Preserving freedom to govern in the face of economic coercion
Whenever I write about China’s use of economic coercion, I receive remarkably similar responses. Beijing, I am told, was simply reacting to Australia’s decisions. Australia offended China, so China responded.
The lesson is straightforward: if countries don’t want to suffer economic consequences, they should avoid unnecessarily antagonising Beijing. It’s an argument that appears pragmatic and grounded in realism. It’s also one that risks drawing precisely the wrong lesson for the decade ahead.
Whether China was justified in responding to Australian decisions is no longer the most important strategic question. More important is what governments across the Indo-Pacific are learning from Australia’s experience and how those lessons shape their future decision-making. If the main lesson is that governments should quietly avoid policies likely to provoke economic retaliation, then the implications extend far beyond Australia’s bilateral relationship with China.
Governments throughout the region are making important decisions about artificial intelligence, semiconductors, critical minerals, digital infrastructure, investment screening, Taiwan, the South China Sea and defence partnerships. Each carries potential economic consequences. Increasingly, there has been an argument that governments should moderate their positions because defending principles, exercising sovereign rights or supporting the lawful rights of others may carry too high an economic cost.
There’s an important distinction, however, between recognising that sovereign decisions can have consequences and letting fear of those consequences limit the range of choices that governments will consider.
The debate over the South China Sea illustrates this point. A decade after the 2016 arbitral award under the United Nations Convention on the Law of the Sea, the legal position has not changed. The tribunal found there was no legal basis for China’s expansive ‘historic rights’ claim. That decision was final and binding.
On the award’s 10th anniversary, 14 governments, including Australia, Japan, Britain and the United States, issued a joint statement reaffirming the award, while the European Union released a separate statement saying the same thing. The key question is what kept so many other governments silent.
There are undoubtedly multiple explanations, including domestic politics, alliance management and differing threat perceptions. Nevertheless, it’s reasonable to ask whether economic pressure increasingly shapes governments’ calculations.
This isn’t an argument against globalisation. Open markets and integrated supply chains remain powerful drivers of prosperity. The challenge is that globalisation has also created concentrated asymmetric dependencies that can be converted into political leverage.
Albert Hirschman’s National Power and the Structure of Foreign Trade showed how unbalanced trade relationships can create political influence. Robert Keohane and Joseph Nye’s theory of complex interdependence showed that economic integration creates both prosperity and vulnerability. More recently, Henry Farrell and Abraham Newman have argued that countries controlling critical nodes within global networks can turn interdependence into ‘weaponised interdependence’.
What has changed isn’t the existence of economic coercion but its precision, persistence and reach.
Australia’s experience shows how economic leverage can operate. China’s restrictions on wine, barley, lobster, timber and coal targeted sectors where Australia had concentrated asymmetric dependence on it. The costs to China were low. Whether Beijing wanted to compel immediate policy change or simply demonstrate the consequences of future decisions is ultimately less important than the broader strategic effect. Australia’s experience showed that economic interdependence can impose political costs without military confrontation.
This reflects an important change in statecraft. Students of coercive diplomacy have long understood that countries change their behaviour to avoid expected costs rather than wait for punishment. The novelty lies in how deterrence increasingly operates. Economic leverage can often be applied more frequently, more precisely and at considerably lower political risk than military force. The most significant consequence may not be the decisions governments reverse, but the policy options they don’t consider.
This suggests that strategic competition is increasingly happening in what might be called a country’s strategic decision space: the range of policy options a government believes it can pursue without incurring unacceptable external costs. Repeated demonstrations of economic leverage may progressively narrow that space by pushing governments to rule out options before formally considering them. Sovereignty erodes not through a loss of authority, but because governments see fewer available choices.
This challenge is not unique to relations with China. The US also employs sanctions, export controls and tariffs to pursue strategic objectives. But these instruments differ from China’s approach, particularly in their legal foundations, transparency and stated purposes. They are not morally equivalent. More broadly, the growing use of economic pressure reflects a structural shift in international relations: major powers are increasingly competing for influence over the decision-making of other countries.
Australia’s challenge isn’t simply building economic resilience; it’s preserving our strategic decision space. Diversified markets, resilient supply chains, trusted technology partnerships and stronger domestic capability aren’t ends in themselves. Their purpose is to reduce concentrated asymmetric dependence so that future Australian governments remain free to consider every policy option that serves Australia’s interests, democratic values and international legal obligations.
Throughout history, sovereignty has depended by borders, alliances and military power. In an increasingly interconnected world, it may depend just as much on preserving the practical freedom to govern. The greatest success of modern economic coercion won’t be measured in tariffs imposed or exports lost. It will be measured in the sovereign choices governments quietly conclude are no longer worth making.
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