Australia’s economic security outlook: Trends and possible responses for 2026

Economic security tools proliferate and intensify

Resorting to economic statecraft tools — like tariffs, trade and investment restrictions, and industrial policy — has become the norm for advanced economies in the 2020s. It is no longer a question of whether but where governments will intervene in their markets.

Undoubtedly, the biggest economic security development globally in 2025 was US tariff policy. With Donald Trump commencing his second presidency in early 2025, the year saw a step change across a series of US trade and economic policies. The ‘Liberation Day’ tariff hikes have led to the largest increase in US average import tariffs since 1930. These tariff increases shocked financial markets and analysts when they were introduced in April 2025, and the policy has remained fluid ever since. Other major developments included intensifying US-China competition over advanced technologies and raw critical mineral inputs, with on-again, off-again US technology controls on semiconductor chips directed at China and ongoing investments by both countries in Artificial Intelligence (AI) development and critical minerals.

US President Donald Trump announced tariffs targeting imports to the United States on the day touted as “Liberation Day”, April 2025.Source: Getty

While workshop participants assessed US trade and economic policies under President Trump as disconnected and failing to support a grand strategy, they also recognised that Trump was the first US president to articulate the economic challenge the United States faced in China. China had not adhered to agreed WTO rules, only conformed rhetorically, and exploited system weaknesses, while other WTO members opened their markets. Over decades, China had captured industrial power and, the more it industrialised, the more it captured economic benefits at the expense of other economies, particularly given China’s low level of consumption. President Trump (and the previous Biden administration) had recognised the United States was at a structural disadvantage and needed to change course. While participants understood what had driven the United States to change course on trade policy, participants were of the view that US tariff uncertainty made US-allied economic coordination difficult and unlikely.

In a less stable, more zero-sum global trading order, participants suggested that Australia needed to exercise greater strategic autonomy and prepare to hedge against more global shocks.

With the rules-based trade order breaking down and a new global operating structure yet to take shape, there is huge uncertainty and risk for US allies, including Australia. Workshop participants described Australia as ‘straddling’ an old and new era. Australia was trying to preserve parts of the old order, such as the WTO, while attempting to break through to new eras, such as a Net Zero and AI-enabled world. In a less stable, more zero-sum global trading order, participants suggested that Australia needed to exercise greater strategic autonomy and prepare to hedge against more global shocks. More broadly, with the United States retreating from its traditional leadership role, participants suggested that US allies would need to exercise a higher degree of agency for the duration of President Trump’s term. There were already signs of this happening, such as with US allies deepening their existing bilateral relationships outside of the United States, such as Europe and Ukraine, as well as Australia and Japan. The year ahead and beyond will present a more challenging economic order for Australia to confront and a wait-and-see approach by the Australian Government and industry will not suffice.

US tariff policy and navigating trade uncertainty

Prior to Donald Trump taking office in 2025, Australian analysts’ concerns about a second Trump presidency centred on his approach to trade.¹ President Trump’s ‘Liberation Day’ tariff announcement proved these concerns to be well-placed, with the introduction of the largest single increase in US import tariffs since 1930. Estimates suggest that this policy increased the effective US tariff rate from less than 2.5% to over 11%.² The Trump administration’s rationale for this on-again, off-again tariff strategy has been inconsistent, including to support the reindustrialisation of the US economy, improve terms of trade, protect national security, generate higher revenues for the US Government, and give the United States leverage to pursue a series of ‘deals’ with Europe, Japan, and others.

Domestically, tariffs are becoming increasingly unpopular among US voters, even within Trump’s own voter base — 60% of Trump voters believe tariffs are hurting the US economy in the short term.³ So far, Trump’s tariff policy has stuttered on a series of fronts:

• Tariffs brought in US$250 billion in revenue in 2025, well short of the estimated US$600 to US$700 billion a year.⁴
• Inflation has been persistent at 3%, despite the full effects of higher tariff rates yet to be felt in the US economy.⁵
• Key parts of the US economy are under pressure from higher tariffs — particularly agriculture, for which the Trump administration announced US$12 billion in economic assistance, and manufacturing, where output contracted for nine months straight.⁶

If cost-of-living pressures continue to mount across US industry and households, tariffs on some key consumer goods could fall. For example, in November 2025, President Trump issued an Executive Order to remove tariffs on food products (including Australian products) to mitigate rising grocery prices.⁷

The severity of US tariff policy shocked foreign governments and industry and sent shock waves through global financial markets. Albeit receiving the minimum ‘baseline’ 10% tariff rate, Australia was unable to secure a full exemption, even in the context of its US treaty ally status and running a trade deficit with the United States. Australian efforts to seek an exemption to tariffs, particularly on steel and aluminium exports, have been largely unsuccessful. Australia was, however, influential in having the global tariff removed from certain agricultural and resource goods, including beef and some critical minerals.

Participant views

While tariff increases had been expected, their scale and coverage caught Australian analysts off guard. Ultimately, workshop attendees felt that the Trump administration’s tariff policy and subsequent dealmaking reflected short-term thinking. One participant contended that “Trump’s only strategy is winning each day.” It was unclear whether US trade and economic policy was bringing short- or long-term benefit to the United States or to its alliance network. In this context, Australia would need to make ‘hard choices’ in its foreign and domestic policies and concentrate its engagement with the United States on key issues such as AUKUS and critical minerals.

In this context, Australia would need to make ‘hard choices’ in its foreign and domestic policies and concentrate its engagement with the United States on key issues such as AUKUS and critical minerals.

Roundtable participants were of the view that structurally high US tariffs are the new norm. The Trump administration was expected to continue to use high tariffs as a bargaining chip to strike deals with other countries (and tariffs had already proven to be a high-value asset in US negotiations with the European Union, Japan, and South Korea). In light of this, Australia needed to hedge its position in the global economy by diversifying its trade partners. However, participants commented that this could become challenging if the United States required Australia to sign onto any trade agreement that included a so-called ‘poison pill’ clause. Recent US deals with Cambodia and Malaysia had included ‘poison pill’ clauses that allowed the United States to terminate agreements if these countries entered into a trade agreement that “jeopardizes essential U.S. interests” (Malaysia) or “poses a material threat to economic or national security” (Cambodia).⁸ These effectively amounted to a loyalty clause that prevents these countries from engaging in meaningful trade negotiations with US competitors. Participants underscored that the competitive trade dynamics between China and the United States were likely to intensify throughout 2026.

Looking globally, participants viewed China as seeking to position itself as a counterpoint to the United States’ perceived unreliability. While China was demonstrably not a reliable and open trading nation, Beijing had been promoting itself as such, including touting renewed free trade agreements, including with ASEAN.⁹ Attempts by China to signal its support for trade openness could be seen in Chinese Premier Li Qiang’s comments about standing up against “economic bullying” at a recent trade agreement’s signing.¹⁰

Traders work on the floor of the New York Stock Exchange in April 2025.Source: Getty

For Australian industry, the question around the table was whether business was appropriately capturing and responding to these geopolitical risks in its decision-making. Australian banks and mining companies were the most successful at operating in overseas markets while businesses from other industries were simply not competitive outside Australia. Many businesses were used to considering geopolitical risks in countries where they might have assets and operations, such as a mine or offices delivering financial services. However, geopolitical risks were moving along the whole supply chain, from crucial material and technology inputs to end-use markets. Moreover, China had sought to punish businesses that acted to diversify away from China. Effectively assessing these geopolitical risks across the supply chain was complex and costly for Australian business, which is why they had been sluggish to respond.

Put simply, without the Australian Government being more explicit about the strategic risks, business would not act.

Put simply, without the Australian Government being more explicit about the strategic risks, business would not act. To that end, more could be done to improve information sharing on geopolitical risks between government and industry. Businesses would also need to increase visibility of their supply chains, beyond immediate suppliers and into the upstream sub-components that feed into their key inputs. One idea that was floated was to undertake corporate ‘wargaming’ which would help businesses to anticipate and plan for supply chain disruptions.

Australia’s position in the global critical minerals trade

The race to secure critical minerals supply accelerated in 2025. Critical minerals, particularly rare earth elements, are key inputs into a wide range of technologies, from smartphones to renewable energy and defence assets. They are crucial to Australia’s and its partners’ economic and national security and they have unique properties that make them difficult to substitute. China dominates 19 out of 20 critical mineral supply chains¹³ required to support economic prosperity, the renewable energy transition, and modern defence systems.

This is not just a theoretical concern. In 2025, China leveraged this dominance to restrict rare earths supply to the United States and its allies by implementing a series of export controls. In response to this, the United States, European Union, United Kingdom, and Australian governments all announced major market interventions, including significant capital injections, mineral stockpiling and price floors. Most notable are the US Government’s combined US$1.8 billion investments into rare earths producers MP Materials and Vulcan Elements, its introduction of a ten-year price floor guarantee for neodymium-praseodymium magnets and its US$2.23 billion loan to Lithium Americas.¹⁴ In response, China — and, to a lesser extent, Indonesia and the Democratic Republic of the Congo — has sought to maintain its place in critical mineral supply chains through export controls and restrictions. In early October 2025, China went as far as requiring foreign companies to obtain export licenses to purchase Chinese rare earth materials — previous export controls only applied to Chinese companies. China then agreed (as part of a broader trade deal with the United States) to place a one-year pause on these restrictions. All this points to a more challenging critical minerals market moving forward. As Chinese supply becomes constrained, other countries will jostle for the limited remaining supply.

Participant views

Discussions around the room centred around three key policy challenges: 1) the complexity of multilateral coordination to create ex-China (without China) supply chains; 2) the need to clearly define Australia’s role in critical mineral markets; and 3) the lack of high-quality intelligence available to governments on supply chain vulnerabilities.

1. The coordination challenge in building ex-China supply chains

Chinese mining, refining and manufacturing are deeply ingrained in critical mineral supply chains. To build ex-China supply chains, the United States and others would need to coordinate on where alternative production capacity should be developed. This would likely entail a significant multilateral effort, highlighting the potential value of multilateral frameworks like the Minerals Security Partnership (MSP).¹⁵ Few economies have the combination of abundant mineral resources, low-cost labour and energy, technological know-how, and end-use demand to compete with China’s critical minerals industry. Different countries would need to play to their individual strengths to help build resilient value chains. While momentum is building for greater multilateral efforts on securing supply chains, participants raised the importance of translating these initiatives into concrete actions and investments.

Australia and partner nations should also be conscious of how more unilateral policies, like stockpiling and direct onshoring, could impact broader critical mineral markets. Aggressive stockpiling, particularly of limited ex-China mineral supply, could lead to significant price increases of key mineral-intensive technologies such as solar panels, electric vehicles or defence technologies. Stockpiling also removes minerals from other productive uses, which could lead to shortages in critical technologies.

Australia's Prime Minister Anthony Albanese and US President Donald Trump after signing an $8.5 billion rare earth minerals agreement during a bilateral meeting at the White House, October 2025. Source: Getty

Additionally, any push to onshore critical mineral refining should acknowledge the commercial realities of such initiatives. Onshoring was likely to require some level of long-term government support and require scale to be cost-effective. Without sufficient end-use demand for critical minerals from advanced manufacturing sectors such as permanent magnets, batteries or semiconductors, participants highlighted the risk that onshore critical mineral production may not have enough offtake to support any real economies of scale. Further, if several countries each tried to onshore the same set of critical minerals in the hopes of circumventing China, they may cannibalise each other. Already, massive investments and efforts from the United States to secure long-term critical minerals supply had EU officials worried that they could get squeezed out of the market.¹⁶

All this points to a complex and dynamic coordination challenge across the United States, allies and partners.

2. The need to clearly define Australia’s role in critical mineral markets

Australia has remarkable resource endowments — it is home to over 40 of the minerals identified on the US Critical Minerals List.¹⁷ Australia’s strengths as a reliable mining partner are globally recognised, however it was unclear to participants where Australian government support would be best placed, particularly to support downstream refining. Participants acknowledged that Australia’s high labour costs, energy costs, and stricter environmental and land use standards made it unsuitable for any energy-intensive refining processes. Similar commercial challenges existed in Europe and North America. The sense in the room was that Australia should look to more clearly define its critical mineral strategic objectives, including where and how comprehensively it would pursue downstream processing.

The sense in the room was that Australia should look to more clearly define its critical mineral strategic objectives, including where and how comprehensively it would pursue downstream processing.

One option could be to further refine Australia’s Critical Minerals List. A view expressed across the group was that critical minerals lists from Australia, the European Union, and the United States were too broad and high-level, listing 26, 34 and 60 minerals as ‘critical’, respectively. This made it challenging for industry and policymakers to prioritise from the list as well as inform decisions around where government support should be targeted or where industry should explore and develop new resources.

Governments could consider segmenting their critical minerals lists into a few key areas, such as:

• High geological potential, where exploration and mining efforts could be directed.
• Import vulnerabilities, where onshoring or ‘friendshoring’ could be warranted.
• Export vulnerabilities, where export diversification is required.
• Strategically important to defence and critical technologies, where price floors or a price premium may be needed.

3. The lack of high-quality intelligence on supply chain vulnerabilities available to governments

Economic security risks primarily lie with the private sector: businesses are at the coalface of economic coercion and global supply chain disruptions. As a result of geopolitical competition, they must increasingly navigate tariffs and trade barriers and consult with government bodies to find solutions. However, business is in some cases reluctant and in other cases unable to provide complete information on its vulnerabilities to government. Yet without the extensive cooperation of business, simply mapping supply chains — even raw materials like critical minerals cross many borders as they are processed and turned into intermediate inputs — is very difficult.

Given the trade secrets and complex supply chains involved, participants acknowledged that Australian and partner governments were hamstrung from accessing the accurate data needed to design effective market interventions. Workshop participants raised a series of blind spots around critical minerals including:

• Detailed and structured information on Australian resource deposits, including deposit size, mineral purity, and ownership.
  • This information is currently collected by federal, state and territory government agencies from public stock market announcements but there is scope to formalise these data collection processes.
• Offtake agreements, cost structures, and where Australia’s competitive advantages lie.
• The critical inputs into key manufacturing sectors, where they are sourced from, and what alternatives exist if access to those critical inputs becomes constrained.
• Greater visibility of over-the-horizon risks and early warning systems to detect potential price fluctuations or supply chain blockages.
• Filling these information gaps could include informal public-private intelligence sharing and collaboration or legislating more formalised reporting requirements.

The US-China race to dominate AI

Technology competition between the United States and China intensified in 2025, with both countries releasing national strategies to become global leaders in AI. Investments from governments, large technology companies, and private investors into the full-stack of AI technologies (computer chips, data, AI models, and energy infrastructure) now reaches into the trillions. Company valuations in the tech field, and project capital investments, are far outstripping revenues, so much so that the US economy would likely be in a recession without these investments.¹⁸ Crucially, the AI boom is driven by a handful of co-dependent companies like Nvidia, OpenAI, Microsoft, Oracle and CoreWeave who are investing heavily in each others’ success through sales, deals and licensing arrangements. This has fuelled speculation that the AI boom is unsustainable and headed for a correction in the near future.

While large language AI models like ChatGPT and DeepSeek have had significant uptake, artificial general intelligence (AGI) could be the real game changer. AGI is an extension of existing AI models that can understand, learn and apply knowledge and could reshape economic, strategic, and security structures. This type of technology would possess human-like cognitive abilities and abstract thinking. AGI is being actively pursued by major companies and some prominent tech business leaders suggest that it could be achieved as early as the next two years.¹⁹ But while US companies are striving to achieve AGI, China’s approach is grounded in diffusing and integrating AI across the economy.²⁰

The battle for AI technological supremacy is at the heart of US-China strategic competition. This competition extends beyond AI products and services to setting global standards and exporting AI models to partners. These ambitions are set out in the United States’ AI Action Plan and China’s Digital Silk Road initiative, both released in July 2025. The endgame for both countries is to dominate the foundational infrastructure of the future global economy and to be the global partner of choice for AI.

Across 2025, Chinese AI models closed the gap on the United States’ AI frontier, beginning with DeepSeek’s R1 model released in January 2025. The October release of Moonshot AI’s Kimi K2 model further demonstrated the capability of Chinese AI companies, even in the face of US export controls on cutting-edge AI chips and hardware. Chinese companies have differentiated themselves by making their models open source, allowing firms to download and fine-tune for free or under flexible licenses.

As this race continues, a number of limitations are emerging. The first is the massive amounts of energy required to power data centres needed to run AI models. AI models are incredibly power hungry and have contributed to a 300% increase in IT power demand in the United States since 2020, with a further 250% increase forecasted by 2027.²² Data centres require constant, 24-hour power supply, which increases pressure on energy grids to provide firm and reliable power.

This is particularly challenging for energy grids transitioning to intermittent renewable generation. Data centres are primarily expected to be powered by a mix of renewable energy technology during the day and fossil fuels overnight.²³ A rapid rollout of data centre infrastructure, without appropriate firming, storage, network planning and investment, could lead to a more expensive, less reliable, and more carbon-intensive electricity grid. In light of this risk, AI models will increasingly need to compete on energy efficiency.

The second limitation is financial. Unprecedented investments have already been made into AI, so much so that some financial analysts are questioning whether we are seeing an AI boom or bubble. At some point, investors who have poured in millions will need to see some tangible returns before committing further funds. Currently, AI developers are far from profitable. By 2028, OpenAI expects its operating losses to reach US$74 billion — around three-quarters of projected revenue.²⁴ Even an impressive 97% reduction in the cost of AI tokens²⁵ has not led to a material fall in the cost of AI.²⁶

Further, OpenAI and Anthropic — two leading AI developers — are not publicly listed companies, meaning they are not required to publish detailed financial results. This presents a blind spot for financial analysts and regulators. It remains an open question whether investors will be able to accept years of heavy losses until profits emerge. Another question is whether the US Government could underwrite any investments into chip spending or data centres if private investors become skittish or if China is perceived to be pulling ahead in AI development.²⁷

Participant views

The consensus around the room was that Australia is unlikely to be a major AI player globally. Although Australia has strong research talent and foundational STEM skills, firms struggle to commercialise and grow. Any significant home-grown AI innovation or talent is likely to look to overseas markets for investment and growth or be acquired by a big US firm.

However, there are three key pillars where Australia can play its part:

1. Being a reliable and stable supplier of critical minerals and energy resources needed to power the hardware and infrastructure underpinning the AI industry, particularly renewable technology (lithium, vanadium, copper), natural gas, and semiconductors (germanium, gallium, silicon).
2. Attracting investments into data centres, leveraging its land and energy abundance to become a data centre hub for the Indo-Pacific region. Australia now ranks among the world’s top data centre markets, behind only the United States in new investments in 2024.²⁸
3. Becoming a leader in AI entrepreneurship and application, which can help Australia unlock the sought-after domestic productivity gains of AI. Two Australia-based firms — Sovereign AI Australia and Maincode — launched in 2025 to support homegrown AI capability and innovation.

Strengthening Australia’s economic security capacity

The economic security issues facing Australia are clearly complex, dynamic, and cut across numerous policy areas. While roundtable participants canvassed a number of potential policy options, two key proposals were discussed in detail.

The first was setting up a centralised policy institute within the Australian Government, which could support government to navigate and respond to national and economic security issues. As economic security issues are broad and dynamic, many policy areas have to contend with foreign policy and international relations issues with which they may not have significant familiarity with or understanding of. Having a central policy institute provide support to officials could allow government to better tailor its approach to specific economic security issues as well as help coordinate a whole-of-government response.

Having a central policy institute would address a number of current structural constraints that limit strategy and policy effectiveness:

1. National and economic security issues are necessarily spread across a broad number of agencies, which often leads to a siloed or uncoordinated approach to issues when a national response is required.
2. The nature of political and media cycles, and limits on available public service resources, mean agencies tend to focus on the immediate, with medium- and long-term strategy and policy thinking and planning receiving limited attention.
3. There is often limited industry and academic engagement during the policy development process — in part because these relationships are not entrenched but also because there are few individuals with security clearances outside the public sector.
4. Demand for advanced policy modelling and data science capabilities is growing but many APS agencies are struggling to attract qualified staff.

The national and economic security institute could have a remit to focus on long-term, whole-of-nation issues, with secondees from across national and economic security agencies, as well as security-cleared representatives from industry and academia. Its work program would be focused on issues of significance to ensure a balance of innovation and practical solutions.

It could also provide a centralised modelling and data science service for relevant national and economic security agencies, act as a front door to industry seeking to assess geopolitical risks, help businesses to ‘wargame’ their supply chain risks, and facilitate information sharing between government and businesses.

A liquified natural gas floating storage unit.Source: Getty

There are some complexities to this. Responsibility for economic security issues is shared with State and Territory governments, which can sometimes take different (or disjointed) approaches. For example, the Queensland, Western Australian, and Tasmanian governments have each committed to setting up or are exploring the potential for common use critical mineral processing facilities. A centralised policy institute could help coordinate these initiatives to drive efficiencies and avoid duplication.

The second option was developing a strategic framework for economic resilience. This framework could help policymakers and industry assess where risks lie and prioritise actions to build economic resilience. The Future Made in Australia National Interest Framework (NIF) is a good starting point but could be further developed. In particular, there is scope to include guidance around how supply chain risks could be quantified and what ‘threshold’ levels are manageable — effectively outlining Australia’s risk appetite to supply chain vulnerabilities.

Preparing Australia for the year ahead

In 2026, Australia faces some major uncertainties. In some ways, Australia is well-positioned for the challenge ahead — with a strong critical minerals sector, the ability to scale up gas exports to meet domestic and global demand, flexibility for Australian exporters to diversify (where other countries’ industries cannot), and public investments being made in strategic industries. In other ways, Australia remains highly vulnerable — it continues to over-rely on traditional trading partners like China due to the economic complementarities (making trade diversification to Southeast Asia challenging), has a modest industrial policy and risk-averse AI strategy compared with comparable countries, and the Australian Government has not moved quickly enough to engage the private sector to support national security objectives. These vulnerabilities place a premium on policymakers and industry working together to jointly assess and respond to risks, anticipate deeper and more sustained trade and economic disruption, and be willing to make harder trade-offs. We look forward to working with government and industry to prepare both for the challenge ahead.