Extract from ABC News
Analysis
A little over a month ago, the US President threw a curveball into the global economy with his Liberation Day tariffs. (Reuters: Damir Sagolj)
A thumping electoral victory just as the domestic economic indicators have begun to head in all the right directions.
That's the kind of scenario politicians universally, and certainly prime ministers, can only dream of.
More often than not, it's usually the contender that inherits this kind of dream position, after the incumbent has endured years of pain battling to right a dangerously listing economy, torching a bonfire of political capital along the way.
The global financial crisis finally put Labor to the sword in 2013. The COVID-19 pandemic brought the Coalition to its knees in 2022.
Anthony Albanese inherited an economy in the painful early throes of the worst global inflationary outbreak in half a century, accompanied by one of the most brutal interest rate hiking programs in history that hammered Australian households.
China is our biggest trading partner, accounting for 26 per cent of our total two way trade with the world last financial year. (Reuters: Eric Lee)
Little wonder his chances of re-election appeared bleak just a few months ago.
Despite all the years of turmoil, and recently emerging beams of light for the local economy, there seems little chance of any kind of enduring calm in the near future.
As early as Sunday morning, just hours after the polls had closed, business leaders and politicians had already turned their gaze on how best to revive flagging productivity and narrow the federal deficit.
But deeper threats are likely to dominate and define the next three years of the Albanese government as the Trump administration attempts to unwind 80 years of an economic, trade and diplomatic world order.
America has decided to sever its trading relationship with China. It is a strategy that, despite the sudden talk of a negotiated settlement, ultimately will come at enormous cost.
It could also get ugly. And Australia, more than any other nation, will be caught smack in the middle. At some point, we may be forced into an uncomfortable choice between our trading partner and our defence partner.
Prepare for more market turbulence
A little over a month ago, the US president threw a curveball into the global economy with his Liberation Day tariffs.
It shouldn't have come as a shock as it's been his oft-touted policy for years. But the extent of the tariffs in terms of breadth and scale was eye-popping, all based upon calculations that had little or no foundation in logic. All foam and no beer.
Global stocks, which had been under pressure since February, tanked. More significantly, the market for US government bonds lurched uncomfortably as investors bailed, sold them down and then took their cash out of the country.
What followed was a White House backflip, further threats and claims of negotiations followed by a generally chaotic and ill-disciplined campaign of conflicting statements and threats of retaliation.
Incredibly, financial markets have since recovered most of that second round of losses. Wall Street is up 12.5 per cent while the Australian Securities Exchange has piled on almost 10 per cent.
That performance ignores a couple of fundamental truths.
Trump's tariffs — even if they are reduced from 145 per cent down to 45 per cent — will come at an enormous cost to America and the global economy.
Global growth will slow and costs will rise. That's likely to be permanent.
The shift towards globalisation and free trade was predicated on the idea that resources would be used more efficiently and that nations would benefit from exchanging things they had a natural advantage in producing.
Shifting back implies the opposite. Resources won't be allocated to their most efficient use. And consumers ultimately will be forced to pay more to support companies that ordinarily wouldn't be able to compete on an open market.
Once financial markets wake up to that, we're likely to see further turmoil.
An ugly divorce
They call it decoupling.
But, like any divorce, especially when money is involved, the appetite for brinkmanship and revenge can escalate tensions into a whole new realm.
How far the US is likely to go in its trade war with Beijing is anyone's guess. The US president claims he's after a "fair deal" but his idea of fairness changes by the minute and appears to encompass quite a degree of latitude.
Both sides have dialled back the threats of fighting "to the end", possibly because the pain already is starting to filter through.
China's manufacturing output contracted the most in two years, according to figures released last week, while the US economy shrank in the March quarter and appears destined to slide into recession.
China's economy has been in trouble for five years as stringent COVID-19 lockdowns compounded a severe property market downturn, and it can ill afford to allow a further deterioration for fear of stirring up internal dissent.
It may need to resort to a massive fiscal stimulus program, which may well benefit Australia to kickstart its economy. Or it could ramp up its military activities.
PLA warships conducted live firing exercises off the east coast of Australia earlier this year before circumnavigating the continent, and it has repeatedly engaged shipping from neighbours, including Vietnam and the Philippines, in the South China Sea.
Taiwan would be the obvious flashpoint if relations between Washington and Beijing became acrimonious, a situation that would put Australia in an extraordinarily difficult position.
China is our biggest trading partner, accounting for 26 per cent of our total two-way trade with the world last financial year.
We have a substantial trade surplus with China, which accounts for more than 30 per cent of our exports, worth more than $212.7 billion.
By far the biggest component of that trade is Australian iron ore, a vital ingredient in steelmaking.
It has been the magic ingredient that has fuelled China's infrastructure and manufacturing boom for decades. It is also vital for conducting conventional warfare.
But when it comes to other minerals, such as rare earths, Australia is hell-bent on breaking China's monopoly on the extraction, processing and refining, in a move that will break the West's reliance on China, a sore point for Beijing.
Trump calls Albanese to congratulate the prime minister on his re-election
Not so diplomatic
Back in 2015, then-president Barack Obama sounded out then-Australian prime minister Tony Abbott on whether Australia would stop selling iron ore to China, according to then-treasurer Joe Hockey.
But with geopolitics entering dangerous new territory, as the world sinks into a renewed Cold War, the dangerous fence we've straddled for decades could become unviable.
Beijing has for years attempted to shore up iron ore supplies and expects to have a huge new source in Guinea, West Africa. After decades of delays, the Simandou mine is expected to begin production within six months and shipments should begin early next year.
Pressure, too, is building from Washington.
At a recent meeting in Washington between Australian funds managers and US Commerce Secretary Howard Lutnick, the US official made it clear that America's allies either could stand inside the tariff wall or outside it.
According to reports of those at the meeting, they were left in no doubt that Trump's trade battle with China would continue and that if the situation deteriorated, US allies were expected to fall into line.
Even if things don't get to that point, the great trade unwind — which Lutnick believes will deliver America back to a golden age of prosperity — is fraught with contradictions.
Trump wants America to remain the dominant world power, all while advocating a retreat from global affairs.
To achieve that, his officials want the US dollar to weaken and for America to move back to trade surpluses.
That would be easier to achieve if the greenback no longer was the global reserve currency, where everything from commodities to currencies is priced in US dollars.
Abandoning that, however, would mean Americans would no longer be able to afford their current lifestyle.
The world is becoming a dangerous place and Australia is caught in the middle.
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