U.S.-China Competition: A View from Australia and the Pacific 

By: Richard McGregor 

July 7, 2025

Australia has long been strung between two poles—a close and longstanding U.S. ally that also sends around 35 percent of its exports to China. The difficulties of managing these dueling relationships are intensifying alongside rising U.S.-China tensions and demands from each country. Australia remains a staunch U.S. ally, but ties with Washington have become strained with the return of President Donald Trump to the White House.

The Trump Shock

In his first term, at least as seen from Australia, Donald Trump seemed to gain the kind of leverage in dealing with China that had eluded previous presidents. Trump was untethered by any political norms or precedent, and unpredictable as a matter of practice. Beijing struggled to respond to his negotiating style until the pandemic intervened and bilateral relations fell into a hole.

In the most important respects, President Joe Biden’s administration maintained policies from Trump’s first term, including tariffs, and built on them, adding sanctions of their own and persuading technology partner countries to sign on. At the same time, at the urging of U.S. allies in the Asia-Pacific, the Biden administration managed to balance its more hawkish initiatives by forging top-level channels to talk to Beijing.

Trump 2.0—from the perspective of Australia, and indeed much of Asia and the Pacific Islands—looks very different. The president remains predictably unpredictable, but the leverage against China that his antics delivered in his first term is struggling to gain traction.

Not only that, Trump seems as willing to turn his rhetorical fire on longstanding allies as he is to target traditional rivals. Unlike friendly fire in war, which is generally a tragic accident, Trump’s political and economic attacks on allies are premeditated, gratuitous, and just as lethal. That makes Trump a potential game changer for Australia, and not in a good way.

Trump’s governing style, symbolized by his near-universal application of tariffs on friends and foes alike, has proved to be political poison in Australia and is already shaping public opinion.

According to new public opinion polling by the Lowy Institute released on June 16, a sizeable majority of Australians surveyed (68 percent) are pessimistic about Trump’s second term. Distrust of the United States has risen sharply by 20 percentage points, with nearly two-thirds of Australians now saying they do not trust the United States to act responsibly on the global stage. 

In Australia’s May 2025 election, which returned Prime Minister Anthony Albanese’s center-left Labor Party to power with a huge majority, the opposition conservatives struggled to overcome public perceptions that they were aligned with Trump. “The Trump effect was the single largest factor that was outside of our control that impacted our campaign,” James Paterson, a senator and spokesman for the center-right Liberal Party, said after the election. “It had a devastating effect on our polling numbers.”

But Australians look at Trump’s America through a split screen. Despite Trump’s own low standing, a clear majority of Australians still strongly support the U.S.-Australian defense alliance. About 63 percent of Australians think the United States would come to the country’s defense if it were attacked—though that figure is somewhat down from previous years.

Coercion with Chinese Characteristics

While Trump’s second term has brought new challenges, Australia and other countries in the region, like Japan, South Korea, and the Philippines have long had to endure disruptions, most notably in the form of economic coercion from China.

China imposed a series of punitive trade measures on Australia in early 2020, the culmination of a lengthy period of tension, notably over Canberra’s decision to ban Huawei from building its next-generation telecoms network in 2018 and its call for an independent inquiry in 2020 into the origins of the Covid-19 virus. China only lifted its last remaining trade blockages on Australia in December 2024.

According to the latest Lowy Institute poll, Australians’ views of China remain deeply scarred by years of bilateral tension. The survey found that only 20 percent of Australians have any level of trust in China, which is slightly higher than the nadir reached in 2022.

This is not surprising, as Beijing has regularly displayed its determination to expand its military footprint in the region and its indifference to Canberra’s requests to provide transparency. This March, a Chinese naval task force conducted unannounced live-fire exercises in the waters between Australia and New Zealand. The ships then circumnavigated the continent of Australia in an unprecedented display of force and capability. The Chinese were unabashed about the optics of the exercises, which they made clear were in response to the Australian Navy’s patrols in the South China Sea and the Taiwan Strait. “If you humiliate us, then we will humiliate you,” a professor at Peking University told me in April.

There has been a degree of stabilization in bilateral ties since the election of the Albanese Labor government in May 2022. The government has made clear that it values the country’s important economic relationship with China, which thrived even during the period when Beijing imposed punitive trade measures. But the government, along with the public, is wary about Beijing’s growing regional influence and its willingness to use coercive tactics, not just against Australia, but in vulnerable Pacific Islands nations as well.

Australia has had deep and very public disagreements with China over many issues in the past decade, such as Hong Kong, the incarceration of Uighurs in Xinjiang, and allegations of interference in Australian politics by Chinese nationals. Since 2022 and the resumption of top-level dialogue between the two countries’ leaders and ministers, deep differences over multiple issues like the South China Sea have persisted.

China has been highly critical of AUKUS, the trilateral Australia-U.K.-U.S. nuclear-powered submarine deal, and Australia’s involvement in the Quad, with the United States, India, and Japan. Beijing has also been frustrated that Australia has continued to sail its naval ships through the South China Sea and joined patrols off the Philippines in tandem with naval forces from the Philippines, the United States, and Japan—events which have been subject to attacks in the Chinese state media.

Dealing with U.S.-China Competition

Beijing, however, has not given up on trying to get Australia to distance itself from Washington. On a recent visit to China, during the same week that Trump’s tariffs were raining down on the country, I was constantly asked one question by Chinese colleagues: can Canberra really maintain an alliance with such an unstable partner as Washington? Trump and his ilk were chaotic, crazy, destructive, and so forth, they said in multiple meetings in Beijing and Shanghai. Why not join a global united front of free traders to push back against Washington instead?

The Chinese were disappointed by the answer, seemingly forgetful that Beijing had only lifted its last punitive trade measures against Australia six months earlier.

The persistent line of questioning was telling, underlining the opportunity Beijing scents in Trump’s actions to advance its longstanding ambition to crack open the West and U.S. alliances.

For Australia and other countries in the region, U.S.-China tensions are like a series of rumbling, undersea earthquakes, primed to send tsunami-like waves washing up on their shores. When those waves will hit, in what form, and how devastating they will be is unclear. Defending against them is difficult in political systems with habits steeped in decades-old policy settings.

Australian governments understand that Trump and his policies were not created in a test tube. Trump has been responding—however erratically, vindictively, and incompetently—to a real problem that many U.S. voters have been angry about for many years. Chinese leaders have promised to rebalance their economy for two decades but have failed to deliver. China’s economic policies continue to turbocharge these imbalances. In 2024, China’s global trade surplus reached nearly $1 trillion. More than half of that was with Europe and the United States, but much was with developing countries as well.

Australia supports the United States in taking the fight to China in multiple contested domains—regionally, militarily, geo-strategically, technologically, and indeed as a democracy competing with a powerful authoritarian state.

But Trump’s fixation on tariffs as the golden bullet to solve America’s problems, the dizzying whiplash from his constant policy reversals, and his undermining of democratic institutions at home have horrified political leaders in Australia—even many conservatives who once supported him. They also believe his actions are undermining his ability to credibly push back against China.

Chinese coercion has long been part of the landscape in Asia. Trump’s return to the White House has meant that Australia and other U.S. allies and partners now have to deal with coercive measures from the United States as well.

The coercive measures from Washington to Australia come mainly in two forms: tariffs and pressure to lift defense spending. Occasionally, U.S. tech giants like Facebook have opened another front by lobbying Washington to rein in Australian regulations targeting their local operations.

Australia has long had a distinctive profile among America’s security allies in the Pacific. Unlike Japan and South Korea, Australia has run a large trade deficit with the United States since, as Canberra likes to say, Harry Truman was president. In contrast to the United States, Australia has a bulging trade surplus with China, its largest trading partner for well over a decade.

In theory, that should have spared Australia from Trump’s tariffs, given that the president’s oft-stated benchmark for whether the United States is getting a fair deal hinges on bilateral trade balances. Australia should qualify for special treatment on that score but got tariffed anyway.

The second bucket of pressure is over what Washington believes to be Australia’s insufficient level of defense spending. This predates Trump but has come to the fore more forcibly in his administration.

In late May, U.S. Secretary of Defense Pete Hegseth made a direct request to Canberra to increase its outlays on the military in a meeting with his Australian counterpart Richard Marles on the sidelines of the Shangri-La Dialogue, the annual Asian defense confab in Singapore. In the words of the blunt Pentagon readout, Hegseth “conveyed that Australia should increase its defense spending to 3.5 percent of its GDP as soon as possible.”

Australia’s defense spending is now just about 2 percent. The federal budget released earlier in 2025 projects it will increase to about 2.4 percent by about 2033, but for the United States, this is far too little too late.

Adding to the pressure from Washington, in June, the Pentagon announced a 30-day review of the AUKUS submarine deal. That move was interpreted in some quarters as another lever to push Canberra to lift defense spending.

How Australia is Responding

Prime Minister Albanese has so far batted back questions from reporters about Hegseth’s demands. “We’ll determine our defen[s]e policy,” he replied before detailing the outlays already announced by Canberra. He concluded, “What we’ll do is continue to invest in our capability but also our relationships in the region.”

On the surface, Albanese’s response seemed like a largely matter-of-fact defense of sovereignty and current policy settings. Reading between the lines, however, Albanese’s words were much more targeted.

Albanese’s statement about investing in Australia’s relationships in the region is a telling statement about his government’s priorities. Certainly, relations with the United States remain paramount. Canberra, Tokyo, and other regional capitals all regularly swap notes about how to keep a Trump-led America engaged in Asia. But Australian day-to-day policymaking is overwhelmingly focused on its near neighborhoods.

First among these is the Pacific Islands, where Australia is in diplomatic hand-to-hand combat with China amidst Beijing’s attempts to establish security outposts in the region. Penny Wong, the Foreign Minister, who is a cautious diplomatic interlocutor, described Australia as being in “permanent competition” with China for influence in the Pacific. Under Trump, the United States has largely stepped back from the Pacific, especially with the abolition of much of USAID, ceding the field to Australia and partners like New Zealand and Japan.

The Albanese government’s other regional priority is Southeast Asia, where it is pursuing a long-term policy to add economic and trade ballasts to mostly healthy, longstanding diplomatic and defense ties.

The U.S. calls for higher defense spending landed in more fertile territory in Australia. Days before Secretary Hegseth’s comments, the Australian Strategic Policy Institute, a think tank in Canberra, released a report saying the country risks having a “brittle and hollowed defense force” if military spending is not increased.

The Australian opposition party supports calls for higher defense spending, as does the military and the national security bureaucracy. The government has thus far shown no inclination to change policy. With a commanding majority, it is expected to stay in power for at least another two terms, or six years. A substantial increase in defense spending thus may be forced by circumstance, potentially by a regional security crisis. Whatever happens, U.S. pressure and political agitation within Australia will ensure that the issue will not go away.

A Hard Balancing Act

Australia has long walked a tightrope between being a security ally of the United States and an economic partner with China. Emerging trends are making that harder than ever.

Beijing has often cited the “complementarity” of the Australian and Chinese economies as an immutably friendly foundation for the two countries. Australia exports resources, foodstuffs, and services such as education. In return, China sells Australia’s finished products like computers, phones, solar panels, toys, and increasingly, cars.

China’s trade blockages in 2020 did not touch the core of bilateral business, iron ore, which powers China’s steelmaking. And the sectors that were targeted, such as coal, barley, and wine, rushed back into the profitable Chinese market the moment Beijing lifted its barriers. After emerging from an intense period of trade coercion at the hands of Beijing, Australia is still sending about 35 percent of its exports to China.

China’s share of Australian exports, though, has likely peaked, largely because steel production in the mainland has been flat for four years. Tepid steel output is capping iron ore prices, which cuts mining profits and the amount of money the government gets from corporate taxes.

Thus, the bounty that Australia has earned through trade with China is peaking as well. Unless new export markets are found, this will cut into Australia’s national wealth, hurt its budget, and in turn, constrict its ability to lift defense spending. But even with slower growth in China, there is no other market of China’s size, appetite, and proximity to which Australia can turn. Decoupling from China is not an option in the short term.

As a result, Australia’s market-driven enmeshment with the Chinese economy will continue to weigh heavily on foreign and defense policy in Canberra and relations with the United States.

Richard McGregor is senior fellow for East Asia at the Lowy Institute, Australia’s premier foreign policy think tank, in Sydney. He is also a senior associate (non-resident) with the Freeman Chair in China Studies at the Center for Strategic and International Studies. Richard is a former Beijing and Washington bureau chief for the Financial Times and the author of numerous books on East Asia.