Listen to this articleWith all eyes on US President Trump over the past month, the world’s second superpower quietly slipped from global headlines. Until this week, when China’s DeepSeekunveiledits artificial intelligence (AI) model, which rivals the advanced American AI, but at a fraction of the costs. The story triggered a meltdown of the US stock market and marked another milestone in the US-China tech race.For Australia, it underlined how China's trajectory in 2025 will profoundly influence our economic and strategic prospects.This will be a testing year for Australia-China relations, as both Canberra and Beijing face a confluence of economic and political pressure points, amid global geopolitical upheaval.Economic interdependence under strainChina’s sluggish economy and theend of the commodities super cyclethat has driven Australia’s iron ore trade with China spell trouble for our already slow-growth economy. China’ssteel production is fallingfaster than expected. Just last week, Rio Tinto reported a 1% decline in its iron ore shipments. Australian grain producers are also pointing to asoftening demandfrom China.Stabilisation of the bilateral relationship and lifting of the remaining trade impediments delivereda bumpto Australian exports in agriculture over the three years. But structural forces of urbanisation, free trade and middle-class expansion that fuelled Australian trade with China over the past four decades are giving way to a cycle of slower economy, economic security andprotectionism.Add to it Australia’s ownill-conceived policyto put a brake on another core export industry – international education – and two of our top four exports are under pressure.In Washington’s shadowDonald Trump will cast a large shadow on Australia-China relations. Trump’s high-tariff trade policy is sending shockwaves across the global economy. Bilaterally, Australia is in a good place. We are close allies, a major buyer of US defence equipment, and run a trade surplus with the United States.But there are risks. Trump may put additional pressure on those US allies that continue to enjoy a healthy trade relationship with Beijing to be a part of his China-decoupling coalition. Washington might demand a more aggressive stance towards Beijing as a condition of continued strategic support, injecting further uncertainty into AUKUS. The new US administration may choose to sharpen its approach to Taiwan and the South China Sea, which will force Beijing into an escalatory position.China is not in decline, is better prepared to deal with Trump, and will remain at the core of the emerging global system, even if its economy stumbles and politics lurch further into authoritarianism.In trade, Trump tariffs on China woulddrive downthe demand for Australian commodities and exacerbate protectionism, further weakening our economic prospects. Conversely, Trump won’t hesitate to ignore the interests of US allies if they stand in the way of securing a grand bargain with Beijing. This will leave Australia trapped in China’s sphere of interest.The biggest unknown remains Beijing’s strategy to withstand Trump, which will be a combination of appeasement, diversification, negotiation and retaliation. China’s toolkit could include an asymmetric punishment of US allies and partners – especially those with close trade ties to China. Conversely, China may seek to drive a wedge between the Unted States and its allies by offering market access and investment opportunities in exchange for neutrality.The end of bipartisanship?The forthcoming federal election could become a critical inflection point in Australia's China strategy. While foreign policy rarely features in the Australian elections, this year might be different. Growing partisan divisions, particularly on security, economy, climate and energy, suggest a potential shift towards a more confrontational approach to China. A Peter Dutton-led government might unwind the current diplomatic stabilisation, risking renewed economic retaliation from Beijing and making Australia an outlier in the region seeking to be a geopolitical middle-ground.Opportunities persistBut it’s not all doom and gloom. The relative success of Labor’s China, US and Pacific policies showed that Australia can trade and compete strategically with China at the same time.The potential of our economic relationship is also far from realised. Australia can play a role in China’snext-stage commodity boom– the one focused on minerals fuelling the global renewable energy revolution, which Chinachampions. Australia’s own ambition to be a renewable energy player will also benefit from Chinese technologies, equipment, talent and investment, with the right risk controls in place. Australian food exports to China have a potential to grow. China continues to be a net exporter of talent and private capital. As both seek to escape from the slow-growth and interventionist environment at home, they can find a home in Australia.Australian universities may benefit from China’s fledging talent. The higher education sector, while under domestic pressure to curb onshore international student numbers, could leverage transnational and online delivery models to grow their market share and diversify revenue, including in China, where the demand for higher education remains high.Strategic hedgingOur strategy to simultaneously trade and maintain strategic boundaries with China has proven achievable. China is not in decline, is better prepared to deal with Trump, and will remain at the core of the emerging global system, even if its economy stumbles and politics lurch further into authoritarianism. In a world struggling to find a new equilibrium between competition, confrontation and interdependency, the best strategy is hedging your bets, especially on declining and resurgent superpowers.Australia has so far shown it can manage the hazards of its relationship with Beijing by resetting diplomatic and trade ties while staying firm on our core values and interests. Australia’s success will depend on its capacity to chart a measured course between Washington's forceful volatility and Beijing’s defensive confidence.