Trump inflicts mining sector predicament on America
Why do you think Trump's tariff strategy will fail?
The market had a relatively modest negative response on Thursday April 3, 2025 the day after Donald Trump declared war on the global economy when he announced major tariffs not just against nations that have a trade surplus with the United States but even those who have a trade deficit. On Friday, however, after China signaled it will respond in kind all hell broke loose and the market took a second plunge at the close, unlike in past sessions when it had bounced back near the end of the day from the morning's declines. This time is different because there is no way Trump can pretend his strongarm tactics are just a negotiating strategy. His decision to hit hard a tiny African country called Lesotho where an American company called Levi's makes denim jeans it ships back to the United States exudes sheer mean-spirited brutality. There is nothing in his Liberation Day tariffs that seeks to even the playing field through something called "reciprocity". It is an exercise in brute force designed to make everybody appreciate how Great America is, even though the official MAGA line is that everything is being done because America is No Longer Great.
He sees the United States as a giant submarine to which the rest of the world's nations are attached like remoras, and it is his intention to take the American submarine into the Mariana Trench where the pressure will destroy all these remora "parasites". The world has finally realized that MAGA means turning the United States into a type of self-sufficient hermit nation, pillaging other nations such as Canada and Greenland when necessary. The adaptation to this new reality has begun and while there will be attempts to beg for specific tariff concessions the current administration is no longer seen as trustworthy or reliable. The break between MagaLand and the Rest of the World is now mutual.
Trump has already indicated that he does not give a "rat's ass" what his MAGA base may end up suffering if the United States drags the entire world into a recession that just might turn into a 1930s style depression. His official line is that today's pain will be tomorrow's gain and everybody should just suck it up and stop whining. When will that tomorrow arrive? If it has not arrived by November 2026 the Republican Party will lose the Senate and the House. If Trump is to preserve his megalomaniacal grip on America's destiny he has no choice but to suspend democracy. That may be a lot harder to do than what happened in Germany, a nation the size of California whose ideological inclinations were spread out throughout the country, making unified resistance to Hitler's Nazi thugs impossible.
In the United States California has the biggest population near 40 million people, a significant majority of whom embrace the founding fathers' 1776 vision of a rule of law democracy with checks and balances, and the largest GDP among all the states which would rank California fifth among the world's nations. While Trump can send tanks rolling across most of flat middle America to suppress opposition to autocracy, and perhaps even impose the theocracy craved by Christian nationalists, sending these tanks over the Sierra Nevada mountain range represents a formidable challenge. Putin and Xi are rolling in the aisles with laughter at the potential breakup of America if Trump tries to remake America to become just like China and Russia. There has been little protest so far because Americans have been in a state of disbelief, as if waiting to wake up from a nightmare. Monday may dash all hopes that Liberation Day is just another April Fools joke.
Overnight on the LME the prices for key base metals, aluminum, copper and zinc, dropped sharply and on Friday the world's biggest base metal mining companies saw their prices also plunge. Oil and thermal coal prices dropped to levels not seen since 2021 when they suffered due to a slowdown of demand caused by the covid pandemic. The markets are telling us via the metals and mining companies that Trump's Liberation Day Tariffs will bring a global economic slowdown, and this realization will likely continue to ripple through equity markets next week.
The S&P 500 and DJIA were down sharply on Friday and have chart patterns akin to falling off a cliff. Stupidity, not bravery, will drive any impulse to "buy the dip" because we are dealing with a September 2008 falling knives and anvils situation. During the past five years American companies have benefited from a perception of "exceptionalism" manifested through stocks such as the Magnificent Seven that have helped American indices outperform other markets.
While some rabid MAGA fans will try to buy the dip, we are dealing with a major exodus from what the world now views as the Magnificent Kneebenders. Bloomberg's John Authers has highlighted a chart which reveals an interesting vulnerability shared by America's technology giants. Trump has focused on America's trade deficit created by imported physical goods, but this chart going back to 2009 shows that the United States has consistently run a services trade surplus with Europe that mirrors Europe's goods trade surplus with the United States. This is going to be an issue for Europeans who have been trying to introduce privacy rules for online platforms.
When you make a physical good and export it to another country that physical good is gone and the recipient benefits from it. But when American technology platforms provide online services to Europeans, not only do they collect revenues from Europeans that get repatriated to the United States, they also hoard an ever-growing trove of information about each European who uses these online services. The chiefs of the Magnificent Seven donated millions to Trump's inauguration and marched to Mar-a-Lago to bend a knee urging Trump to push back against European privacy laws. But now that Trump has declared war on Europe in order to wipe out their export economy, it makes sense to take a hard look at the services trade surplus the Magnificent Kneebenders suck out of Europe.
European investment funds which are loaded up on American "exceptionalism" may be inclined to follow Warren Buffett's earlier example (he built a $375 billion cash stockpile last year) and start to exit these stocks. Where is the buying supposed to come from as Americans watch their pension plans shrink and begin to fear the hard times Trump insists they must endure to Make America Great Again? Europe has already started to adapt to the reality that it must provide its own military protection against Putin's Russia to which Trump appears to be switching America's allegiance. When the United States imposed technology export bans on China that country responded with heavy government investment that enabled technology giants like Huawei do develop domestic technology. NYT's Thomas Friedman described this new reality in his April 2 article "I Just Saw the Future. It Was Not in America." As Europe rolls up its sleeves to expand its military capacity it is also rethinking the wisdom of relying on American hardware.
Trump's Liberation Day trade war, rather than bringing China to its knees, may be the "tough love" China needs to focus more effort on developing domestic consumption. During the past quarter century it has relied heavily on its export economy and a real estate development bubble. The residential real estate boom is now over, and although the Rest of the World may continue to trade with China, the fact of China's $1 trillion trade surplus is going to be a problem. China's leader Xi Jinping has bullied his people into a hyper-surveillance controlled submission while doing little to allay concerns about healthcare and social security. The Chinese have slipped into a mode of saving for "hard times" despite Xi's promise of "prosperity for all". A major slowdown in the global economy may force his hand to liberalize China. What Trump may not have anticipated is that the American resistance may come in a similar form where worried Americans hunker down and begin to embrace the R's that became popular during the 2000s such as recycle, re-use, repurpose, and repair. None of this is good for GDP and certainly not the Magnificent Kneebenders who flog disposable crap people don't really need.
There is no question about the need for the United States to re-establish domestic manufacturing capacity, but will tariffs accomplish this goal? Trade works because when a country is able to produce a good at a lower cost it makes sense for the higher cost country to import that good. In theory the importing country is able to make some other good more cheaply which it can export to that country to offset the value of the import. It does not have to be a direct trade. It can involve a chain of countries but at the end of the day it is supposed to balance out. The United States has consistently run trade deficits because its corporations shifted production capacity into lower cost jurisdictions which became feasible when the Cold War ended in the 1990s. This was able to continue because the countries with trade surpluses such as China converted that trade surplus into US treasury bills, in effect a future repayment call that Trump has whispered he might renege on. This was only possible because the US dollar is the world's sole reserve currency, and the federal government used these return capital flows to bankroll the federal budget deficit which largely consisted of providing services to the sick, poor and old which translated into employment for people no longer with manufacturing jobs.
A tariff is a cost added to the price of an imported good which artificially raises the final consumer price to a level where an American business could produce the same good and still make a profit selling it at that tariff boosted price. The reason Trump's tariff strategy will fail is that the American producers must invest time and capital to create that new production capacity. But this effort is clouded with uncertainty, namely, when the new manufacturing facility is up and running, will that tariff boosted price still be at that level? Or will there have been a change of government that eliminates or reduces the tariff so that the American business ends up selling the good at a loss or breakeven, both of which are unacceptable in a capitalist free market economy. Or, will the producer of the imported good reduce the import price by giving up some of its margin? Or perhaps reduce his cost by using slave labor or further slashing worker safety and emission control costs? The United States could deal with this by increasing the tariff so that the American producer can still make and sell the domestic good at a profit. But Trump's Liberation Day tariffs are so extreme and blunderbuss-like that a potential American producer will take a wait and see attitude. Those that already produce the good and do not need to invest time and money to tool up will enjoy an instant profit boost, with the consumer experiencing inflation. But they also are not going to expand production. This in fact is how the mining industry has been behaving since the China Super Cycle ran out of steam.
Trump's tariff strategy is inflicting on the United States the same predicament that afflicts the western mining sector, by which I mean mining companies who are supposed to produce raw materials at a profit for the benefit of their shareholders. The mining sector's predicament is that it must sell its output at the price set by the global market which is a function of supply and demand. But it can take 5-10 years to permit and construct a mine with a heavy up front capital cost and a mine life of 10-20 years during which first payback of the CapEx must be achieved and then profits to pay "dividend" to the shareholders. What will the price of copper be in 5-10 years and beyond? That will depend on the strength of the global economy, possible demand destruction by substitution or demand creation through new usages, and to what degree other mining companies mobilize new supply. And then there is the risk that a Communist nation such as China produces a raw material at breakeven or even at a loss so as to discourage supply development elsewhere in the capitalist world, and recovers those losses through profits in downstream products on which it has a near monopoly - rare earths and magnets are a good example. The inability to predict macroeconomic boom-bust cycles results in new mining supply arriving during an economic downturn that results in lower metal prices, putting western mining companies always at risk of getting pummeled by shareholders when their timing fails to be synchronized with the business cycle.
A classic conundrum today is the situation of lithium. If lithium ion batteries are to power an explosion of EV demand during the 2030s, planning for new supply to match the future demand must be undertaken today. But today the price of lithium carbonate is far below the cost to produce it, at least at the total future output scale required. Then there is the risk that a new kind of battery that does not use much lithium ends up powering the future EV fleet. Not to mention that a clown backed by anti-science religious zealots who is an atheist and could not give a "rat's ass" about what happens after he croaks is more than happy to disrupt global policy designed to avert an End Times outcome. The mining industry has to cope with this extraordinary uncertainty.
Today metal supply is dominated by China and Russia which have lower production costs than other jurisdictions because they enjoy a natural endowment of grade and abundance. In addition they have lower standards for worker safety and emission controls than do jurisdictions such as Canada and the United States. In a world of globalized trade among democracies that respect each other's sovereignty the skewed supply distribution is not a problem. But when countries like China and Russia develop imperialist ambitions, this supply dominance becomes a geopolitical liability. The reason China embraced electric vehicles was not because it wanted to be a leader in climate change mitigation efforts (coal is a major source of electricity), but rather because it saw its reliance on imported oil as a transportation fuel a severe strategic vulnerability. How are independent capitalist corporations supposed to plan in the face of state managed industrial policy mediated through semi-private corporations?
There are three ways to deal with the raw material supply imbalance. One is a cost "race to the bottom" where a country such as the United States eliminates costs associated with safety and environmental standards and union supported wages. The United States may now be on that path, which shifts the costs onto powerless downstream victims as is the case in China and Russia where any form of protest is suppressed.
The second way started to become a concept in 2021 through the ESG movement where new information tracking technology made it possible to demonstrate the "clean" source of all the inputs for a consumer good. An ESG certified good would sell at a higher price than the dirty good, but that would be the consumer's choice. Apart from the information tag, assuming similar physical and functional quality, the clean and dirty goods would be indistinguishable from each other, so a low income consumer would rationally buy the "dirty" good, which is hard to argue against though elites have sullied this survival need through their "full of merit" righteousness. As long as the higher income group placed a value on the ESG nature of their consumption, namely having as small a footprint as possible, this would assure some domestic raw material supply without any meaningful personal sacrifice by these consumers. It is a celebration of a free market system and acknowledgement that inequality need not be zero sum ame of winners and losers. However, this free market approach went out the window with Trump's inauguration.
The third approach is to apply tariffs to imported metals, which raises the cost of the final consumer good. But while setting up a new manufacturing facility and training staff may take only a couple years, it will take 5 years to build a mine whose ability to achieve payback for CapEx relies on a stable tariff boosted price. With the more obscure metals this is accomplished by binding offtake agreements, but this simply will not happen with base metals that have proper futures markets. Today the mining companies have the additional concern that Trump's Liberation Day tariffs will create a global recession which in turn could unleash all sorts of geopolitical stresses which further undermine the global economy. Never has the future been clouded with so many forking paths.
The Liberation Day tariffs can only succeed if the United States turns itself an autarky, a self-sufficient hermit nation whose prosperity will take a huge hit as the price of everything reflects the domestic production cost. But that really is not what MAGA voters had in mind when they supported Trump. When Trump orders them to suck it up and be patient, they will for a while, but if they observe rising unemployment, curtailed social services, and higher costs for everything, that patience will run out. And this creates a further reason for businesses to take a wait and see attitude rather than risk a costly and ultimately pointless investment. Business decision makers will soon if not already see Trump as a Rumpelstiltskin, that nasty extortionist dwarf from Grimm's fairy tales whose rage over not getting his way blows him up.
When the will to build domestic manufacturing capacity finally does arrive, possibly because trade between the United States and the Rest of World has become bogged down in irresolvable paralysis and dysfunction, it will be done with an unprecedented degree of automation that will not bring back blue collar manufacturing jobs. By then the replacement of white-collar workers with AI agents will be in full swing, eventually creating a paradox for a capitalist society. How is a business supposed to generate revenues and profits if human workers no longer have anything productive to contribute that deserves compensation they can spend on goods and services? And this brings me back to the Magnificent Kneebenders. What will happen to their revenues and profits when the United States descends not just into a cyclical recession, but also a structural recession, possibly caused by Resistance in the form of a collective withdrawal from online engagement? The predicament of the mining sector is now the predicament for all American businesses. Nothing will get done and everything will get worse. Do not buy the dip!