Trade rules are fractured – Australia needs a fallback

Australia’s prosperity is tied to a multilateral trading system that no longer functions. The United States has effectively abandoned its World Trade Organisation commitments, while China has hollowed out the rules from within. Defences against trade discrimination rest on agreements that are no longer honoured, and Australia lacks a coherent strategy, shared with other trade-exposed economies, for how best to respond.

Restoration of the WTO, though worth advocating, is a low-probability scenario. Australia’s priority should be using the Comprehensive and Progressive Agreement for Trans-Pacific Partnership as an anchor for like-minded economies defending rules-based trade where global consensus is out of reach.

About US$11.6 trillion of merchandise trade – 23% of the global total (Opens in new window) – runs through either the United States or China, exposed to discrimination from one side or the other. US import conditions form a hub-and-spokes arrangement set in Washington, changeable at any time. China’s are formally rules-based but shadowed by coercion. Both claim to be playing fair, and both participate in WTO processes as though nothing has changed. Countries with FTAs with the United States or China – Australia has both – have lost the predictability those agreements were meant to guarantee.

The challenges with the United States will persist. Thenew 12.5% US tariff on Australian imports over an alleged failure (Opens in new window) to ban goods made with forced labour marks the first time Australia has been penalised under Section 301 of the Trade Act of 1974. Canberra will contest the move, but with little prospect of a reprieve: Section 301 makes Washington prosecutor, judge and executioner, with carve-outs limited mainly to goods the US cannot itself produce in volume.

This tariff replaces a universal 10% rate imposed in February after the Supreme Court invalidated Donald Trump's earlier “reciprocal” tariffs. Washington has also revived (Opens in new window) a dormant 1930 provision against Canada (the infamous Smoot-Hawley Tariff Act), empowering the president to impose duties of up to 50% on any country he judges to be discriminating against US commerce – broad enough to potentially target trade agreements that don't even involve the United States.

China has contributed to the impotence of trade rules in its own way, exploiting gaps in WTO rules on state subsidies and using macroeconomic policy to artificially expand export supply and suppress import demand. Like Washington, but over a longer timeframe, Beijing disregards trade obligations when it judges vital interests are at stake.

Beijing has repurposed (Opens in new window) WTO trade remedy tools – anti-dumping and countervailing duty investigations – as instruments of retaliation rather than genuine responses to unfair trade. Australian wine exports collapsed under tariffs of up to 218% for three years and still haven't fully recovered since the duties were lifted in 2024. These actions follow WTO procedures on paper, but their deterrent effect is immediate – a rules-based façade that still lets Beijing impose rapid costs on governments considering action against surges in imports of Chinese goods.

Australia’s response should follow a clear hierarchy: defend the WTO where possible, anchor practical cooperation in the CPTPP, and adapt domestic policy to a more coercive environment. As a middle-sized, trade-reliant nation, Australia can afford neither nostalgia for a functioning WTO nor resignation to power-based trade.

To abandon the WTO would concede power-based trade is the new norm – but Australia needs to be realistic. Washington won’t easily cede the unilateral flexibility Trump has uncovered, and even modest WTO reform is trapped by consensus decision-making.

The CPTPP is now Australia's strongest practical platform, representing about 15% of global GDP and drawing interest from others. But the CPTPP, now eight years old, has been slow to realise (Opens in new window) its potential. Australia should use it more actively: support credible new accessions, deepen its EU relationship, and position it as a platform for economies committed to open markets and strong, predictable rules. In that regard, China’s membership aspirations defy Beijing’s track record of weak domestic reforms.

Australia should also prepare for more predictable unpredictability, reapplying coalition-building tactics we have used before, Cairns Group-style, to defend and advocate for open markets sector by sector. Washington or Beijing may misconstrue any grouping that excludes them as a threat – but acting collectively projects a stronger voice and raises the cost of punitive measures against any one member.

Global supply-chain shocks in recent years have returned industry assistance to the policy mainstream. One lesson from the United States is that trade orthodoxies collapse quickly once the government stops selling the benefits of open markets. Trade policy should be grounded in clear national benefit, not the assumption that Australia’s domestic free-trade consensus will hold indefinitely.

Australia’s first move should be to work with CPTPP partners and credible accession candidates around a practical agenda for rules-based trade, sector by sector, while preparing domestic policy for a world where resilience and openness must be managed together. That is how Australia can find its way in a fractured trading system: not by waiting for the old order to return, but by building the strongest rules-based space still available.