Intensifying US-China trade war leaves Australia in uncomfortable position

Trump has also announced a 90-day pause of ‘reciprocal’ tariffs on Thursday (AEST), which would see most tariffs pared back to a base level of 10 per cent.

The S&P 500 rallied on the news, bolstered by the broad-based reduction in tariffs. However, the escalating trade war between the US and China may affect the Australian economy.

“Based on the lack of respect that China has shown to the World’s markets, I am hereby raising the Tariff charged to China by the United States of America to 125%, effective immediately,” Trump announced on his social media platform, Truth Social.

“At some point, hopefully in the near future, China will realize that the days of ripping off the U.S.A., and other Countries, is no longer sustainable or acceptable.”

While the threats of a broader global trade war have been dampened by Trump’s policy backflip, steep tariffs on China could dampen Chinese demand for Australian commodities by slowing their economic growth.

The US-China trade war has also left Australia in an uncomfortable position.

In an op-ed for The Sydney Morning Herald published Thursday, Chinese ambassador to Australia, Xiao Qian, called on Australia to join hands with China to resist US bullying.

"The only way to stop the hegemonic and bullying behaviour of the US in harvesting the whole world is to strengthen solidarity and collaboration, and to jointly resist," Qian wrote.

"Under the new circumstances, China stands ready to join hands with Australia and the international community to jointly respond to the changes of the world.

“China is also committed to working with Australia to … seize opportunities of co-operation, expand mutually beneficial collaboration and promote greater development of China-Australia relations.”

Deputy Prime Minister Richard Marles rebuffed this sentiment, emphasising Australia’s focus on diversifying its trade and pursuing greater ties with Indonesia, India, the UK and the UAE.

"I don't think we'll be holding China's hand," Marles told Nine News.

"We don't want to see a trade war between America and China, to be clear, but our focus is on actually diversifying our trade.”

China is currently Australia’s largest trade partner by a large margin, comprising 37 per cent of Australia’s export market in 2023, according to data presented by the Observatory of Economic Complexity.

When asked about Australia-China relations, Prime Minister Anthony Albanese said: “We will speak for ourselves. Australia’s position is that free and fair trade is a good thing,” in a Thursday press conference.

He added that Australia would continue to lobby the US for a total abolition of the tariffs on Australia.

China has not signalled any intention to back down from the trade war, and has devalued the yuan in efforts to make its exports more attractive.

“The timing and nature of the yuan’s movement underscore the seriousness of Beijing’s position. It’s not a reckless devaluation aimed at short-term advantage. It is a carefully calibrated message to the White House: escalation will not come without consequences,” Nigel Green, chief executive of global financial advisory firm deVere Group, said.

“By allowing the yuan to weaken, Beijing is flexing its muscles and demonstrating that it holds powerful economic cards it’s willing to play if pushed further.”

The trade war could impair the US economy more than Trump expects. The world has changed significantly since 2001, when over 80 per cent of economies had more two-way trade with the US than with China, according to IMF data presented by the Lowy Institute.

This dynamic has flipped in the intervening years, and China’s lead over the US in international trade has only widened since the US-China trade war of 2018–19.

“About 70 per cent of the world, or 145 economies, now trade more with China than with America,” the Lowy Institute wrote, based on 2023 trade data.

While the threat of a global recession has been tempered after Trump paused sweeping reciprocal tariffs, the trade war unfolding between China and the US could have an outsized impact on Australia, given Australia’s economic reliance on China’s commodity demand.