Straits Financial Chief Strategist Provides Insights on Navigating Global Macroeconomic Uncertainty

On April 23, at the CCIE 2025 SMM (20th) Copper Industry Conference & Copper Industry Expo - Main Forum, hosted by SMM Information & Technology Co., Ltd., SMM Metal Trading Center, and Shandong Aisi Information Technology Co., Ltd., with Jiangxi Copper Corporation and Yingtan Land Port Holdings Co., Ltd. as the main sponsors, Shandong Humon Smelting Co., Ltd. as the special co-organizer, and Xinhuang Group and Zhongtiaoshan Nonferrous Metals Group Co., Ltd. as co-organizers, Hou Zhenhai, Chief Strategist of Straits Financial Group, delivered a speech named "Global Macroeconomic Uncertainties and Outlook for Commodity Allocation".

Part I: Trump 2.0's Impact on the World

Although Trump has returned to the White House, he still faces intense political struggles with the Democrats and conservative Republicans.

The rise of Trump's populism in the US is mainly due to the fact that, despite significant economic growth in the past few years (with nominal GDP growing by nearly 40% over the past five years), most of the profits and wealth gains have been captured by the wealthy class represented by large corporations and their shareholders. Since 2020, profits of non-financial corporations in the US have nearly doubled.

However, the wealth of most ordinary Americans has not increased, and they even feel that their living standards are declining due to job losses in manufacturing, immigration pressures, and rising prices. Data shows that the proportion of Americans dying from despair, drug addiction, and alcoholism has surged over the past 20 years. This phenomenon is particularly pronounced among white Americans and has not been observed in other developed countries such as the UK and Australia in Europe. Therefore, the core of Trump's supporters is "anti-establishment."

Three Ideological Foundations of Trump's Domestic and Foreign Policies

1. Mercantilist high-tariff import policy

2. Supply-side manufacturing "producer" economic thinking

3. Traditional isolationist thinking of US conservatives

Trump has stated that his political idol is the 25th US President, William McKinley (1843-1901). During McKinley's presidency, the US federal government's revenue mainly relied on tariff income, with almost no personal income tax. This is in stark contrast to today, where about half of the US government's revenue comes from personal income tax, while tariffs account for a negligible portion.

The reason for this difference is that the current US economic structure and global economic model are vastly different from those 130 years ago. Currently, manufacturing accounts for only 10.2% of the US GDP, compared to 23.2% in 1900. The US is now an economy dominated by services and technological innovation, and it cannot achieve self-sufficiency in the short term by significantly raising tariffs or through import substitution.

The US's consumption of non-energy products has consistently relied on imports at a rate of 50-55%. A broad and comprehensive increase in tariffs, without a sufficient domestic industrial supply chain, would lead to rising prices. This is in stark contrast to the situation in 1900, when the US, as the world's largest industrial power at the time, had established a complete and self-sufficient industrial supply chain.

Moreover, over the past four years, manufacturing wages in the US have actually risen faster than those in the service sector, but the number of manufacturing jobs has continued to decline. This may be because, from 1992 to 2015, manufacturing wages in the US remained stagnant in absolute terms for over two decades. Although wages have accelerated in recent years, they still lag behind the overall wage growth in the service sector, so American young people are still reluctant to enter the manufacturing sector. However, this also means that the overall wage growth in the US manufacturing sector is likely to outpace that of other countries in the future, making it difficult to support the repatriation of manufacturing jobs.

The US industrial sector is still far from a situation where companies would significantly increase capital expenditures. In fact, since 2023, the capacity utilization rates for industrial semi-finished products and finished goods in the US have been declining. This is mainly due to the continued appreciation of the US dollar, the rapid rise in US labor costs, and the persistent decline in domestic industrial finished goods prices.

In Q4 2024, the total amount of private sector equipment investment in the US (adjusted for inflation in constant prices) was $1.33 trillion, representing a cumulative increase of about 10% over the $1.21 trillion in Q4 2019. Even if Trump introduces policies to encourage domestic manufacturing investment, such as tax breaks, after taking office, it will be very difficult to significantly reduce the US's reliance on imports for domestic consumption in the next 2-3 years.

Since 2020, increases in US domestic private investment have largely been concentrated in technology R&D, such as AI large models (though Deepseek may pose a challenge to this).

In 2024, the total value of US merchandise imports reached a record high of $3.29 trillion.

In terms of the share of import sources, the proportion of direct imports from China to the US has continued to decline, reaching 13.3% in 2024, a significant drop of 7.8 percentage points from 21.1% in 2018 when the US launched the trade war against China. However, the most pronounced decline occurred after 2022, during the Biden administration. Most of the share lost by China has been taken over by ASEAN, Mexico, and Taiwan, China.

Although the proportion of China's direct exports to the US in China's total exports has declined significantly since 2018, in recent years, China's exports to countries such as ASEAN and Mexico have surged, including many re-exports and growth in exports from these emerging countries to the US.

However, if the US significantly raises import tariffs on these countries or requires them to also significantly raise tariffs on Chinese imports, the impact on China's exports would be greater than that of China's direct exports to the US.

Trump's current tariff policy consists of three parts: IEEPA tariffs, also known as fentanyl tariffs; S232 tariffs, which are industry-specific; and reciprocal tariffs.

According to the tariffs announced by Trump on "Liberation Day" (April 2), calculated based on the 2024 US import weights by country, the total tariff amount would rise to $700 billion, accounting for about 22% of its $3.3 trillion annual total merchandise imports (however, as the actual supply chain will change in response to tariff adjustments, the actual tariff revenue would only reach $500 billion). Subsequently, Trump announced a 90-day suspension of implementation and a 10% tariff rate, except for China. If a 10% tariff rate is maintained in the future, the tariff increase would be approximately $270 billion.

Ignoring other negative impacts of the trade war, who will bear the additional $270-500 billion in annual tariffs in the US (depending on the outcome of future negotiations)?

*If other countries retaliate against the US, the total tariff costs could rise further.

**If US stock markets continue to fall and overall consumption deteriorates, the economic losses would far exceed the tariff revenue.

The Republican-controlled House of Representatives recently passed a fiscal plan that is expected to continue tax cuts of $4.5 trillion over the next 10 years while increasing border spending by $300 billion. On the spending side, it plans to reduce spending by $1.5-2 trillion and raise the debt ceiling by $4 trillion over the next two years. If implemented as planned, the US fiscal deficit would not significantly decrease.

Trump believes that tariffs will supplement US fiscal revenue, thereby providing the conditions for tax cuts without increasing the fiscal deficit. This implies that, over the next 10 years, the Trump administration would need to increase the current annual tariff revenue of $80 billion to over $300 billion. However, in the absence of domestic manufacturing capacity in the US, this would effectively amount to imposing a consumption tax on ordinary American consumers to subsidize corporate and personal income tax cuts. Such an approach would only exacerbate social issues caused by the wealth gap in the US.

Currently, Musk's DOGE is only seeking to cut spending that has a minimal impact on the American public from less than 20% of discretionary fiscal spending, resulting in very limited savings in the total $7.2 trillion fiscal expenditure. If future fiscal cuts involve more items such as education, healthcare, and social security, it could harm domestic US interests and groups, affecting the Republican Party's victory in the 2026 midterm elections. However, from Musk's perspective, to justify the existence of DOGE and his own power, he must seek more fiscal expenditure cuts.

The deterioration of relations between the US and Europe has led the EU to rebuild its own armaments and increase investment in its manufacturing sector, boosting demand for some non-ferrous metals.

Part II: Domestic Macro

Due to the rush of imports by US importers before Trump raised tariffs, the US trade deficit reached record highs of $131.3 billion and $122.6 billion in January and February, respectively. Meanwhile, China's trade surplus in Q1 also hit a record high of $238.5 billion, compared to $155.1 billion in Q1 2024. As a result of excessive short-term imports by the US, with the implementation of tariffs, US imports are expected to pull back significantly starting in Q2, which will then begin to exert pressure on China's exports.

The changes in China's export value to Vietnam are almost entirely synchronized with the changes in Vietnam's export value to the US. Therefore, future changes in China's exports will not only be affected by the tariffs imposed on direct exports to the US but also by the outcomes of negotiations between the US and re-exporting countries like Vietnam.

China's goods trade surplus with the US was $360 billion in 2024. In Q1 this year, China's goods trade surplus with the US was $76.6 billion. If China's exports to the US decline by 70% from April to the end of the year (with electronics accounting for 22% of China's exports to the US, assuming no additional tariff increases on these products by Trump in the future), and China's imports from the US decline by 90%, China's trade surplus with the US will fall to $188.4 billion this year, a decrease of $171.6 billion from last year. Adding in the losses from re-export trade, the total losses would amount to approximately $200 billion.

China's current account surplus totaled $423.9 billion in 2024, including a goods trade surplus of $768 billion and a services trade deficit of $229 billion. As previously estimated, affected by the Sino-US trade war, China's direct and indirect goods trade surplus with the US will decrease by $200 billion in 2025, resulting in a negative contribution of 1.1 percentage points to GDP. Compared to the positive contribution of 1.5 percentage points from exports last year, the difference is 2.6 percentage points, equivalent to RMB 3 trillion. Therefore, the government needs to take measures to increase export support to non-US regions and stimulate domestic demand.

The Chinese government may choose to further increase fiscal stimulus, especially in stimulating domestic consumption. We believe that the probability of RRR cuts and interest rate cuts in Q2 has increased, and additional fiscal stimulus policies may be implemented in Q3.

Judging from the government bond issuance volume in Q1, the overall fiscal stimulus this year will be greater than last year and will start to take effect from Q1, rather than being in a state of fiscal tightening in H1 as it was last year. However, the main reason is that this year's quota of RMB 2 trillion for local government debt replacement was basically issued in advance in Q1, while the policy was announced in September last year and issued in Q4. Therefore, if there is no further fiscal stimulus in H2 this year, there may be a downside risk in the second half of the year. Last year, local government bond issuance followed a pattern of "low in the first half and high in the second half." If there is no new fiscal stimulus in H2 this year, government bond financing will follow a pattern of "high in the first half and low in the second half" on a YoY basis.

In addition, the reset of mortgage interest rates will reduce the repayment burden on households by approximately RMB 400 billion.

Real estate transactions have become more active this year, mainly concentrated in first- and second-tier cities. The stabilization of housing prices is also primarily seen in first-tier cities.

Although real estate sales have rebounded, it will be difficult for new construction and ongoing projects to rebound. The period from 2025-2026 will still be a phase of destocking existing housing inventory. It is expected that the nationwide housing investment and construction area will bottom out in 2026.

However, compared to the construction area, the extent of further decline in the new construction area will be limited in the future.

From the perspective of investment direction, manufacturing investment remains the main driver of overall investment and economic growth, but the specific industrial direction of investment has changed, manifesting as a shift from "old new quality productive forces industries" to "new new quality productive forces industries," such as AI, robotics, chips, as well as new equipment and high-tech products.

Previously, there were two major themes of speculation in non-ferrous metals: 1. The US imposing tariffs, leading to logistics flows towards US inventory. 2. European remilitarization, along with preparations to abolish carbon taxes, driving market expectations for a rebound in European metal demand. However, in the case of significant tariff increases by the US, the overall prices of upstream resource commodities will face downward pressure. This is because the increased tariffs will ultimately be unaffordable for US consumers (unless the US increases fiscal stimulus again), and midstream and downstream producers, due to their thin profit margins, will also be unable to bear the costs, which will then be transmitted upstream through the supply chain.

In Q2, factor driving commodity prices will shift from insufficient supply to declining demand.

However, Trump's aggressive global trade wars and cuts in US fiscal spending will lead to a decline in the wealth level of the US private sector and may even push the US economy into recession, ultimately worsening global consumer demand.

In summary, the Chinese government may increase domestic investment in infrastructure and other areas, including further strengthening support for real estate policies, while also seeking new export directions for export enterprises. At the same time, it is believed that the final trade negotiations between the US and China may lead to the abolition of unreasonable punitive tariffs, as US President Trump has also expressed this desire, and there may be relatively positive changes in US-China tariffs in the future.