Zhenhai Hou: Global Macroeconomic Landscape Remains Unpredictable, Commodity Allocation Outlook [SMM Copper Industry Conference]

On April 23, at the CCIE-2025SMM (20th) Copper Industry Conference and 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 Holding Co., Ltd. as the main sponsors, and Shandong Humon Smelting Co., Ltd. as a special co-organizer, along with Newhuang Group and Zhongtiaoshan Nonferrous Metals Group Co., Ltd. as co-organizers, Straits Financial Group's Chief Strategist Hou Zhenhai shared the theme "Global Macroeconomic Uncertainty and Outlook for Commodity Allocation" with the attendees. Part One: The Impact of Trump 2.0 on the World Although Trump has once again taken office in the White House, he still faces intense political struggles with the Democrats and the conservative wing of the Republican Party. The rise of Trump's populism in the US is mainly due to the fact that although the US economy has grown significantly over the past few years (nominal GDP grew nearly 40% in the last five years), most of the profits and wealth growth have been captured by the wealthy class represented by large corporations and their shareholders. Since 2020, non-financial corporate profits in the US have nearly doubled. However, most ordinary Americans have not seen an increase in their wealth, and some even feel that their living standards have declined due to the loss of manufacturing jobs, the impact of immigration, and rising prices. Data shows that the proportion of the US population dying from despair, drug addiction, and alcoholism has increased sharply over the past 20 years. This situation is particularly significant among white Americans and has not appeared in other developed countries such as Europe, the UK, and Australia. Therefore, the core of Trump's supporters is "anti-establishment." The Three Ideological Foundations of Trump's Domestic and Foreign Policies 1. Mercantilist high-tariff import policy 2. Supply-side economics focusing on manufacturing "producer" economy 3. Traditional isolationist ideology of the US conservative faction Trump stated that his political idol is William McKinley, the 25th President of the United States, 1843-1901. During McKinley's presidency, the main source of federal revenue was tariffs, and there was virtually no personal income tax. This is completely different from today, where about half of the US fiscal revenue comes from personal income tax, and tariffs account for a very small portion. The reason is that the current economic structure and world economic model of the US are vastly different from 130 years ago. Today, 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 through a significant increase in tariffs or import substitution. The dependence of US non-energy product consumption on imports has remained stable at 50-55%. A substantial and comprehensive increase in tariffs, without sufficient domestic industrial supply chains, would lead to price increases. This is entirely different from the situation in 1900 when the US, as the world's largest industrial power at the time, had established a complete self-sufficient industrial supply chain. Moreover, over the past four years, wage growth in US manufacturing has actually exceeded that in the service sector, but the number of manufacturing jobs continues to decline. This may be because from 1992 to 2015, US manufacturing wages did not increase in absolute terms for more than 20 years. Although wage growth has accelerated in recent years, it still lags behind the overall wage growth in the service sector, making young Americans reluctant to work in manufacturing. However, this also means that the overall wage growth in US manufacturing is likely to continue to outpace that of other countries, making it difficult to support the return of manufacturing. The current state of US industry is still far from encouraging significant capital expenditures. In fact, since 2023, the capacity utilization rates for semi-finished and finished industrial products in the US have been declining. This is mainly due to the continuous appreciation of the US dollar, the rapid rise in US labor costs, and the persistent decline in the prices of finished industrial products in the US. In Q4 2024, the total amount of private sector equipment investment in the US (inflation-adjusted constant dollars) was $1.33 trillion, up about 10% from $1.21 trillion in Q4 2019. Even if Trump introduces policies to encourage domestic manufacturing investment after taking office, such as tax cuts, it will be very difficult to significantly reduce the dependence of US domestic goods consumption on imports within 2-3 years. Since 2020, the increase in private investment in the US has been concentrated in R&D, such as AI models (but Deepseek may pose a challenge). The total value of US merchandise imports reached a record high of $3.29 trillion in 2024. In terms of the share of import sources, the direct import ratio from China to the US has continued to decline, reaching 13.3% in 2024, down 7.8 percentage points from 21.1% in 2018 when the US launched a trade war against China. However, the most significant decline occurred after 2022 under the Democratic Biden administration. The share lost by China has largely been replaced by ASEAN, Mexico, and Taiwan, China, with their shares of US imports increasing by 1.9 and 3.5 percentage points, respectively. Additionally, the shares of Taiwan, China, and the EU have also increased by 1.7 and 1.5 percentage points, respectively. Although the proportion of direct exports to the US in China's total exports has significantly decreased since 2018, in recent years, China's exports to countries including ASEAN and Mexico have grown substantially, including a lot of re-export trade and growth in these emerging export countries to the US. However, if the US significantly raises import tariffs on these countries or requires them to significantly raise import tariffs on China, the impact on China's exports will be greater than the direct impact of China's exports to the US. Trump's current tariff policy consists of three parts: IEEPA tariffs, also known as fentanyl tariffs; Section 232 tariffs targeting specific industries; and reciprocal tariffs. According to the tariffs announced by Trump on April 2, calculated based on the 2024 US import country weights, the tariff amount will rise to $700 billion, accounting for about 22% of its annual total merchandise imports of $3.3 trillion (but due to changes in the actual supply chain, the actual tariffs can only reach $500 billion). However, Trump subsequently announced a 90-day suspension and, except for China, imposed a 10% rate. If the future rate is 10%, the additional tariffs will be about $270 billion. Without considering the other negative impacts of the trade war, who will bear the additional $270-500 billion in tariffs per year (depending on the results of future negotiations)? *If countries retaliate against the US, the total cost of tariffs may further increase. **If the US stock market continues to fall, the deterioration in overall consumption will cause economic losses far greater than the tariff revenue. The latest fiscal plan passed by the Republican House of Representatives is expected to cut taxes by $4.5 trillion over the next 10 years, while increasing border spending by $300 billion. On the expenditure side, it plans to reduce spending by $1.5-2 trillion. The debt ceiling will be raised by $4 trillion over the next two years. If this plan is implemented, the US fiscal deficit will not decrease significantly. Trump believes that tariffs will supplement US fiscal revenue, providing conditions for tax cuts without increasing the fiscal deficit. This means that over the next 10 years, the Trump administration needs to increase the current annual tariff revenue of $80 billion to over $300 billion. However, in the absence of domestic manufacturing capacity, this is equivalent to imposing a consumption tax on ordinary American consumers to subsidize corporate and individual income tax cuts. Such practices will only exacerbate social problems caused by the widening wealth gap in the US. Musk's DOGE is currently looking for ways to cut less than 20% of discretionary spending that has a minimal impact on the American people, which is very limited in terms of saving the total fiscal expenditure of $7.2 trillion. If future fiscal cuts involve more education, healthcare, and social security, it may harm the American public and interest groups and affect the victory of the Republican midterm elections in 2026. However, from Musk's perspective, to justify DOGE and his own power, he must seek more fiscal spending cuts. The deterioration of relations between the US and Europe has led the EU to rebuild its military and increase investment in its own manufacturing, boosting demand for some non-ferrous metals. Part Two: Domestic Macroeconomics Because US importers rushed to import before Trump raised tariffs, the US trade deficits in January and February reached record highs of $1,313 billion and $1,226 billion, respectively, and China's trade surplus in Q1 also hit a record high of $238.5 billion, with a surplus of $155.1 billion in Q1 2024. Due to the short-term excessive advance imports by the US, as tariffs take effect, US imports will begin to pull back significantly in Q2, which will then start to put pressure on China's exports. The changes in China's export value to Vietnam are almost perfectly 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 direct US export tariffs but also by the results of US negotiations with transshipment trade countries like Vietnam. China's merchandise trade surplus with the US in 2024 is $360 billion. In Q1 of this year, China's merchandise trade surplus with the US was $76.6 billion. If from April to the end of the year, China's exports to the US decline by 70% (China's exports of electronic products to the US account for 22%, assuming that Trump does not impose additional tariffs on these products in the future), and China's imports from the US decline by 90%, China's trade surplus with the US this year will drop to $188.4 billion, a reduction of $171.6 billion from last year. Adding the loss from transshipment trade, the total loss will be about $200 billion. China's current account surplus in 2024 is $423.9 billion, with a merchandise trade surplus of $768 billion and a service trade deficit of $229 billion. As previously estimated, in 2025, the direct and indirect merchandise trade surplus with the US will decrease by $200 billion due to the Sino-US trade war, resulting in a negative contribution to GDP of 1.1 percentage points. Compared to the 1.5 percentage point positive contribution from exports last year, the difference is 2.6 percentage points, or 3 trillion yuan. Therefore, the government needs to take measures to increase support for exports to non-US regions and boost domestic demand. The Chinese government may choose to further increase fiscal stimulus, especially for domestic consumption. We believe that the probability of RRR cuts and interest rate cuts in Q2 will increase, and additional fiscal stimulus measures may be added in Q3. Judging from the government bond issuance in Q1, the overall fiscal stimulus this year is greater than last year and has already started to take effect in Q1, rather than being in a state of fiscal tightening in H1 as it was last year. However, the main reason is that the 2 trillion yuan local government bond replacement quota for this year was basically issued in Q1, while last year the policy was announced in September and issued in Q4. If there is no further fiscal stimulus in H2, there may be a downward risk. Last year, local government bond issuance was "low in the first half and high in the second half." This year, if there is no new fiscal stimulus in H2, the YoY government bond financing will be "high in the first half and low in the second half." Additionally, the reset of mortgage interest rates will reduce the repayment burden for the household sector by about 400 billion yuan. Real estate transactions have become more active this year, but they are mainly concentrated in first- and second-tier cities. Housing prices have stabilized, primarily in first-tier cities. Although real estate sales have rebounded, new starts and ongoing construction will find it difficult to rebound.The period from 2025 to 2026 will still be a phase of destocking existing housing inventory. The national housing investment and construction area are expected to bottom out in 2026. However, compared to the construction area, the future decline in new construction area will be limited. From an investment perspective, manufacturing investment remains the main driver of overall investment and economic growth, but the specific direction of investment industries has shifted from "old new quality productive forces industries" to "new new quality productive forces industries," such as AI, robotics, chips, and new equipment and technology products. Previously, the two major themes in the non-ferrous metals market were: 1. The US increasing tariffs, leading to logistics flows to US inventory. 2. Europe's remilitarization and the potential cancellation of carbon taxes, driving market expectations for a rebound in European metal demand. However, with the US significantly increasing tariffs, the overall prices of upstream resources will face downward pressure. Because the increased tariffs will ultimately be unaffordable for US consumers (unless the US again increases fiscal stimulus), mid- and downstream producers, with thin profit margins, will also be unable to bear the costs, thus transmitting the pressure upstream through the supply chain. In Q2, the narrative driving commodity prices will shift from supply shortages to demand declines. However, Trump's aggressive global trade wars and US fiscal spending cuts will lead to a decline in the wealth levels of the US private sector, potentially even causing the US economy to fall into recession, ultimately leading to a deterioration in global consumer demand. In summary, the Chinese government may increase domestic investment in infrastructure, 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 unreasonable punitive tariffs in the US-China trade negotiations will eventually be canceled, as US President Trump has expressed this desire, and there may be more positive changes in US-China tariffs in the future. Click to view the CCIE-2025SMM (20th) Copper Industry Conference and Copper Industry Expo special report.