My latest from The Guardian

=With the resumption of parliament this week, and an election only months away, we have seen even more of the usual point-scoring about the cost of living, tax breaks for long lunches and budget deficits. But since the return of Donald Trump to the White House, the assumptions on which Australian economic policy have always been based are obsolete.

We must ditch the illusion that the US will return to normal and instead become more self-reliant

With the resumption of parliament this week, and an election only months away, we have seen even more of the usual point-scoring about the cost of living, tax breaks for long lunches and budget deficits. But since the return of Donald Trump to the White House, the assumptions on which Australian economic policy have always been based are obsolete.

It’s not just the “rules-based international order”, symbolised by the already moribund World Trade Organization, that is gone. Trump is ruling by decree (more politely referred to as “executive order”) and encountering little resistance. Corporations have rushed to buy his favour (or placate his wrath). The US Treasury appears to have been turned over to Elon Musk. No one can predict what will happen here, but a major financial crisis can’t be ruled out.

The most immediate threat to Australia arises from Trump’s use of tariffs as a bludgeon to be used in pursuit of vague political demands, or simply as a display of dominance. Trump’s surprising backdown in response to mostly symbolic concessions from Canada and Mexico might be seen as a recognition of the risks of overreach. More likely, however, it reflects a belief that this is a weapon that can be used over and over again, and a desire to fight one enemy at a time (Trump does not believe in friends).

For the moment, the tariff fight is with China, and both sides are showing some restraint. As long as this restraint persists, the collateral damage to the Australian economy will be modest. But Trump is prone to acting like a capricious dictator. He could easily take offence at some real or imagined slight and return to the 60% tariffs he promised on the campaign trail.

Tariff policy is one of many fronts. Trump has withdrawn the US from the Paris climate agreement, the WHO and international aid programs. Of more immediate consequence for Australia, the US has withdrawn from the OECD agreement on corporate tax minimisation and from attempts to tax the digital economy. Musk and the other tech cronies have already threatened to punish Australia for taxing social media platforms, and for attempts to restrict toxic and violent content.

In the long run, this means Australia needs to treat both the US and China as unreliable trading partners who will bully us whenever they see a benefit from doing so. We need to seek a balance between the two and, more importantly, become more self-reliant. In particular, we need to develop our own AI and social media infrastructure, for example by making our own version of DeepSeek and breaking with X and Meta as well as TikTok.

In the short run, what’s needed is a recognition that the downside risks to the Australian economy have increased greatly. The government should be preparing plans for fiscal stimulus rather than worrying about public debt. More importantly, the Reserve Bank needs to start cutting rates immediately to guard against recession, even at the price of an incomplete victory over inflation.

Above all, we need to ditch the illusion that all this is theatre and that things will go on as before. The US, as we knew it, is gone and won’t be back any time soon. The implications for the global economy, and therefore for Australia, are hard to discern, but they are sure to be profound.