Australia's Strategic Trade Dilemma: Economic Ties with China vs. Defence Alignment with the US

Australia stands at a crossroads, balancing its economic reliance on China with deepening defence-industrial cooperation with the United States. The Trump administration's  America First Trade Policy (2025) and recent executive orders on defence manufacturing have intensified this tension. The situation has become more precarious with the Pentagon's formal review of AUKUS launched in June 2025 under Under Secretary of Defense for Policy Elbridge Colby, coupled with unprecedented tariff expansions on derivative steel, aluminium, and copper products. Despite a temporary de-escalation in US-China tariffs in May 2025 reducing rates from 145% to 30% on US imports and 125% to 10% on Chinese goods, structural shifts toward protectionism persist. Australia's defence integration with the US through AUKUS and the F-35 program now risks colliding with its economic dependence on China of Australia's total merchandise trade ($312 billion in 2024), which accounts for around 30% of Australia’s global trade.

US Protectionism and Escalating Trade Restrictions

The Trump administration's April 2025 America First Trade Policy Executive Summary prioritises domestic industrial revitalisation and retaliatory measures against perceived unfair trade practices. The situation has deteriorated significantly with steel and aluminium tariffs doubling from 25% to 50% effective June 4, 2025, and new 50% tariffs on copper derivative products implemented August 1, 2025. Most critically for Australian defence contractors, the US Department of Commerce expanded Section 232 tariffs in August 2025 to include 407 additional derivative steel and aluminium product codes. These encompass consumer goods, industrial products, transportation equipment, and infrastructure components, all essential inputs for defence manufacturing. The tariff applies to the steel and aluminium content at 50%, while non-metallic components sourced from Australia face the baseline 10% reciprocal tariff.

BlueScope Steel, a critical supplier for Australian naval shipbuilding programs, faces 50% tariffs on US-bound semi-processed steel exports while benefiting from protection for its Ohio-based operations underscoring how tariff policy favours US-based over Australian production. The US has signalled that continued access to defence supply chains may be contingent on Australia mirroring US export controls on China and achieving higher defence spending targets. This represents a marked shift from previous Reciprocal Defence Procurement arrangements, where access was based on alliance trust rather than explicit policy alignment and burden-sharing metrics.

The Elbridge Colby Review: AUKUS Under Scrutiny

The Pentagon's formal review of AUKUS, announced in June 2025 and extended to completion by fall 2025, represents the most significant challenge to the partnership since its inception. Led by Elbridge Colby a known AUKUS sceptic, the review explicitly aims to ensure the agreement aligns with Trump's "America First" doctrine. Secretary of Defense Pete Hegseth has demanded Australia increase defence spending to 3.5% of GDP "as soon as possible," nearly doubling current expenditure of approximately 2% GDP. This pressure intensified after Secretary Hegseth reportedly pushed for specific commitments regarding potential Taiwan Strait contingencies requests that Prime Minister Anthony Albanese correctly rejected as undermining Australian sovereignty.

Colby has reportedly sought "pre-commitments" ensuring US-supplied submarines support American forces in potential conflicts with China. Such demands fundamentally misunderstand sovereign capability development and risk transforming AUKUS from technology-sharing into a mechanism for forward-deploying US strategic assets under Australian flags. The submarine industrial base remains vulnerable. Despite Australian contributions of A$1.6 billion to US shipyard capacity, Virginia-class submarine production has declined from 1.2 submarines per year in 2023 to 1.15 in 2024 well below the Navy's target of 2 annually. This shortfall occurs as the US Navy approaches minimum submarine force levels, making proposed transfers increasingly problematic.

Defence Manufacturing Under Pressure

The expansion of US tariffs to derivative products poses immediate risks to Australian defence manufacturing. Australian firms participating in the F-35 program which has delivered over A$5.1 billion in contracts to 75+ companies supporting more than 2,500 jobs now face enhanced scrutiny over component sourcing and increased input costs. Companies like BAE Systems Australia, producing titanium components for F-35 vertical tails, and Marand, manufacturing F-35 engine trailers, must navigate tariff structures applying different rates to metallic versus non-metallic content. US Customs now requires separate line items for steel and aluminium content values, with companies unable to determine precise metallic content facing tariffs on entire product values.

This represents a fundamental shift from cooperative alliance-based procurement to transactional, compliance-heavy relationships. The F-35 program's integrated supply chains now face fragmentation as tariff structures privilege US-based over allied production, regardless of technical capability or cost efficiency.  Trump's April 2025 Executive Order on Modernizing Defense Acquisitions prioritises "Buy American" mandates, potentially marginalising foreign suppliers. Defence offset agreements securing Australian industry roles face particular threat, with new restrictions on foreign dependency in Major Defense Acquisition Programs favouring domestic over allied suppliers.

Economic Independence vs. Strategic Alignment

China remains Australia's largest export market while recent diplomatic engagement has strengthened economic interdependence. Prime Minister Albanese's July 2025 visit to China yielded significant agreements, including enhanced market access for agricultural products and cooperation in artificial intelligence, green hydrogen, and critical minerals processing. The tariff expansions create acute tensions for Australian resource companies. Australia exports approximately 76% of its steel and aluminium to China compared to less than 1% to the US, yet faces 50% tariffs on derivative products serving US defence manufacturing. Resource dependency exemplifies these contradictions while Australia supplies 95% of its lithium and 70% of its iron ore to China, US pressure forces costly infrastructure investments like Iluka Resources' A$1.65 billion rare earths refinery. The Chinese response has been strategically calibrated. Rather than broad economic coercion, Beijing has accelerated bilateral cooperation where Australia maintains competitive advantages, particularly in education, tourism, and resource processing. This positions China as a more reliable partner than the increasingly transactional US relationship.

Navigating the Strategic Dilemma

Australia faces unprecedented challenges balancing economic prosperity with strategic security. The Elbridge Colby review and derivative product tariffs represent qualitative shifts transcending traditional burden-sharing negotiations. The US now explicitly links defence technology access to specific policy alignments and spending commitments. The path forward requires recognising Australia's leverage as a critical minerals supplier essential to US defence manufacturing. Strategic diversification offers the most sustainable approach accelerating partnerships with ASEAN, the EU, and other democratic allies reduces dependence on any single relationship.

The recent Australia-UK bilateral AUKUS treaty, committing to sustain the partnership for 50 years regardless of US policy shifts, exemplifies strategic insurance against American unpredictability. Sovereign capability investment must be economically sustainable. Expanding the A$2 billion Critical Minerals Fund to build refining infrastructure would satisfy US diversification demands while capturing value-adding opportunities. Diplomatic advocacy must emphasise mutual benefit Australia's $31 billion in US foreign direct investment and contributions to defence industrial capacity represent concrete American interests transcending ideological preferences.

Conclusion

The Trump administration's protectionist policies have transformed Australia's strategic trade dilemma from manageable tension to acute crisis. The precedent of conditional alliance access based on policy alignment will likely persist beyond current administrations. Australia must develop strategic resilience reducing vulnerability to American policy volatility while maintaining beneficial relationships. While defence-industrial integration with the US offers technological advantages, it risks destabilising a $316 billion economic relationship with China. Success requires abandoning illusions that Australia can satisfy all US demands without compromising economic interests or sovereignty. The $312 billion economic relationship with China shouldn’t be sacrificed to appease American protectionism, nor should defence cooperation become a mechanism for US control over Australian trade and fiscal policy.

Australia must leverage its role as a critical minerals supplier and defence partner to both powers through agile diplomacy. Failure to do so could see the nation caught in the crossfire of an escalating techno-geopolitical rivalry that risks both economic prosperity and genuine security, undermining the objectives alliance relationships should serve. This would have profound implications for Australia’s economic sovereignty and regional security.

This article reflects the author's views and not necessarily those of the University of Adelaide or the Export Controls Australia Group.