President Trump ordered the Commerce Secretary to prioritise an investigation into whether steel imports into the US "threaten to impair national security", by drawing on an obscure provision in a 1962 trade law.
The move opens up a path for the Trump administration to potentially impose harsh tariffs on steel from a broad range of countries that Australia exports the steel-making ingredient iron ore to.
American Enterprise Institute US-China economic relations expert Derek Scissors, who last month visited government officials in Canberra, said invoking national security measures was "unpleasant" and the Trump administration was yet to consider the detrimental economic impact on allies such as Australia from any trade punishment of China.
"If the US severely punished the Chinese steel industry, which is absolutely warranted on economic grounds for China dumping overcapacity on the world market for 15 years, how are they going to affect the demand for Australian iron ore?"
On the other hand, the measures could help Australia's BlueScope Steel which has large steel plants in the US.
Flanked by steel executives and unionists in the Oval Office, Mr Trump said on Thursday that American-made steel was critical to supply the local defence-building industry to protect the military and economy.
"This is not an area where we can afford to become dependent on foreign countries," Mr Trump said.
Though the President insisted the probe had "nothing to do with China" and that the dumping of subsidised steel was a global problem, past US government trade sanctions have overwhelmingly targeted Beijing and led to tariffs.
China is the largest consumer of Australian iron ore, the key ingredient to make steel to construct buildings, bridges, roads and other infrastructure in its expanding economy.
In recent years the global market has experienced a steel glut, hurting American steel companies and workers in so-called "rust belt" states that elected Mr Trump on his "America First" trade protectionist platform.
China is responsible for about 45 per cent of global steel production, followed by Japan and India, two other commodity export markets for Australia.
Last year the Obama administration slapped a 522 per cent tariff on China's cold-rolled steel used to make appliances and car parts.
Certain steel imports from Brazil, India, Japan, Korea, Russia and the United Kingdom were hit by smaller tariffs of between 4 per cent and 71 per cent by the Obama administration.
However, Commerce Secretary Wilbur Ross said past measures only narrowly targeted select products from individual countries, where his review would look at a broad range of steel-producing economies.
President George W. Bush imposed tariffs of up to 30 per cent on a much broader range of Chinese steel products in 2002 invoking a similar law on "safeguard" measures. But the measure was successfully challenged by the European Union in the World Trade Organisation. After the EU imposed penalty sanctions with WTO approval, the Bush administration dropped the tariffs.
Opening China's economy
During the election, Mr Trump railed against China for "illegal export subsidies" for its steel mills and other heavy industries.
More recently he has toned down his protectionist trade rhetoric since a cordial meeting with China's President Xi Jinping in Florida this month.
The US and China set in motion a 100-day trade review that Mr Trump's economic adviser Gary Cohn said on Thursday would move to open up China's market for US financial services, beef and rice.
Mr Cohn said narrowing the US trade deficit with China could be achieved by Beijing allowing more US products and investment into its market, instead by of the US imposing tariffs on Chinese goods.
Mr Trump has repeatedly singled out helping steel workers as a top industrial priority for his administration, and billionaire industrialist Mr Ross has lamented that unfair trade has hurt the US industry.
Mr Trump's US trade representative nominee Robert Lighthizer, who is yet to be confirmed by the Senate, as a private sector lawyer led dozens of anti-dumping legal cases against China.
His delayed confirmation helps explain why Mr Trump has so far moved slowly on any trade actions.
Dairy dispute with Canada
In another sign that Mr Trump's trade policies are still fluid, he lashed out at Canada for its dairy exports hurting the milk and cheese industry in the neighbouring US state of Wisconsin.
"I wasn't going to do this — but I was in Wisconsin the other day, and I want to end and add by saying that Canada, what they've done to our dairy farm workers is a disgrace. It's a disgrace."
"We can't let Canada or anybody else take advantage and do what they did to our workers and to our farmers."