Could Australia’s relations with China, already at their lowest point in decades, get any worse? The best place to answer this question is the port of Darwin in the scarcely populated north of the country. Australia is reviewing the 99-year lease on the port signed by Shandong Landbridge Group in 2015 and approved at the time by regulators overseeing foreign investment. Security concerns about a Chinese company owning the access point to northern Australia were dismissed and even faintly ridiculed. “If [ship] movements are the issue, I can sit at the fish and chip shop on the wharf at the moment in Darwin and watch ships come and go, regardless of who owns it,” Mark Binskin, chief of the Defence Force at the time, told a 2015 Senate hearing. Since then, bilateral relations have been turned upside down. The two countries have fallen out over a series of disputes, ranging from Covid-19 to Huawei. Beijing has implemented trade sanctions against billions of dollars’ worth of Australian exports. Australia, in turn, has drawn closer to the United States, including increasing troop rotations through Darwin to nearby training facilities. No one is making lighthearted quips about fish and chip shops any more. Everything to do with China in Australia now passes through a national security lens, mirroring how such issues have long been dealt with in China itself. If there was any doubt about Canberra’s repositioning, the recent Aukus agreement with the United States and United Kingdom to buy nuclear-powered submarines and share other technologies dispels them. Still, not everyone in Canberra favours picking a fight. The decision on the port of Darwin will provide a litmus test on competing approaches. Within Australia’s conservative ruling coalition, the hawks – led by Defence Minister Peter Dutton – are in the forefront of arguments to cancel the Landbridge contract. Other ministers see no point in revisiting the deal, especially as the contract would have to be paid out. The port of Darwin displays how bilateral relations could deteriorate further. There are few people, however, who can think of ways in which bilateral ties might significantly improve. Chinese sanctions against Australia have had a limited impact, although they have hurt individual industries and communities in localities tied to wine, meat and seafood. And let’s be clear – China has banned Australian exports to make a political point. Australian commodity exports in iron ore and natural gas continue to thrive, even if a flattening in Chinese demand and falling prices in the long run will reduce their value to Australia. If iron ore sales to China fall rapidly, the biggest impact will be on federal government corporate tax revenues and royalties in mineral-rich Western Australia. Aukus submarine deal shows a worrying shift in Australia’s foreign policy Australia would have to adjust. But if the fall in iron ore sales is a by-product of weakening construction markets in China, it is Beijing that will face a far greater economic adjustment. Other commodities stopped by Beijing, such as coal and barley, have been largely redirected to other markets . Australia is even picking up some thermal coal sales to China despite the official ban on their entry because of chronic shortages in some parts of the mainland. But that is a short-term measure to plug a few holes in demand. The aim of the trade sanctions remains – Beijing wants Australia to feel economic pain . Beijing’s calculus is twofold. Australia folds and provides an example to other countries which might defy China, or Australia stands its ground but at a cost, which provides a different sort of example. Over time, Australia will pay a price in lost sales to China. In the areas with the most potential growth – selling fresh food and related goods to China’s middle class – Australia is locked out. The border closures associated with Covid-19 in both countries mean quantifying the impact on tourism and students is impossible at the moment. However, there is little doubt that when both countries reopen, there will be fewer Chinese students and tourists travelling to Australia. ‘I’ve lost all hope’: Australia’s international students in pandemic limbo The last nation to face this kind of economic coercion from China was South Korea, also a US ally. Beijing wiped out entire South Korean-owned industries in China and killed tourism to its neighbour after Seoul agreed to a US request to deploy a missile defence system. South Korea, much like Australia today, managed to expand trade while being sanctioned by China. South Korea provides indispensable inputs such as semiconductors to industry in China. Likewise, Australia sells resources that China needs. The episode left scars, though, and not just in darkening South Koreans’ views of their neighbour . Washington was a bystander during China’s economic coercion, and Seoul has not forgotten that. On the economic front, Canberra is still casting around for ideas on how allies and partners can help each other alleviate the pain when targeted by Beijing. So far, the US has offered little help on that front. In fact, the opposite is the case. The US and other countries continue to benefit from Chinese sanctions on Australia, selling farm products and mining goods that Beijing refuses to take from Australia. Washington’s “phase one” trade deal with China, struck under former US president Donald Trump, grants US goods preferential quotas. Beijing is banking on its economy surpassing that of the US and leveraging its size and market access to weaken opposition to its agenda. This is hardly surprising. The US did the same, in a positive way, after World War II. It opened its markets to Japan and South Korea with the aim of building strong allies in the Cold War. Can anything be done to blunt Beijing’s coercion? The World Trade Organization might help at the margins, as will Australia’s effective veto over China’s joining of regional trade deals. Senior US officials promised before meeting the Chinese this year that they would “not leave Australia alone on the field” in its dispute with Beijing. Welcome words, but there are many kinds of battlefields in global politics, not all of which are military. Richard McGregor is a senior fellow with the Lowy Institute