Spotlight on Australia - June 2025

Any small, open economy depends on its major trading partner to flourish. Canada and Mexico need the US, Sweden and the Netherlands need Germany, and Australia needs China. As the major trading partner goes, so does the smaller dependant trading partner. Australia, thus looks to be well placed for the long-term. However, nothing is static and Australia has shown an amazing ability to move its orbit to different major trading partners as needed. It helps when you are rich in natural resources and have good domestic and foreign access to capital.

Australia’s dependence on China

In 2024, around 35% of Australia’s merchandise exports by value went to China. Australia exported around the same amount to China as it did to its next 5 major trading partners (see chart below).

Breaking it down by product, in 2023, 57% of exports to China were iron ore, 9.3% were minerals, and 8.8% were natural gas.

China has been Australia’s largest trading partner since 2009, when it replaced Japan. Or to explain it in terms of the top export to each country: iron ore exports to China overtook coal exports to Japan (see chart below).

Coal exports to India may overtake those to Japan in the future but are far short of iron ore exports to China.  

China is also Australia’s largest export market for services with a 13.3% share. 76% of these services are education-related travel services.

China is also Australia’s largest import partner with AUD 116 billion in 2024, followed by the US at AUD 93 billion, and Japan at AUD 32 billion.

Whatever way you look at it, China is Australia’s most important trading partner!

A history of adaptation

However, as already mentioned, Australia’s most important export partner used to be Japan. And Japan held this position from the 1970s through to the 2000s, which includes the collapse of the Japanese asset bubble in 1991.

Before that and going all the way back to colonial times, Australia’s main trading partner was the United Kingdom with merino wool exports dominating. Australian wool fed the textile hungry mills in northern England. In 1924-25s, Britain’s share of Australian exports was 42%. 

For much of Australia’s early modern history, the United Kingdom was both the world’s preeminent military and economic power.

Australia’s reliance on Britain changed with the end of the British empire, the economic rise of Japan from the 1950s and Britain’s entry into the European Economic Community (a forerunner to the EU ) in 1973. Only now, post-Brexit, is Britain looking again to Australia with interest.

The chart below illustrates Australia’s movement from exports dominated by wool to Britain, coal to Japan, and iron ore to China (bars).

The chart also shows that Australia became less reliant on commodities over time (line). This was because of the development of manufacturing in the 1940 and the deterioration in the terms of trade for agriculture in the 1970s to 1990s.

Australia’s Merchandise Exports: Share of Top 5 Commodities to Total Exports

The rise of China and the commodity supercycles in the 2000s saw the price of iron ore and coal price push Australia’s terms of trade back up (see chart below).

Despite the pandemic, a Chinese property crisis, and slowly recovering Chinese consumers, the chart shows that the price for Australia’s commodities remain high.

Future prospects

In the next few decades, Australia may face less demand for iron ore from China as Chinese investment in African iron ore starts to pay off. Chinese growth will also move into a more mature stage. But demand will remain strong as China continues to develop more of its hinterland and income levels rise.

India will become more important but may eventually ween itself off Australian thermal coal as it embraces other forms of energy. Australian LNG may gain ground there.

South East Asia lies on Australia’s doorstep, with Indonesia having the 4th largest population in the world. The ASEAN economies have already grown tremendously since the 1990s but there is still plenty of room for growth. In 2023, Australia exported USD 36 billion to South East Asia, bettered only by the individual countries of China and Japan. Minerals and agriculture dominated (see chart below).

Australia should also benefit going forward from its rare earth minerals and has the attributes to develop a strong green hydrogen industry. The Australian government announced in 2024 that it would be investing AUD 8 billion in green hydrogen over 10 years.

Australian Exports to South East Asia by product, 2023

Final thoughts

Australia has ridden on the back of its bountiful natural resources. From wool to coal, and coal to iron ore. No new champions such as rare earth minerals and green hydrogen beckon.

Australia has also benefitted from its relationships and geography. First from its colonial relationship with Britain, and in the second half of the 20th century, from the economic rise of Japan and then China.

China’s rise is still in full stride with South East Asia likely to underline the rise of the region more generally. Australia is well placed to benefit from a booming backyard. 

However, Australia is more than minerals. The mining industry is well supported by a strong banking and financial system and world-leading technology. And under the export-orientated mining sector lies an advanced service-based economy. Australia’s natural resources should be seen as a strong foundation to Australia’s growth not as a weakness.