In early 2020, China, Australia's top export market, unilaterally imposed trade restrictions on Australian barley, beef, coal, cotton, timber, copper and wine. However, convincing evidence regarding the effects of such trade restrictions on firms is scarce. Leveraging data on daily stock returns from 20 listed Australian and 32 listed Chinese firms that produce the restricted commodities, we provide the first systematic analysis of the firm‐level economic impacts of China's trade restrictions on Australian and Chinese firms. We find significant adverse effects on Australian firms' stock returns, leading to almost 20% loss within 10 trading days; however, most firms' stock returns immediately rebounded. In contrast, Chinese firms usually saw significant positive stock returns, leading to almost 30% gains, and the positive abnormal returns continuously increased within 10 trading days. Media coverage and trade dependence substantially impact Australian and Chinese firms' stock returns—industries with stronger trade dependence on China saw greater losses in Australian firms' stock returns. Our results suggest that trade reallocation and deflection are two effective mitigation mechanisms for Australian exporters facing China's trade restrictions.