The Bigger Story Beneath Tariffs
Stocks crater … CPI inflation comes in soft … is something bigger happening with China? … the case for why rapid onshoring is the real goal in this chaos
As I write Thursday mid-afternoon, each of the three major stock indexes is down more than 2% (the Nasdaq leads the way, off about 4%)
Perhaps investors are remembering a pesky detail forgotten in yesterday’s meteoric “tariff pause” surge…
We still have new, 10% tariffs in place on dozens of countries around the world.
Just last week, this idea horrified Wall Street. As a reminder, let’s rewind to Citibank and its note to clients:
Looking out, large tariffs would move us closer to the stagflationary risks we have downplayed this past year.
The note, written before “Liberation Day,” modeled a base case of – wait for it – 10% tariffs.
Resist the temptation to join the herd, and be deliberate about your market activity today – whether buying or selling.
Good Inflation data falls flat
The big headline this morning was that the Consumer Price Index (CPI) posted a month-to-month decline of 0.1% in March, the coolest monthly reading since July 2022.
Year-over-year inflation came in at a 2.4% increase, below the 2.6% forecast from economists.
Core CPI, which strips out volatile food and energy prices, rose 2.8%. This was below forecasts for a 3% pace and marked the smallest increase since March 2021.
Normally, such a cool print would spark a market rally. After all, softer inflation increases the odds that the Federal Reserve delivers the rate cuts everyone wants.
However, in this case, the cooler-than-expected readings reflect the period before President Trump’s “Liberation Day” tariffs announcement that spooked Wall Street.
Plus, a major contributor to the decline was slumping energy prices that reflect concerns of a global recession.
So, while cool, the data were somewhat irrelevant and suggestive of economic weakness.
Returning to the tariff drama…
Yesterday, President Trump turned up the pressure on China with 125% tariffs.
He clarified that this morning. The 125% tariff is on top of the previous 20% fentanyl-related tariff. So, the all-in tariff rate on China is 145%.
In yesterday’s Digest, I wrote:
The new 125% tariff leaves China in a tough – and potentially dangerous – spot.
After all, if Beijing feels trapped, it’s more likely to go big with its response.
Let’s zero in on this, because it’s beginning to appear there’s a far larger story bubbling under the surface of “trade war.”
In 1951, the Atomic Energy Commission (AEC) chief public information officer told the Associated Press:
[The AEC] has never sponsored a medical research project where human beings were being used for experimental purposes.
This statement was wildly misleading.
The AEC was indeed involved in human experiments at the time – and would continue to be for years.
From the Advisory Committee on Human Radiation Experiments Report (established in 1994 by President Clinton) from the Department of Energy:
In 1953 the AEC wrote to members of the public that it “does not deliberately expose any human being to nuclear radiation for research purposes unless there is a reasonable chance that the person will be benefited by such exposure” …
[However], uranium miners were not adequately informed about the purpose of research regarding their exposure to radon in the mines.
Above and beyond lack of disclosure, there is evidence that deception was not unusual in data gathering on AEC workers.
Bottom line: The U.S. government withheld information and misled the public, believing that such actions served a greater strategic purpose.
Is something similar playing out with China today?
We’ve been told that these trade wars are about unfair trade practices.
But there’s incongruence between words and actions. After all, we’ve already had Israel, Vietnam, and the European Union either lower their tariffs on U.S. goods to 0% or propose such a move, and yet the Trump Administration’s response was “not good enough.”
What appears to be “good enough” is mass onshoring. In other words, the real goal appears to be bringing back manufacturing to within the United States.
Why is this such a big deal?
Because the U.S. has a key vulnerability that most Americans don’t realize: We no longer produce the vast majority of the goods that are critical for day-to-day “normal” life.
The average American has no idea this is the case. And the Americans who do have an idea don’t realize how bad it is.
But the truth is that we’re dangerously dependent on other nations – one in particular.
From CNN back in June of 2020:
The Covid-19 pandemic has revealed a terrible truth: Our mindless over-reliance on China has led us to no longer have the capacity, the expertise or the manufacturing infrastructure to meet our own nation’s needs…
Take, for example, that 90% of antibiotics and 80% of active ingredients for other medicines come from India and China.
That means we no longer have the ability to easily ramp up production of such items here.
This overdependence is hardly limited to medicine.
On “critical minerals,” here’s the German Marshall Fund of the United States:
Critical minerals are non-fuel minerals or mineral materials essential to the economic or national security of the U.S.
They have no viable substitutes yet face a high risk of supply chain disruption, with China controlling 60% of world-wide production and 85% of processing capacity.
For “industrial metals,” here’s Mining Technology:
As a leading producer of graphite, lithium and refined copper, China has an increasingly dominant position in critical mineral supply chains.
With the necessity for these minerals driven by advanced technology and renewable energy capacity, the country’s increasing control both domestically and internationally in regions like Africa raises concerns about diminishing access for Western nations and mining companies.
According to data from the International Energy Agency (IEA), China accounts for approximately 80% of natural graphite and 60% of mined magnet rare earths.
[China] produces 99% of battery-grade graphite, more than 60% of lithium chemical, 40% of refined copper, over 80% of refined magnet rare earths and 70% of refined cobalt today, while also dominating the entire graphite anode supply chain end-to-end.
And for semiconductors – the brains of every electronic gadget we use daily, and the lifeblood of AI and quantum computing – here’s Semiconductors.org:
The share of global semiconductor manufacturing located in the U.S. has plummeted in recent decades…
U.S.-located fabs only account for 12% of the world’s semiconductor manufacturing, down from 37% in 1990…
75% of the world’s chip manufacturing is concentrated in East Asia. China is projected to have the world’s largest share of chip production by 2030 due to an estimated $100 billion government subsidies.
I could go on, but you get the point.
Here’s the bottom line: Our government has downplayed it, but we’re dangerously dependent on other countries for most of our day-to-day supplies, primarily China.
What our officials would rather you not know is that if China cut us off today, we’d have a national emergency on our hands tomorrow.
“Jeff, this is silly – if onshoring was Trump’s true goal, why not just lobby Congress to allocate trillions for a domestic manufacturing push? Why hit countries – especially ones other than China – with nosebleed tariffs?”
Let’s explore some possibilities…
One – partisan politics.
Trump and many Republicans historically have opposed “big government spending” unless it’s framed around defense or infrastructure. A massive federal investment campaign would clash with that stance.
Two – cost and hypocrisy.
We already have a federal debt and fiscal deficit that are bordering on unsustainable. Trump can’t have his DOGE team cutting costs and highlighting government waste over here while he spends trillions over there. The optics would be awful.
Three – immediate leverage.
Tariffs can be enacted literally overnight via executive action. Large-scale domestic manufacturing incentives require legislative approval – a much slower and politically contentious process.
Four – immediate pain on China.
Tariffs make it more expensive to import goods from China (and other manufacturing-heavy nations) immediately, nudging U.S. companies to consider relocating production closer to home or to “friendlier” nations (also called “friend-shoring”) – even if Trump’s tariffs on those other countries remain, which they might not.
Five – immediate pain on corporate America.
U.S. companies outsourced to China and other countries for decades to cut costs. Moving back to the U.S. is expensive, risky, and slow. Tariffs create the pressure to reconsider.
And the final reason brings us full circle to the 1950s…
Being honest with the public about our vulnerability to China could result in unhelpful panic
Admitting the full extent of America’s supply chain/manufacturing dependence – particularly on China – could shake consumer confidence, spook markets, and raise serious questions about readiness for conflict or crisis.
So, we get the Cold War strategy: the government admits the threat is real, but the public gets a managed, watered-down version.
If you’re skeptical, ask yourself this…
Based on what you know about Trump – and our government’s history of misleading the public when it serves its purposes – is it not possible there’s some degree of misdirection?
Now, why would there be a misdirect?
Did you know that China faces a demographic and economic collapse?
From the Council on Foreign Relations:
China’s population fell by two million in 2023, marking the second straight year of decline.
Statistics suggest that China’s total fertility rate, which has steadily declined from 1.5 births per woman in the late 1990s to 1.15 in 2021, is now approaching 1.0—far below the replacement level of 2.1 that would maintain current population levels…
Perhaps unappreciated is the extent to which current official population projections actually underestimate the extent of these challenges, precisely because they bake in shaky statistical assumptions that fertility rates will “rebound” in coming decades.
Here’s Business Sweden with the impact of the demographic collapse on the Chinese economy:
The ageing population and declining workforce are straining China’s economy.
Labour shortages threaten industrial productivity, and global supply chains may face disruptions as labour-intensive industries relocate to regions with lower costs.
Raising a child in China costs approximately 6.3 times GDP per capita, one of the highest rates globally, further discouraging higher birth rates.
And here’s Forbes:
This limited number of workers will have to support themselves, their immediate dependents, and about half of what each retiree needs.
It will matter not whether the retirees have adequate pension resources or fall on public support, the economics will be the same.
Workers, in addition to other needs, will have to produce retiree demands for food, clothing, shelter, medical service and more.
Under such pressure, it is hard to see how China will be able to produce much of an economic surplus, for exports, for instance, or for the investment projects that are necessary for rapid economic growth.
What if – facing these demographic and economic pressures – Chinese leadership senses a narrowing window of opportunity to assert its interests?
What if China realizes that this is the strongest it’s going to be?
Perhaps, behind closed doors, our government has information concerning this and feels it’s important to shore up our manufacturing base immediately.
If so, then this tariff absurdity – though ugly and disjointed – might be the fastest way to jumpstart the critical reshoring process.
Even if I’m dead wrong about “why,” the push for onshoring is happening regardless.
And that means investors should see the writing on the wall…
The next handful of years could support an explosion of domestic manufacturing buildout
From pharmaceutical manufacturing… to rare earth mineral mining… to semiconductor production… to steel manufacturing… to high-tech defense and weaponry buildout…
Anything and everything critical to U.S. dominance will be on the receiving end of billions, possibly trillions, of public/private dollars as we race toward domestic manufacturing autonomy.
In other words, we could be on the cusp of a super boom.
Inflationary? Most likely.
But supportive of enormous earnings/economic growth? Absolutely.
Such a domestic buildout would have huge implications for electric power generation… oil and gas pipeline companies… construction & engineering stocks… factories and robotic automation… you name it.
We’re running long…
I’ll leave you with this: Look beyond tariffs.
The story we’ve been told in today’s headlines doesn’t add up 100%. And that suggests something else is happening under the surface.
I suspect that those who sniff it out are going to make a tremendous amount of money.
Have a good evening,
Jeff Remsburg
