Australia is facing fierce competition for Chinese tourist dollars and needs to cut red tape on visa application processing.
China is now Australia's second largest source of international visitors after New Zealand, according to a Productivity Commission research paper released on Thursday.
Globally the Chinese are the fastest growing international tourism market and other countries such as the UK, Thailand and India are gaining an edge by relaxing visa arrangements.
The UK and US have also ramped up destination marketing efforts to China.
The commission warned Australia should not allow itself to be left behind.
Australia's visa application process for the Chinese needed to be simplified and online lodgement offered.
The immigration department aims to make online visa applications available to visitors from all countries by the end of the year.
Historically Americans, Brits and Japanese have been flocking to Australia in droves, but those numbers have slowed.
Tropical far north Queensland in particular has faced an economic hit from a decline in overall tourist numbers, particularly the Japanese, with a 40 per cent reduction in real expenditure between 2006 and 2014.
The commission said tourist operators needed to be more digitally savvy to cater for travellers' increasing appetites for online booking and research.
National parks needed facility upgrades and should consider greater user fees.
Brisbane, Melbourne and Perth airports had the capacity for increased international flight traffic.
KEY FINDINGS
* New Zealand biggest source of visitors, followed by China.
* Slow down in tourist numbers from historically important countries NZ, US, UK and Japan.
* Tropical north Queensland hit by 20 per cent decline in overseas visitors particularly Japanese.
* National parks need facility upgrades and extra funding.
* Scope for international airlines to increase services for all major cities particularly Brisbane, Melbourne and Perth.
* Cruise ship terminals in Sydney and Brisbane at capacity and unable to cope with expected industry growth.
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