Many economists argue that Australia’s trade relations with China are both its greatest strength and most glaring weakness. Born out of slow beginnings and later cemented as China grew into a global power, Australia’s economy has never been so dependent on a single country. Although a primary driver in Australia’s prosperity as a nation, the risk of over-concentration and the imperative to diversify are becoming increasingly urgent and apparent.
How did Australia and China become so economically entwined? To begin to understand their current state of trade, it is necessary to trace the evolution of both economies and the key events which shaped the trade relationship.
This relationship can be thought of as three distinct phases. The first of which began in 1901 with Australia’s Federation and ended in 1972, with Canberra’s recognition of the People’s Republic of China (PRC), followed by the Trade Agreement in 1973. In this period of early interactions, trade remained minimal, accounting for only 1% of Australia’s total merchandise trade by the early 1970s. Exports consisted largely of rare-earth minerals, gold, silver and copper, as well as agricultural products such as wheat and butter. Interestingly, in the post-World War II period, wool emerged as a critical export, accounting for an astounding 99% of Australia’s exports to China by 1953-54. Despite this, overall growth remained limited, constrained by the lack of formal diplomatic recognition and the fact that China’s modern economy was still in its infancy.
As mentioned, this changed in 1972, with Australia’s formal recognition of the PRC, normalising relations and paving the way for an explosion in economic activity. The scale of this transformation is best illustrated in growth in merchandise trade, which expanded from $100 million in 1972 to approximately $114 billion in 2011, with China becoming Australia’s largest trading partner by 2012. At the heart of this shift was the immense infrastructure demand of the rapidly industrialised Chinese economy. Unsurprisingly, the two major exports were iron ore and coal. From 2012 onwards, as the partnership reached its present maturity, Australia’s export profile has become increasingly concentrated. China has emerged as the ‘central pillar’ of the Australian trade economy, bringing with it both economic prosperity and a host of risks and concerns.
China continues to hold the top spot as Australia’s biggest trading partner. During the period from 2023-24, it accounted for 32.2% of Australia’s exports and supplied almost one-fifth of its imports. Australia mainly sends iron ore, LNG, coal, and agricultural products to China, while imports from China consist of electronics, machinery, and textiles due to China’s comparative advantage in manufacturing. Since entering into force in 2015, the China-Australia Free Trade Agreement (ChAFTA) has provided preferential market access for exporters from both countries, facilitating trade growth by allowing many goods to enter duty-free.
In recent years, trade relations between the two countries have strengthened further. In 2024, China’s Ministry of Commerce removed tariffs on Australian wine, which boosted exports to China to over A$1 billion as at March 31 2025, and lifted its four-year ban on lobsters, the last of several restrictions that had together cost Australian exporters more than A$20 billion annually. In July 2025, Prime Minister Anthony Albanese’s second visit to China since 2023 delivered more wins: apple farmers across Australia gained access to China’s market, and canola exports resumed after the phytosanitary restrictions in 2020.
However, this close economic tie means any changes in China’s demand can affect Australia substantially. For instance, a recent 6.9% drop in Chinese steel production to 86.55 million tonnes in May, linked to trade tensions with the US, has already dragged down iron ore prices. Therefore, without diversifying, Australia’s heavy reliance on China can prove to be detrimental to Canberra’s economic stability in the long run.
While the economic ties and benefits of trading with China are undeniable, the ever-apparent need to diversify is no longer just strategic, it’s essential. Recent global events—including supply chain shocks and rising protectionism—have intensified calls for resilience through diversification.
To address this, India has emerged as a prominent alternative. With the Economic Cooperation and Trade Agreement (AI-ECTA) entering into force, bilateral trade between Australia and India is projected to surpass $45 billion by 2035. This agreement removed tariffs on over 85% of Australia’s goods exports to India by value, already delivering opportunities for sectors such as agriculture, resources, and education, where the demand from India’s growing middle class is forecasted to expand.
Another possible alternative is Southeast Asia, which also presents as a compelling partner. ASEAN collectively ranks as Australia’s second-largest two-way trading partner, with regional economies like Vietnam, Indonesia, and Malaysia showing robust demand for Australian services and raw materials which is in line with Australia’s raw material strength and the needs to develop its regional relations. Additionally, the government’s Southeast Asia Economic Strategy to 2040 underscores Australia’s most promising sectors—from green energy to digital technologies.
Nonetheless, diversification from China does not entail forgoing the existing partnership. Rather, it means acknowledging the need to rebalance trades with the goal of ensuring long-term economic stability and resilience in Australia’s trade portfolio. By expanding ties with other fast growing economies regionally, Australia’s trades can hedge against geopolitical risks, support domestic industries, and position itself more strongly in an increasingly multipolar global economy.
The choice to trade with China has undoubtedly provided decades of rapid growth, but it also highlights the vulnerabilities that can no longer be ignored. With global dynamics shifting weekly, supply chain disruption frequently occurring and rising geopolitical tensions, the need to diversify Australia’s trading portfolio has become a necessity rather than a choice. Southeast Asia and India prove to be promising alternatives that align with Australia’s strengths in education, raw minerals and agriculture. With industries such as digital technologies and clean energy gaining traction in rapidly developing countries, the choice to rebalance Australia’s trade portfolio would allow Australia to secure long-term economic stability and reduce exposure to external shocks into the future.
Image source: https://www.globaltimes.cn/page/202210/1278174.shtml
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
