Australia has more reason for confidence in its position in Asia than many would credit.
Asia remains the world’s fastest-growing region. Over the past two years it has faced the largest tariff shock in a century, and largest oil supply shock in at least that long. Yet the growth consequences have been modest. Even at 3.7 per cent in 2026, regional gross domestic product (GDP) excluding China and India is still likely to grow above its pre-pandemic average of 3.4 per cent.
India’s growth is likely to slow by a full percentage point this year, but at 6 per cent plus, will still grow at more than twice the rate of the G20. India’s equity market has had a challenging year. But compared with another big external test, the 2013 taper tantrum, India’s currency, current account deficit, inflation and interest rates have all held up better.
While the foundations of India’s growth accumulate, those of China are eroding. Since the first pandemic headlines in 2019, the parallels between 1990s Japan and present-era China have become more apparent. At 300 per cent of GDP, China’s total debt is approaching levels more common in high-debt, high-income economies. Japan’s is 353 per cent. History is rhyming.
But engagement can no longer be measured purely in trade terms. Trade, business, geopolitics and policy are increasingly intertwined.
Influence
The Lowy Institute’s Asia Power Index measures regional influence. Since the index was first published in 2018, Australia’s overall score has been relatively stable at around 32, with a ranking of sixth. But under the surface much has changed.
Australia’s Diplomatic Influence and Cultural Influence have risen 15 and 11 points respectively, according to Lowy, but Resilience has declined 35 points, reflecting fuel security vulnerabilities and high trade concentration. The question is how consequential these vulnerabilities are.
China’s economic growth is likely to continue slowing, but will remain the largest contributor to global growth for some time. Even more than 30 years after Japan’s property bubble burst, Japan is still Australia’s second-largest export market and third-largest trading partner. China’s GDP is more than four times larger than either India or Japan.
The ASEAN region’s share of Australia’s trade has improved modestly to around 15 per cent over the last three years. That is an improvement on the 13 per cent recorded in 2019, but remains below the 16 per cent reached in 2008.
Australia remains dependent on imported fuel, and 2026's Middle East crisis has underscored the risks associated with that dependence. But 2026 has also shown Australia’s ability to mitigate that vulnerability through regional partnerships and diplomacy.
The March joint Prime Ministerial statement, and July’s Australia and Singapore Landmark Protocol, have improved certainty with Australia’s largest fuel supplier. During an April visit to China, the Australian Foreign Minister highlighted the commodities sector’s dependence on imported fuel and its importance to the bilateral trading relationship. Trade is mutually beneficial but it also creates mutual vulnerabilities.
The simplicity of Australia’s trade also offers some advantages. Not least is fungibility, but another advantage is less direct competition with China.
China’s exports have grown to 16 per cent of world trade in the past few years, comparable with the US share in the 1970s. But its trade surplus has risen to 1 per cent of world GDP, for which there is no historical comparator. China’s share of world trade is unprecedented, and its mix of trade is also changing.
As the Centre for Economic Policy Research has identified, China is importing fewer goods typically exported by advanced economies, while more of its exports resemble the sophisticated products they need. China is increasingly competing with advanced economies in trade they used to dominate.
But Australia remains one of the few economies running a bilateral trade surplus with China. Australia’s relatively simple export basket is difficult to disintermediate. Complexity is just a capability, but raw materials are an endowment.
Divergence
The divergence between Australia’s trade and investment activities has also widened. Cross-border investment over the past five years has grown, across both inbound and outbound flows, with economies such as the US, New Zealand, France and Canada. China is the only economy to show both declining inbound and outbound investment over the same period.
This is an uncomfortable reality, but it is also a common one. Research from the European Central Bank and Bank of International Settlements shows capital flows across all major categories, including foreign direct investment, cross-border bank lending and portfolio investment, are increasingly concentrating among like-minded economies.
Diverging trade and investment flows reflect a broader geopolitical shift rather than a uniquely Australian vulnerability. Australia’s stronger diplomatic and cultural standing in the region strengthens its ability to navigate this complexity, while the simplicity of its trade profile affords greater flexibility than many of its peers.
Australia’s integration with the region suggests it is well placed to adapt to changing dynamics.
Richard Yetsenga is Chief Economist and Head of Research at ANZ
