The ‘China’ challenge: now a multi-generational test for Australian strategy

In the week of Australia’s 3 May election, ASPI will release Agenda for Change 2025: preparedness and resilience in an uncertain world, a report promoting public debate and understanding on issues of strategic importance to Australia. This is an article from the report.

Navigating increasingly complex and sharp geostrategic competition while advancing Australia’s long-term national interests will be the fundamental test for the next government. China remains a key systemic challenge in this regard—not just for Australia but for the Indo-Pacific and the rules-based order that has served Australia so well since World War II.

Since entering office, the Albanese government has approached its China policy through the prism of stabilisation—along with the formula of cooperating where we can, disagreeing where we must, and engaging in the national interest. That has worked to reset the bilateral relationship, but stabilisation is a transitionary state, not a strategy. Australia’s ‘China challenge’ isn’t cyclical. It’s structural. And, thus, it requires fundamental change for Australia to retain agency and sovereign decision-making.

Indeed, the current relationship is one of increased diplomacy simultaneously with increased malign Chinese activity, and therefore more uneven. Put another way: when one party is seeking stability and another is seeking to destabilise, the destabiliser will always be dominant until facing pushback.

This means, for an incoming government, the key question is: now that Australia–China relations have stabilised in diplomacy but not security, is there a need for a next phase? The answer should be ‘Yes.’

A mercantilist Trumpian world makes this already difficult task harder. The US–Australia relationship remains crucial to security in the region, but Australia must adapt to new realities. The (slim) possibility of a grand bargain between Washington and Beijing also has the potential to sideline Indo-Pacific allies, including Australia. The risk lies in the potential for a US–China agreement that prioritises perceived bilateral interests over the collective security and economic wellbeing of the region.

The unlikely possibility of a grand bargain isn’t the only threat from the US–China relationship. Ad hoc agreements, such as a potential deal over TikTok that doesn’t solve the national-security risk, will also affect Australia, both nationally and regionally. That’s because any sign that the US will take a purely economic approach to China will probably only incentivise more nations to do the same and become even more (over) dependent on the Chinese economy and technology.

To ensure that the US remains invested in the liberal democratic order in the Indo-Pacific, Australia must clearly and consistently demonstrate to the US the tangible benefits of doing so.

Australia has already faced years of coercion from Beijing for choosing national security and international alliances over economic gain but should expect growing pressure to pick sides in ways that will constrain trade and investment choice. The Trump administration’s America First Trade Policy and America First Investment Policy indicate that countries with close trade and investment ties with China could face new obstacles when investing in the US, while countries without those ties may enjoy expedited access.

Amid this ‘harsh’ competition, we’re seeing China accelerating its efforts to pursue military, economic and technological dominance. China’s military aggression has become more pronounced over the past year. In August 2024, a Chinese spy plane breached Japanese airspace for the first time ever. Later in the year, the Chinese Government held its largest military exercises around Taiwan in almost 30 years. Meanwhile, unsafe encounters between Chinese and Australian military aircraft, initiated by the Chinese, have continued to roil relations.

Compounding this is the ‘creeping normalcy’ of China’s use of coercion to bully its near neighbours and to advance unlawful maritime claims, threaten maritime shipping lanes, and destabilise territory along China’s periphery—namely the South China Sea and Taiwan Strait.

More unusually, in February this year, three Chinese warships sailed 150 nautical miles east of Sydney to what Australia’s Director-General of National Intelligence, Andrew Shearer, described as ‘the furthest south a PLAN task group has operated’. Days later, the Chinese vessels undertook live-fire drills in the Tasman Sea in an unprecedented exhibition of non-allied force—before undertaking an almost complete circumnavigation of the continent. Analysts expect such activities to become more frequent as the PLAN expands its power-projection capabilities south—sending a message not just to Australia and New Zealand, but to Pacific partners as well. The message to, and about, the US shouldn’t be ignored: Beijing was telling the US that it can’t prevent China creating a sphere of influence, and telling regional nations that the US had lost power. It didn’t help that a less than ideal response from the Australian Government was reinforced by no comment at all from the US administration.

Meanwhile, the Cook Islands recently signed a pact to deepen ties with China, without consulting with New Zealand (its free association partner). The prospect of a standing Chinese military presence in the southwest Pacific continues to haunt Australian defence planners. Equally concerning for our economic and fiscal planners are persistent risks associated with China’s debt-trap diplomacy, which is creating significant debt burdens, straining the economies of Pacific nations, diverting resources from essential services and requiring Australia to step in.

In emerging technologies—what’s now the ‘centre of gravity’ when it comes to national power—ASPI’s Critical Technology Tracker confirms that China now leads advanced research in 57 of 64 key fields. Those technologies include many with defence applications, such as radar, advanced aircraft engines, drones, swarming and collaborative robots, and satellite positioning and navigation. The number carrying a high risk of monopoly by China has jumped from 14 in 2023 to 24. China is expected to further expand that dominance over the next decade, and we’re already seeing its investment in research resulting in commercial innovation and leadership (for example, DeepSeek).

The Australia–China trade relationship managed to buck some negative trends in 2024. China lifted tariffs on Australian wine and ended import bans on beef and lobster, effectively ending the active Chinese-initiated economic coercion of Australia underway since 2018. The problem is that it’s a mistake to view coercion as existing only once punishment begins—if the threat of punishment results in one not taking action, then that’s still coercion. And it reflects the state of China’s relationship with Australia, and many others. Beijing removed the economic measures only after Australia suspended two WTO cases, which allowed Beijing to save face from what would have been clear international rulings that China had engaged in unfair trade practices against Australia. Notwithstanding the compromises made by Australia, those developments were significant. China is Australia’s number one two-way trading partner; nearly a third of Australia’s exports went to China in 2023.

Although the ending of bans offers the perception of relief, failure to discern between China’s intent and capability—not just in the economic domain, but across the military, diplomatic and technological domains—puts Australia at risk.

China’s actions, not its words—especially in our own region—should drive our choices. From talking points to policy, Australia’s strategic narrative on China has so far been narrowly fixed in terms of Beijing’s apparent intent. The challenge for an incoming government is to shift that focus to China’s capability.

That doesn’t preclude ‘cooperation’ with China where we think we can and should cooperate, but due diligence must be undertaken. Too often, policymakers and politicians use climate change as the easy example of where we should aim to cooperate but fail to acknowledge that China is the largest emitter of carbon dioxide and that, in all likelihood, cooperation with China on issues such as renewable-energy technologies means facilitating China’s systemic use of modern slavery in regions such as Xinjiang. The key is to ensure that our own decisions don’t constrain our future choices as the price Australia pays for stable or cooperative ties with China.

Crucially, Australia shouldn’t limit itself to only being able to ‘disagree where we must’, but rather disagree where we should for national security and sovereignty. That requires a response framework that focuses in equal measure on ‘prevention’ (minimising the conditions from which Chinese coercion can manifest), ‘protection’ (proactive measures to defend against adverse impacts of such coercion), ‘resilience’ (building capabilities to bounce back quicker where coercion is applied) and ‘deterrence’ (imposing costs collectively to deter the continued use of coercion).

Economically, that means we shouldn’t try to replace the decades-long complementarity of the Chinese and Australian economies. Instead, we should focus on:

—building greater diversification and conscious redundancy—with other regional partners and with Europe

—building the dynamism and productivity of our businesses, including through revised industrial policy settings and increasing adoption of technologies such as artificial intelligence (AI).

While China is Australia’s top trade partner on traditional measures, excluding foreign direct investment (FDI), the US is Australia’s other major trade partner, including FDI. So, it can’t be the case that China’s ranking means it dominates our thinking. With Japan, South Korea, India, the US and Taiwan ranked 2 to 6 (and 2 to 6 accounting for more than the 30% that’s China), we’re as economically dependent on the ‘allied’ powers as we are on China.

In scientific developments and critical technologies, most of our strategic partners—the US, Japan, Britain, the EU and South Korea—are larger and have globally competitive tech sectors they’ve spent decades building. In recent years, those areas have included AI, semiconductors, quantum computing and biotechnology.

By contrast, Australia largely remains a mid-sized mining and tourism–dependent economy with a low national spend on R&D (we sit below the OECD average). Building greater sovereign capability in our science and technology sector is needed to improve the shape and size of our economy, as well as its competitiveness. At present, we also poorly understand the industrial dependencies within our economy. That’s resulting in Australian industries becoming uncompetitive and disappearing. For example, the loss of nickel mines has killed fertiliser production. Building real resilience requires us to understand those complex interdependencies, to take more risks in responding (fail fast, but learn faster), and to build new trusted partnerships while strengthening existing ones.

The next Australian Government should therefore consider the following four strategies.

Reframing the ‘China’ challenge as a multigenerational national enterprise

Commence development of an integrated (public and classified) national strategy—embedded as a standing national enterprise. This needs to start from a holistic view of our national interests and our values to determine not just who we must trade with, but how we must trade with them, the undivided purpose being to make us both more prosperous and secure. We have long worked towards a liberal economic order governed by rules—free trade and free markets. The intent of this national enterprise is to not let China trade (or America First trade) water down our national commitment to a liberal economic order.

This national strategy should be enabled by an appropriately tailored whole-of-government coordination mechanism, potentially the reinvention of a dedicated Australian National Security Adviser role with a secretariat, as ASPI has recommended separately. And it should reflect engagement not just across the federal government, but with states and territories and across the economy, as well as think tanks and civil society.

The Prime Minister should give effect to this proposal by making a national address or statement detailing why such a reframing is critical, and then provide an annual account to parliament of progress against the strategy. That statement should speak plainly to the strategic challenges that confront Australia and the Indo-Pacific region and be focused on lifting public awareness and understanding. The purpose will be to alert, not alarm, and to be accountable for progress.

Behind closed doors, an incoming government should elevate systematic planning to identify points of vulnerability or potential leverage. That includes a review of Australia’s supply-chain resilience across sectors relevant to national resilience.

Embedding economic resilience

Complementing the 2024 Independent Intelligence Review’s call for ‘an uplift in intelligence support on economic security’ and a matching review of economic security policymaking architecture, appoint a Minister for Economic Resilience. This could be modelled on Japan’s approach to coordinating and implementing policies to make its economy more robust, more competitive and less vulnerable to external shocks—and which sits as a crucial component of Japan’s overall national-security strategy.

The ministerial portfolio would involve, among other functions, a focus on:

—securing supply chains (particularly for essential goods and technology); that includes diversifying supply sources, promoting domestic production and reducing reliance on potentially vulnerable foreign suppliers

—safeguarding sensitive technologies and intellectual property from foreign interference or leakage; that includes protecting patents and restricting export of strategically important technologies

—driving a coordinated effort to rebuild manufacturing capability and rethink the industrial ecosystem that drives innovation and productivity; that includes building an understanding of industrial dependencies within our economy where investment is necessary for real resilience.

Enabling this would be a redesign of cabinet decision-making processes through the introduction of an advisory framework that better supports cross-cutting decision-making at the intersection of economic prosperity and security, ensuring that the objectives in each domain are rigorously assessed against the impact in the other. That would require a greater focus within the Australian Public Service on developing ‘dual skilled’ personnel who are equally proficient and capable in economics and in national security.

Blocking a ‘G2’ world

Reinvest in collective action to push back on the risk of a ‘G2’ world, in which the fate of Australia and the region is decided exclusively in Beijing and Washington. The current government has pointed to a multipolar diffusion of power in East Asia as an ideal; that is, while there are two great powers, multiple countries retain global influence and impact.

That should indeed become a more explicit strategic objective, but we also need to recognise that a world of multiple influential nations without an architecture for a rules-based order would be just as bad for Australian security and prosperity. Historically, the US and Europe have been the ‘global police forces’ of the rules-based system. We need to adapt our approaches to ensure that they remain ‘fit for purpose’. That requires Australia to commit to even closer relations with Europe, Japan, the ROK, India and the non-aligned world to drive an agenda of purposeful and tangible reform to the rules-based system.

Doing so also requires the development of a ‘strengthened deterrence’ strategy that reflects the reality that the trans-Atlantic and Indo-Pacific no longer exist as distinct geographical locations. The longstanding judgement that authoritarian regimes don’t trust each other enough to work together is no longer accurate. Countering one adversary now requires addressing the influence of the other.

Enhancing competitive edge

Implement a two-pronged approach that attracts our best and brightest in emerging technologies back home from places such as Silicon Valley, while also offering fast-track visas to top US-based scientists and researchers who are newly out of a job or low on the funding they need to keep their start-up or scientific lab running. All would provide shared benefit to our alliance with the US and close partnerships.

Complementing that would be the implementation of a comprehensive strategy to create an Australian AI ecosystem that drives innovation and enhances economic competitiveness—ensuring Australia’s place higher in the value chain. The UK Government is pursuing such a strategy. That includes driving AI adoption through investments in infrastructure, talent and R&D, while also establishing a flexible regulatory environment and actively encouraging both domestic and international investment in the sector. There’s a focus on sector-specific regulatory approaches, empowering existing regulators and promoting the UK as a global hub for AI innovation and safety. That’s a valuable approach for Australia to consider.