Tariffs could hurt US economy, boost China’s mineral imports

Cost of tariffs passed on to end users can be a chokehold on industries that are labour intensive

In 1992, James Carville, who was then Bill Clinton’s campaign strategist, coined a phrase that explains election results. Quite simply: “It’s the economy, stupid.” Despite some economic challenges being exogenous — such as high fuel prices after Russia’s invasion of Ukraine — the US electorate has made it clear they want someone who will safeguard the US economy.

President-elect Donald Trump has one economy policy lever that he’s repeated advocated for: tariffs. In just more than two months, the new administration will be inaugurated and a new Congress will begin — comprising a Republican House and Republican Senate. And there’s one economic policy that we will see feature prominently: tariffs, tariffs, tariffs.

However, tariffs should be used judiciously. Let’s take the mining sector, as an example. High tariffs on mineral imports can have two economically damaging consequences. This is particularly true for minerals of which the US has little to no reserves or are in the early stages of developing production capacity.

First, high tariffs on minerals raise the cost of goods that they are used in — automotives, semiconductors, defence technologies, computers and phones, and household appliances. Ultimately, when the cost of tariffs are passed on to end users, it can be a chokehold on vital industries that are labour intensive. These industries are also vital to economic prosperity and competitiveness.

Second, tariffs can become encouraging for mineral-rich countries to export minerals to China for processing rather than the US or its allies. This increases China’s dominance in key minerals supply chains. China has long encouraged mineral imports from other countries. Though it produces just 10% of the world’s lithium, nickel and cobalt, it imports them from across the globe, allowing it to process 60%-90% of the global supply of these commodities. The processing facilities were built with financial support from the state.

In 2022, these countries sent the largest value of minerals to China for processing and/or manufacturing: Australia ($96.4m), Brazil ($27.6m), Chile ($20.4m), Peru ($19.6m), SA ($11.4m), Guinea ($4.5m), Indonesia ($4m) and Kazakhstan ($3.9m). Tariffs would discourage countries from exporting resources to the US and could have the opposite effect — China getting more minerals for domestic processing. 

Make no mistake — economic sticks serve a purpose. But carrots are just as important.

The mining investment climate is generally unfavourable. With the exception of copper, prices for major base metals are at multiyear lows and private sector mining activity is sluggish as a result. Thus, government incentives to invest in production and processing in both the US and in allied countries will be important.

The Inflation Reduction Act (IRA) — the Biden administration initiative to build green supply chains — provided significant tax credits. In June 2024, automotive manufacturing jobs reached a 34-year high in the US — the highest since 1990. The IRA drove construction of the “Battery Belt” — a stretch of battery factories in the southeastern part of the US. It also led to $114bn in private sector investments related to electric vehicles (EVs) that are expected to create nearly 100,000 jobs.

Eliminating incentives for sourcing and processing minerals and manufacturing EVs will have economic consequences. US carmakers are largely staying commercially with their EVs because of the tax incentives — getting rid of them would render the industry entirely cost uncompetitive. Meanwhile, China will continue outpacing the US with increasing the profitability and scale of its EV industry — and exporting them globally.

Incentives are also required to generate the investments needed to create resilient supply chains for minerals needed for defence technologies and semiconductors.

If tariffs are overused, the resulting pull back in investment, jobs and output will be economically devastating. Instead, a complementary suite of sticks and carrots will be important.

Otherwise, it’s likely we’ll come back to the drawing board after the next election, mulling on Carville’s words yet again: “It’s the economy, stupid.”