As the world moves away from the rules-based international order, Australia will need to adapt its approach to trade and negotiation, experts have said.

Australia is set to be caught between China – its most significant trading partner – and the US, a close geopolitical ally, as tensions rise between the two powers, a new report by UNSW Sydney and the e61 Institute has found.

“The global economic order has shifted. The rules-based system is giving way to a new era of power-based transactional negotiations, more like an arm wrestle among ‘strongmen’ leaders,” the report said.

“A rules-based order relies on credible long-term commitment. The ripple effects of recent, dramatic US policy changes are far-reaching and cannot be easily reversed. There is no return to normal.”

According to the report, Australia should not respond by imposing protectionist policies to shore up its own domestic manufacturing, as many countries are.

Instead, Australia should negotiate with trading partners, demonstrating its security value to the US based on its geographical position in the Pacific and its economic value to China.

The report said Australia must be adaptable in switching its imports and exports to other friendly nations as reliable trade routes become more uncertain. Australia’s financial stability and democratic institutions make it an attractive location for foreign capital looking for stable investment opportunities.

Other economic challenges the report outlined included Australia’s high immigration rates, lagging productivity growth, fiscal pressures and intergenerational equity risks.

Australia has one of the highest population growth rates in the OECD, 35 per cent in the past two decades, well above the OECD average of 13 per cent. Meanwhile, limited housing availability has led to skyrocketing costs, amping up political pressure to curb immigration.

This poses a dilemma for policymakers, who must balance sustainable immigration rates with other priorities, including economic growth, maintaining support for an aging population and maximising the benefits of skilled migration.

Productivity growth is another long-standing problem for the Australian economy, set to be a serious headache for policymakers as global conditions worsen.

Rising market concentration and faltering economic dynamism – the rate of new firms entering and old ones exiting – could be a contributing factor to poor productivity performance, the report said. High market concentration creates barriers to entry for new firms, dampening productivity-boosting competition between businesses.

Budgetary pressures are set to grow, and future surpluses rely on demand for the commodities Australia exports, including iron ore, coal and gas. Fiscal sustainability could help Australia weather global shocks, such as falling commodity prices, due to a global trade war.

A US$10 decrease in the iron ore price would decrease federal government revenue by $3.4 billion, the report warned.

Serious tax and spending reform must be considered to bolster Australia’s fiscal position amid rising uncertainty, according to the report.

In the absence of such reforms, ongoing boosts to government spending would be paid for through higher income tax on working-age Australians, and higher deficits would transfer the tax burden to future generations.

Furthermore, without addressing the crippling housing affordability issue, Australia risks making its younger generations worse off than their parents and grandparents.

“We live in a time of stark political and strategic disruption, and policymakers face an unenviable task of confronting complex challenges without ready-made, well-defined solutions,” Michael Brennan, chief executive of the e61 Institute and co-author of the report, said.

“The report aims to assist policymakers as they adapt to the new global order and tackle domestic pressures by framing the big policy challenges.”