A man surfing a wave with a container ship behind

The problem isn’t that free trade was wrong. It is that the system in which free trade paid is no longer the system we inhabit (Nimity Boronia/Unsplash)

The trade climate has already changed: Canberra is still adjusting too slowly

Global protectionism has hit record highs, and Australia’s diversification push hasn’t caught up.

Alicia García Herrero

17 September 20264 min read

Any data showing the degree of trade protectionism in the world only heads north, and nobody should be surprised – certainly not Canberra.

A Trade Policy Activity Index (Opens in new window) compiled from World Trade Organisation (WTO) and International Monetary Fund (IMF) sources shows global trade-policy intervention from January to May 2026 running at nearly double 2024 levels and about 25% above the 2025 average – the highest peak since tracking began after the global financial crisis. The surge is driven by tariffs, import bans, and subsidies. Measures that ease trade have lost relative momentum. G20 governments lead, but the rest of the world is following.

This is the operating system Australia now trades in, and it’s not going to change any time soon. Industrial policy has been relegitimised. Economic security has substituted any commercial logic. The US has wrapped most of its import bill in new duties. Washington and Ottawa are no longer on talking terms, trade-wise. The EU has proposed “buy European” procurement rules. China answers with export controls and state support. Smaller economies copy the script because the alternative is to be the last open market in a closed neighbourhood.

Merchandise trade hasn’t collapsed. First-quarter 2026 volumes still rose (Opens in new window), lifted by demand for semiconductors and other AI infrastructure. That is sometimes read as proof the old order is holding, but it isn’t a good argument. Goods are still moving through a thicket of interventions, not because governments have rediscovered comparative advantage. Supply chains are being rewritten by statute.

Realism doesn’t mean joining the subsidy race to the bottom or wrapping the economy in tariffs.

There is no serious prospect that the WTO will put the old system back together. The 14th Ministerial Conference (Opens in new window) in Yaoundé failed to agree even a modest reform package. Members couldn’t restore a functioning dispute-settlement system, couldn’t settle the development fight over policy space, and allowed the e-commerce moratorium to lapse. That’s not a temporary deadlock, it’s the organisation reflecting the world that now exists: large powers using trade as statecraft, and no consensus left to constrain them. Australia should keep showing up in Geneva. It should stop waiting for Geneva to save it.

Australia remains, by conviction and by habit, a free-trading country. That conviction served it well when the system rewarded specialisation: iron ore and coal to China, education and tourism across Asia, alliance insurance from Washington. The problem isn’t that free trade was wrong. It is that the system in which free trade paid is no longer the system we inhabit.

The dependence is still lopsided. China took 29% (Opens in new window) of Australia’s goods and services exports in 2025 and a quarter of two-way trade. Iron ore still dominates the relationship. The US is the security guarantor, a growing export market (Opens in new window), a source of critical technology, and the co-architect of AUKUS. Neither relationship is optional. Both are now instruments of someone else’s industrial strategy.

There is no serious prospect that the WTO will put the old system back together (Julia Taubitz/Unsplash)

Canberra hasn’t been idle, which is a good thing. A free trade deal was reached with the EU in March. The UAE deal is in force. A protocol with Singapore covers essential supplies. Critical minerals cooperation with Washington has grown into multi-billion-dollar project lists. The government’s Trade 2040 (Opens in new window) horizon talks the language of diversification. Limited anti-dumping actions have been taken. All of this is useful. None of it yet matches the speed or the scope of the shift elsewhere.

The risk for countries that still preach openness isn’t a sudden conversion to autarky. It is slowness – and lingering hope that a restored multilateral rulebook is just one more ministerial away. While others subsidise processing, ring-fence procurement, and treat investment as a security tool, Australia can find itself exporting unprocessed rock into a market that no longer wants to be dependent on it, and importing the finished green-tech and AI stack from the two capitals it most needs to hedge against.

Realism doesn’t mean joining the subsidy race to the bottom or wrapping the economy in tariffs. Australia is too small, too specialised, and too trade-exposed for that. It means treating partnerships as infrastructure, not communiqués, and building them now rather than after a WTO revival that isn’t coming.

It means preferring trade partners who can absorb more than bulk commodities – India, Southeast Asia, Japan, Korea, the EU, and the Gulf – and writing agreements that cover services, data and procurement, not just tariffs. Plurilateral deals among the willing will do more work than consensus among 166 members.

On investment, it means being equally serious about attracting patient capital from those same partners and screening capital that arrives with political strings. On the green transition, it means using Australia’s energy and mineral endowment to lock in processing and green-metals partnerships so the country isn’t merely the quarry for other countries’ net-zero plans. On AI, it means energy, compute, skills, and standards coalitions that reduce default dependence on America’s AI hardware and models, and increasingly also on Chinese open-weight models.

Australia can stay open without staying sentimental. The middle-power interest is coalitions of the commercially compatible: countries that still want rules, still need resources and technology, and are large enough together to matter. Waiting endlessly for WTO reform isn’t prudence. It is a strategy for arriving late.

About the author

Alicia García Herrero

Alicia García Herrero is Adjunct Professor at the Hong Kong University of Science. Alicia also serves as a Senior Fellow at the Brussels-based European think-tank BRUEGEL, a non-resident Senior Follow at the East Asian Institute (EAI) of the National University Singapore (NUS) as well as at the Institute of Chinese Studies in Delhi (ICS).

Topics

Trade & investment Australia Economy