I’m not going to dwell on the specifics of US trade policy, as it seems to change almost daily, but rather on how the chronic uncertainty it is causing is likely to impact the mining industry. And history has some sobering lessons.  

The mining industry is highly cyclical and is potentially sensitive to events, such as trade wars as these can result in significant economic damage. But first some background.

Temporary relief 
The latest is that there has been a 90-day pause in the highest tariffs bringing them down to 10% for most countries. China, meanwhile, remains saddled with very high tariffs of 145% with some reliefs, I believe for certain electronic goods.  

The 90-day reprieve came as a deep relief for markets and reversed collapsing equity and bond prices. But of course, this charade could play out all over again in three months’ time.

Then there are tariffs of around 25% for specific industries, either discussed/planned or being implemented, for automotive, steel & aluminium, pharmaceuticals and semi-conductors.  

Despite the global turmoil this is causing, the Trump administration seems committed to tariffs.  It just hasn’t figured out how to do it without tanking the US economy and financial markets – at least in the short-term.  

Shell shocked 
This situation has left the mining industry (along with everyone else) dazed and confused. If the uncertainty and turmoil persist then companies in most industries will delay or cancel investment plans. Consumers will curb their spending.  

Goldman Sachs analysts are already predicting near-term inventory destocking and a 6–12-month contraction in metal consumption, particularly for iron ore and alumina (also for coal).  Other metals, such as zinc, nickel and copper, to mention a few, are likely to take a hit as well.  

One bright spot for the mining industry is gold given its safe-haven status.

The China factor 
Reflecting China’s manufacturing dominance, it is estimated to consume around half the world’s industrial raw materials. A trade war with the US, leading to less Chinese manufacturing exports, coupled with depressed global economic activity would hit the mining industry hard.  

Meanwhile, China is hitting back hard with its own tariffs and cancelling deliveries of Boeing aircraft through to curbing exports of its critical rare earths and rare earth magnets to the US – a sector the Asian giant totally dominates. The US only imports about $170 million of rare earths – but these are essential for everything from vacuum cleaners, MRI scanners through to advanced weapons systems.  

This could damage parts of US advanced manufacturing. That is what a trade war looks like – only losers.  

Same movie – same ending? 
Sadly, we’ve seen this movie before, and it didn’t end well.

In 1930 the US unleashed the Smoot–Hawley Tariff Act, which had devastating consequences on the global and US economy. It raised tariffs by an average of 20% to protect US agriculture and manufacturing from overseas competition coinciding with the start of the Great Depression. Economists warned the Hoover administration not to implement the act. They were ignored and economic conditions carried on deteriorating.

Consequently, the US saw the collapse of its agricultural, metals and manufacturing exports as the world retaliated with its own protectionist measures and slid deeper into depression. The US and the global mining industry were particularly hard hit by the Great Depression.  

So bad was the impact of Smoot-Hawley that it is blamed for encouraging Japanese imperialism and the rise of Hitler in Germany and eventually the second world war. Now, I’m not predicting that we’re heading for a depression or World War III (back then policy makers made horrendous monetary & fiscal mistakes that worsened economic conditions, and they even allowed banking collapses).

Three possible motives 
So, is there any hope? Maybe this is all a clever ploy by the Trump administration to raise tariffs to force other countries to lower theirs in exchange for a free trade deal. Countries apparently being prioritised for trade deals – presumably meaning less tariffs – include the UK, Australia and Japan.  

However, the administration has said that revenues raised by tariffs will be used to lower taxes. Maybe. But free trade deals will reduce tariff revenues – making this a contradictory position.  

Yet another motive ascribed to the tariff moves was to slow the economy so the US Federal Reserve would reduce interest rates. But the proposed level of tariffs would be inflationary meaning the Fed is less likely to reduce rates – another contradiction.  

Bond vigilantes* to the rescue?  
However, none of this may matter as much as we think, because President Trump collided with a force far more powerful than himself.  

As he unveiled his volley of tariffs on April 2 billed as ‘liberation day’ something unusual happened. Predictably stocks plummeted, but so did the US dollar and US Treasuries – the latter is seen as a safe-haven asset, which investors flock to when the world is in turmoil.

The sight of soaring US Treasury yields apparently shocked Trump into temporarily reversing many of his tariffs (no one else managed to do that, including world leaders).  

Basically, bond investors were concerned that a global trade war could crater the US economy meaning a lot more borrowing and bond issuance.  

And right now, the attitudes of bond investors, who are effectively lending money to the US really really matter (oh and about a third of them are foreigners).  

Neither a borrower nor a lender be 
The US budget deficit is equivalent to around 6.4% of the country’s GDP, which is staggeringly high when the economy, so far, has been doing well and unemployment is slow.  Historically, US budget deficits have averaged around 3.7%.  

When the administration revisits its tariffs in about three months' time and tries to restore them it may well find itself once again stirring the bond vigilantes’ displeasure.  

The more often the administration takes actions bond investors see as highly damaging to the economy the more nervous they will become about lending the US money. They will want more interest on their capital to compensate for the extra risk they would be taking.

Who would have thought it – maybe this vast network of global financial institutions could curb some of the excesses of the Trump administration and save the global economy from an all-out trade war and deep recession?  

We live in strange times!  

*The term ‘bond vigilantes’ was coined in the 1980s. It refers to bond market investors who reject government fiscal policies they see as irresponsible — typically by selling off government bonds, which drives yields (interest rates) higher.