Balancing act: Debate continues around Australia’s economic v national security

This relationship was reinforced by preferential trade agreements and a shared strategic outlook. However, as Britain’s global influence declined after World War II and its focus shifted towards European integration, Australia was forced to diversify its economic partnerships.

The latter half of the 20th century saw the nation pivot towards Asia, with Japan emerging as Australia’s largest trading partner during the post-war economic boom. The export of coal, iron ore and other raw materials fuelled both Australia’s prosperity and the rapid industrialisation of key Asian economies.

By the 1990s and early 2000s, China’s meteoric rise transformed Australia’s economic landscape. The sheer scale of Chinese demand for Australian commodities – particularly iron ore, coal and natural gas – drove unprecedented economic growth, with China becoming Australia’s largest trading partner by a significant margin.

This economic windfall, however, came with risks. Australia’s heavy reliance on Chinese markets – accounting for over a third of total exports – created a dangerous vulnerability. The relationship was largely transactional, with Australia supplying the raw materials that underpinned China’s industrial expansion.

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Unlike past economic dependencies, such as those with Britain and Japan, Australia’s reliance on China came with no deep strategic alignment or shared political values. As geopolitical tensions have escalated, Beijing has increasingly used trade as a tool of coercion, imposing tariffs and restrictions on key Australian exports such as barley, wine and beef in response to political disagreements.

This economic dependence has highlighted critical national security concerns. The ability of a foreign power to disrupt key sectors of the Australian economy raises questions about economic sovereignty, resilience and long-term security. In response, Australia has begun efforts to diversify its trade relationships, strengthen domestic manufacturing and invest in strategic industries.

However, the path to reducing reliance on China remains complex, requiring a fundamental shift in economic policy, trade diversification and stronger alliances with like-minded nations. As Australia navigates this economic transition, balancing prosperity with national security will be one of its most pressing challenges in the years ahead.

Highlighting this reality and the growing need for the nation and its policymakers to take the intersection of economic and national security more seriously is ASPI senior fellow Rajeswari Pillai Rajagopalan in a piece for ASPI Strategist, titled When dealing with China, Australia must prioritise security over economics.

Weak foundations

Australia’s economic foundation, while prosperous on the surface, rests on increasingly fragile pillars. The nation’s wealth is heavily concentrated in a handful of sectors, many of which rely on unsustainable trends, external demand or government intervention. At the core of this structure is the overwhelming dominance of the resources sector, which has long been the driving force behind Australia’s economic growth.

Mining exports – particularly iron ore, coal and natural gas – generate substantial national revenue, funding public services and infrastructure while masking underlying structural weaknesses in the broader economy. Similarly, Australia’s agricultural exports provide an important, though smaller, pillar of economic strength, supplying global markets with grain, beef and dairy.

Beyond these resource-based industries, much of the domestic economy is built on less secure foundations. Government-dominated sectors such as healthcare, social services and education account for a significant share of employment and gross domestic product (GDP), yet their expansion is largely dependent on public spending rather than organic productivity growth.

The real estate sector, fuelled by speculation and high levels of household debt, has been a major driver of economic activity, but its long-term sustainability is increasingly questioned, especially in the face of rising interest rates and affordability concerns. Meanwhile, Australia’s niche services sector – comprising professional services, finance and tourism – remains relatively small compared to other advanced economies, limiting the country’s ability to transition towards a more knowledge-based economy.

Higher education, another key pillar of the economy, has also become heavily commercialised, with universities relying on an influx of international students, primarily from China and India, to sustain their financial models. This dependence on foreign enrolments exposes the sector to geopolitical and economic shocks, as seen during the COVID-19 pandemic when border closures led to massive revenue losses.

Highlighting this inherent vulnerability in the Australian economy, Rajagopalan said, “China’s economic importance cannot be allowed to supersede all other Australian interests. For the past couple of decades, trade has dominated Australia’s relations with China. This cannot continue. Australia needs to prioritise its security interests when dealing with Beijing, and it shouldn’t overestimate or overstate its vulnerability to China’s coercive trade practices.”

The nation’s vulnerability to economic coercion has only become increasingly obvious, even to average Australians on the street, with Beijing’s latest overt attempt to shape Australian public perception with a series of live-fire naval exercises in the Tasman Sea and the successful circumnavigation of the continent by a heavily armed surface action group.

But this is only the most recent and openly visible effort of coercion by Beijing. Its economic coercion has been going on for longer than just the rather blunt attempts and efforts of China during the COVID-19 pandemic, something Rajagopalan believes will only become increasingly common as China continues to emerge as the world and region’s superpower.

Critically, as the era of globalisation continues to die a slow, agonising death – driven in large part by the second Trump administration – and gives way to an increasingly competitive national interest and sovereignty, Australia and its economy will require a significant decoupling and restructuring to limit exposure to further Chinese coercion.

It is equally important, to understand that Australia certainly isn’t alone in facing these challenges, and Beijing’s willingness to resort to economic coercion to achieve its national ambitions and objectives, Rajagopalan added, “China has repeatedly used trade sanctions against smaller economies – such as Norway, Canada, Sweden and Mongolia – for perceived slights and other political reasons. But it has never really benefited from doing so, instead gaining a reputation as a bad and unreliable actor. Its trade threats in the past few years have been more bark than bite, with most targeted countries, including Australia, standing their ground and China eventually backing off.”

Rajagopalan detailed this, saying, “Economic issues are important for political leaders, especially in democracies, where everyday issues take precedence even over discussions about national security. This is probably why Albanese highlighted the government’s success in boosting trade and addressing disputes with Beijing – even though many of these disputes were of China’s doing, rather than Australia’s.”

“But Australian leaders should also recognise that China is not simply doing us a favour by trading with us. It benefits from the goods and services that Australia offers and the revenue from what it sells. This is a mutually beneficial relationship, and disruptions will affect China too,” Rajagopalan further said, highlighting the country’s seemingly impossible challenge to overcome.

However it isn’t impossible to overcome, at least in theory.

Decoupling, diversifying and strengthening the economy

Despite frequent satire, including the well-known Utopia skit, Australia has failed to address the deep structural weaknesses of its economy, instead doubling down on vulnerabilities – such as over-reliance on China and single points of failure – despite the hard lessons of COVID-19.

The nation continues to embrace “burnout economics”, where cracks in the system are temporarily patched through quantitative easing and record migration. While these measures boost overall GDP, they fail to deliver meaningful per capita growth, masking the broader economic fragility beneath short-term fixes.

However, diversifying the economy presents a way out of this bind and a lesson for future policymakers. Rajagopalan said, “While China may be able to source its mineral and other resources from other parts of the world, Australia can similarly find other markets for its resources, as it has in response to previous Chinese trade obstruction. China buys from Australia for a variety of reasons, including price, quality and the predictability of supply. These are not values it can get from anywhere. In many countries, resources are in conflict zones that are difficult to access.”

Such an approach isn’t without its challenges or its impacts domestically, but the short-term pain becomes long-term pain the longer we delay decoupling and diversifying the national economy. Rajagopalan detailed this further, saying, “Any trade disruption would likely hurt Australia more than it would hurt China, but it would still damage China’s economy. There is a reason why previous trade punishments have targeted a few niche products, such as wine. China has not targeted critical items, such as mineral resources, precisely because it knows that its own economy would face difficulties if it did so. As China’s economy slows, the cost of transitioning away from Australian goods and services rises.”

This is where Australia can – with a little imagination, some crafty policy and regulatory reform, combined with deft diplomacy – accelerate our decoupling of the export economy from a single point of failure, diversifying our industrial base to strengthen the national economy.

In order to deliver this, Rajagopalan said, “Australia should initiate talks with its European and Indo-Pacific partners, as well as the US, to present a united front against such threats. China can make threats and apply sanctions only against countries with smaller economies, and only because it thinks they will have to face such sanctions alone.

“Even if sanctions are ineffective – as indeed they have been – we cannot let China assume that it can get away with such behaviour without consequences. A united response to China’s trade bullying is needed to deter and, if deterrence fails, punish China for such aggressive action.”

So what are we waiting for?

Final thoughts

Australians urgently need come to terms with a series of uncomfortable realities in the years ahead – realities that will fundamentally reshape the nation’s position, role and security.

First and foremost, while the world is shifting towards a multipolar order, the Indo-Pacific is rapidly emerging as the most contested region on the planet. This transformation is being driven by the growing economic, political and military power of nations such as China, India, Pakistan, Thailand and Vietnam, alongside the established and re-emerging capabilities of Japan and South Korea. As competition intensifies on Australia’s doorstep, the strategic landscape is evolving in ways that demand a recalibrated national response.

Second, both the Australian public and policymakers must accept that, without a sustained period of investment, reform and strategic foresight – what could be likened to our “Rocky montage” moment – Australia risks declining economic prosperity and strategic relevance. Without proactive measures, future generations may find themselves living in a country increasingly outmatched by rising regional powers, with diminished economic leverage and security autonomy.

To navigate this complex future, Australia must move beyond the short-term thinking that has long characterised its diplomatic, strategic and economic policymaking. Since Federation, successive governments have largely focused on immediate economic gains and reactive policy responses rather than playing the long game. Now, as the Indo-Pacific undergoes rapid transformation, Australia must take a more forward-thinking approach to fully capitalise on emerging opportunities and mitigate growing risks.

The most pressing question is not whether these challenges exist but rather when Australia will develop a detailed, strategic response. When will policymakers articulate a clear narrative that helps both industry and the public understand the nation’s evolving position? When will we see a comprehensive plan that addresses these shifts and ensures Australia is not left vulnerable in an era of intensifying great power competition?

As China continues to assert its economic, political and strategic influence, Australia faces a choice: remain a secondary power or embrace a more independent, assertive role in shaping the future of the Indo-Pacific. The decisions made now will determine whether Australia thrives in this new era – or is simply carried along by the currents of history.

Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below, or get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it. or at This email address is being protected from spambots. You need JavaScript enabled to view it..