23/01/2017 2:47 PM AEDT | Updated 23/01/2017 2:52 PM AEDT

Australia Is Facing A Few Potential Risks From A U.S.-China Trade War

It's not all trade, and there mightn't be a Plan B.

The era of President Donald Trump will herald an uncertain period in U.S.-China relations that could have serious implications for Australia's economic and security future.

Fears of a trade war or even outright conflict between the U.S. and China have played out in the public eye since late last year, when Trump openly questioned the One China Policy and took aim at China's trade policies, both during the campaign and recently on Twitter.

Trump's pick for secretary of state, Rex Tillerson, suggested early this month that China should be blocked from its militarily built up islands in the South China sea, a position Chinese state media met with threats of a "large-scale war, and warnings to "prepare for a military clash".

But it wasn't just China's Global Times that had hot words for the incoming administration, with former Australian prime minister Paul Keating lambasting Tillerson and accusing him of threatening to involve Australia in a war with China.

While armed conflict in the region is still a hypothetical, it's one that presents significant problems for Australia.

Currently about 35 percent of Australia's exports go to China, said Paul Dibb, Emeritus Professor of strategic studies at the Australian National University.

He told The Huffington Post Australia that if a military blockade of the South China Sea sparks armed conflict between the U.S. and China, it would force an ANZUS treaty response, and failure to do so could see the end of the alliance.

In the event of Chinese armed forces shooting at and killing Americans in the pacific area, if we did not go to help the U.S. militarily, it could well mean the end of the ANZUS allianceEmeritus Professor Paul Dibb

If that situation were to expand into outright war -- which Dibb stressed is only a hypothetical and only comes after the failure of foreign diplomacy -- Australia would immediately lose its biggest export customer.

"A full scale war would mean 35 percent of our exports -- iron ore, coal, uranium, alumina -- would stop. And the impact on our economy would be massive and quick," Dibb said.

"What can one do about that? Not a lot frankly, unless one had an understanding with America to offset that situation."

Bill Clark via Getty Images
Secretary of State nominee Rex Tillerson has taken a more hawkish attitude to China, suggesting access to the disputed islands could be blocked.

Taiwan Is Also A Flash Point

There's one diplomatic issue in particular that is sacred to China, and that's its One China Policy -- a recognition that Taiwan, for all intents and purposes, is part of China.

Trump has questioned that policy, and Chinese state media responded by saying "Beijing will have no choice but to take off the gloves".

Dr Sow Keat Tok, a lecturer in Chinese Foreign relations at the University of Melbourne said America's response to the One China Policy is key.

"I wouldn't say conflict is likely, there is still a lot of space for negotiation" he said.

"If the U.S. changed the international and diplomatic status if Taiwan, if the United States stopped China from assessing those reefs in the South China Sea, it is very likely some kind of conflict would happen."

He argues Trump's appointments -- such as Terry Branstand as Ambassador to China, Rex Tillerson in State and General James Mattis in Defence-- indicates Trump is playing both sides, and China is still trying to figure the president elect out.

"Right now we have disputing voices from within Trump's team -- Rex Tillerson saying one thing, and James Mattis saying another -- so I think they are still trying to feel their way around," Sow Keat said.

Australia Calls For Peaceful, Legal Solutions To South China Sea Dispute

Prime Minister Malcolm Turnbull last week reaffirmed Australia's position that the South China Sea dispute be settled legally and peacefully.

China Stringer Network / Reuters
J-15 fighters from China's Liaoning aircraft carrier conduct a drill in an area of South China Sea, January 2, 2017.

"We urge all parties to refrain from any actions that can create or exacerbate tensions," he said.

"We urge all parties to refrain from the alteration of any features in the South China Sea and refrain from the militarisation of any features, islands and so forth in the South China Sea.

"It is critically important that territorial disputes in that important part of our region are settled, consensually and in accordance with international law."

While tensions in the South China Sea may be avoided, Trump's team isn't shying away from a trade war with China.

The BBC reports Trump aid Anthony Scaramucci warned that if China chose to retaliate when the new administration imposed tariffs on imports, it would cost them "way more" than it would cost the US.

The comments came just as China's President Xi warned no-one would "emerge as a winner in a trade war".

"Pursuing protectionism is just like locking oneself in a dark room. While wind and rain may be kept outside, so are light and air. No-one will emerge as a winner in a trade war," he told the audience in Davos.

"China will keep its door wide open and not close it."

Professor Dibb said there are two prevailing views on the Trump presidency in Canberra: optimism that the office of the president will moderate him; pessimism that it won't -- or can't.

The defence specialist said he hoped someone was working on a classified "Plan B."

"I suspect we aren't," he said.