trajectory of this decade’s deadliest conflict – the war in Ukraine. The war continues to destabilise the global energy and commodities markets and makes an already dysfunctional multilateral system largely redundant. The war also sucks up the political energy and policy attention of Australia’s key ally – the United States.
Trump’s ambitious promise to end the war within 24 hours of becoming a President, which has been recently extended to 100 days, looks more and more unrealistic, as Russia and Ukraine’s positions harden and prospects of a compromise dim. As the key economic and geopolitical partner of Russia, China has an influence on the course of the conflict. But Beijing is unlikely to use it, as it is focussed on the heightened competition with the United States, and its relationship with Russia takes precedence. Even though such scenario remains a distant prospect, the test to the China-Russia “no-limit” partnership would come if Beijing decides to use its friendship with Moscow as a bargaining chip in its “deal” with the United States.
The end of bipartisanship?
The forthcoming federal election could become a critical inflection point in Australia's China strategy. While foreign policy rarely features in the Australian elections, this year might be different. Growing partisan divisions, particularly on security, economy, climate and energy, suggest a potential shift towards a more confrontational approach to China. A Peter Dutton-led government might unwind the current diplomatic stabilisation, risking renewed economic retaliation from Beijing and making Australia an outlier in the region seeking to be a geopolitical middle-ground.
Opportunities persist
But it’s not all doom and gloom. The relative success of Labour’s China, US and the Pacific policies showed that Australia can trade and compete strategically with China at the same time.
The potential of our economic relationship is also far from realised. Australia can play a role in China’s next-stage commodity boom – the one focussed on minerals fuelling the global renewable energy revolution, which China champions. Australia’s own ambition to be a renewable energy player will also benefit from Chinese technologies, equipment, talent and investment, with the right risk controls in place. Australian food exports to China have a potential to grow. China continues to be a net exporter of talent and private capital. As both seek to escape from the slow-growth and interventionist environment at home, they can find a home in Australia.
Australian universities may benefit from China’s fledging talent. The higher education sector, while under domestic pressure to curb onshore international student numbers, could leverage transnational and online delivery models to grow their market share and diversify revenue, including in China, where the demand for higher education remains high.
Strategic Hedging
In an era of geopolitical flux, Australia's optimal strategy remains a nuanced engagement with China, informed by national interest and prudent risk management. Our strategy to simultaneously trade and maintain strategic boundaries with China has proven achievable. China is not in decline, is better prepared to deal with Trump and will remain at the core of the emerging global system, even if its economy stumbles and politics lurch further into authoritarianism. In a world struggling to find a new equilibrium between competition, confrontation and interdependency, the best strategy is hedging your bets, especially on declining and resurgent superpowers.
Australia has so far shown it can manage the hazards of its relationship with Beijing by resetting diplomatic and trade ties while staying firm on our core values and interests. Australia's success will depend on its capacity to chart a measured course between Washington's forceful volatility and Beijing's defensive confidence.
Grasping 2025
For Australian companies active in international markets, 2025 is likely to be a challenging year. But with some strategic planning, renewed foresight capability and closer engagement with policymakers, avoiding calamities and capturing opportunities with China is possible. Here is where to start:
1. China plus strategy still makes sense. China remains an attractive market for Australian commodities, agricultural products and education services. But geopolitical volatility is on the rise and diversification must be a strategic imperative. In the rapidly changing global trade system, it’s worth looking towards markets in the Middle East, South-East Asia, India, Central Asia and Latin America – geoeconomic “swing-states” seeking to reduce their risks vis-à-vis China and the United States.
2. Watch China more closely. China will require extra attention this year as the country’s policymaking gets into gear to rekindle economic growth and respond to Trump.
3. Build your understanding of the US. Few businesses can afford to ignore President Trump’s wholesale disruption of America and the global trade order. Watching China in 2025 will also include watching a rapid fire of policymaking in the United States.
4. Deepen connections with the Australian foreign policy ecosystem. Australian government and the strategic research community are critical sources of intelligence and insights for Australian business in this age of geopolitical upheaval. Regular, pro-active engagement with the Australian foreign policy ecosystem on China is a must for 2025.
5. Investing in your own geopolitical risk muscle: Not all big foreign policy thinking can be outsourced to governments or consultants. Geopolitical risks emanating from policy decisions in the global centres of power have a real and often immediate impact on Australian business. Business must invest in its own geopolitical capabilities – from boards to middle management. This will take time, but 2025 is a good year to start.
Governance is a logical starting point. China expertise would not be wasted on Australian boards, as they are getting increasingly more attuned to geopolitical risks. Many boards are imbedding geopolitics into the work of their risk committees by establishing early warning systems for geopolitical and economic shifts and testing their management teams through robust scenario-planning.
Building internal geopolitical management capacity will go a long way in assuring both boards and shareholders that a company is prepared to deal with the rapid structural changes and emergencies in the market. American and European companies, burnt by their experiences in Russia and during COVID are actively investing in geopolitical intelligence and analytical functions, adding geopolitical risk to their enterprise risk frameworks. Fostering external China and regional expert networks and advisory relationships will add another useful independent source of intelligence for boards and executives. For those exposed to China and the United States, the return on investment in your in-house and on-demand geopolitical capabilities is now far more clear-cut than even during the pandemic.
Finally, corporate diplomacy is increasingly a part of a business toolkit for dealing with global volatility. To stay ahead, most Australian export-oriented businesses will need to ramp up engagement with our political, foreign policy and industry ecosystems. Many will also need to rely less on Australian resources and networks and develop nuanced, relationship-based diplomatic strategies for the governments, regulators and stakeholder groups in their core global markets.
This is an abridged version of the GRASP Briefing (January 2025) – a quarterly letter to clients on the geopolitical developments and strategies for resilience. An edited version of this briefing was published by the Lowy Institute’s The Interpreter on 30 January, 2025.
Image: Photo by Kayla Kozlowski on Unsplash