Metal Movers: Macro-economic impact of tariffs

Raghav: Hello, and welcome to the Argus "Metal Movers" podcast. I'm Raghav Jain, senior reporter for Argus Non-Ferrous Markets, covering the base metal and stainless steel sectors. Macroeconomic trends, particularly central banks' monetary policy, have been a major driver in base metal pricing over the past 18 months, as policymakers have sought to thread the needle between bringing down inflation and providing support for economic growth. This task has become even more complex with the return of Donald Trump to the U.S. presidency and the subsequent resurgence of trade conflict across the world.

To explore how the wider macro picture may influence metals markets this year, I am joined today by economist and author, Jonathan Haskel. Jonathan is a professor of economics at Imperial College Business School, Imperial College London. He was an external member of the Bank of England's Monetary Policy Committee from 2018 to 2024. While from 2016 to 2023, he was a non-executive director of the UK Statistics Authority. And from 2001 to 2010, he was on the reporting panel of the UK Competition Commission. He is the co-author of "Capitalism Without Capital," the 2017 book that explores the rise of intangible capital and how it has shaped modern economies in the 21st century. Jonathan, thank you for joining us today.

Jonathan: Raghav, delighted to be with you. Thank you for having me on.

Raghav: Wonderful. Now, let's kick things off with a big-picture outlook. What are the key macroeconomic trends you see shaping 2025? According to you, are we in a period of sustained growth, stagnation, or volatility?

Jonathan: Thanks very much, Raghav. I think before two weeks ago, I probably would have said that 2025 is going to be a period of somewhat of stagnation, which is to say many developed economies, pretty flat inflationary pressures are still affecting us, you know, left over from the types of pressures that we have from COVID. We had a cold winter here in the UK that's pushed up gas prices both in the UK and in Europe. So, if you'd asked me two weeks ago, I would have said fairly flat, you know, a bit of inflation. I wouldn't quite say stagflation, but to the dictionary definition of stagnation being a rather complicated one. But that would be the sort of general portrait. Now, of course, since then, we've had the various developments around Ukraine and Mr. Trump and all of that. And that's thrown a lot of that, I think, rather up in the air.

Raghav: It has, hasn't it? I mean, I'll get to the U.S. in a minute, but let's start close to home, I suppose. I'm curious on your views on European inflation and interest rates. With inflation stabilizing in the UK and Europe and central banks adjusting interest rates, how do you see monetary policy influencing commodity markets and particularly base metals? And I suppose there will be a knock-on effect from, you know, what's happening with Mr. Trump, as you said, but curious to sort of hear your views on this.

Jonathan: Yeah, thanks. Raghav, let me just pick up on the previous answer. I think we then, essentially as a community of macroeconomists, have to make a guess if we're trying to figure out the overall economy, which is what macro does. We have to make a guess about what the effects of tariffs are. And I think what we are seeing... So, you know, this is me speaking on a Tuesday afternoon, heaven knows what it's going to look like tomorrow afternoon. But anyway, if the listeners will just bear with us, I think what we are seeing is a lot of tit-for-tat on tariffs, actually. So, my understanding this morning of the announcement of tariffs on Mexico, and Canada, and China as well is that all those countries have retaliated with sort of matching tariffs back against the U.S.

Now, again, you know, there are lots of political difficulties around all of this. So, I won't say who's right and who's wrong. I guess the job of the economist is to try to unravel what we think the effects are going to be on the economy. And I think most economists take the view that a situation where you just have one country, even a big country like the U.S. imposing tariffs is probably inflationary for the U.S. and probably of not that much consequence for other countries if nothing else happens. But now, we have all these reciprocal tariffs being imposed. We have the very real specter, it seems to me, of a tariff war. And a tariff war, I think we know from history, is deflationary, by which I mean both deflationary for prices because activity slows and deflationary for growth because activity slows. That's the one kind of common factor driving all of that.

I think the last part of that chain then to your question is, what is the consequence for metals and commodity prices? And at that point, I'm happy to bow to the superior knowledge. I'm sure lots of people listening to this program, but in a very simplistic sense, I presume a lot of commodity prices sort of follow the level of activity very generally, right? High levels of activity and very strong growth means high demand for the iron ores, the coppers, all those kind of commodities. So, a period of subdued growth it seemed to be pulled down as it were derived demand for those commodities. And that presumably is bad news for commodity prices.

Raghav: Yeah, makes sense. I mean, obviously, the U.S. tariffs, staying on that topic, are very much in the headlines. What impact do you see these tariffs having on inflation, monetary, and fiscal policy in the U.S. itself, domestically?

Jonathan: And yes, it's a very good question. I think in the U.S. itself, there is a general agreement that these tariffs are potentially quite inflationary. And the reason they're inflationary is, of course, has been pointed out by lots of economists. If we think back to tariffs in the 1920s, which is the last time we had all these big tariff rounds, the U.S., of course, at that time was importing lots of final goods. That's essentially what international trade was. Trade wasn't a sort of split-up supply chain with all sorts of intermediate inputs crossing over borders multiple times. Trade was, you know, you made some cars, but you didn't make any, I don't know, aircraft. Somebody else made aircraft, you didn't make any cars. And so, a tariff on aircraft, a tariff on cars was all very straightforward.

Nowadays, because the bulk of trade is made of these very, very complicated supply chains, I mean, that's why companies are so much more efficient, a tariff on imported goods is not a tariff on a good that you, that particular country, are not making. It's actually a tariff on yourself, by which I mean, it's a tariff on a good which you are importing, let's say a component of a car, which you are then putting together and then you're re-exporting it again. And so, the way that tariffs work nowadays, I just think is quite different to the way that tariffs used to work. And that puts them as being more of a sort of cost-based, a sort of cost driver, a cost escalator essentially for domestic industries, which pushes one, I think, towards them being rather much more inflationary than was previously thought. So, if I had to guess, those kind of pressures would be upwards on U.S. inflation.

Raghav: We've seen automaker shares drop quite drastically today as these things have been unraveling, I suppose, which is I think to your point as well. I mean, Trump has also threatened tariffs on the EU. That's still up in the air. He hasn't actually gone ahead with a proper announcement. If he was to go ahead with these tariffs on the European Union, how do you see the European Union's picture playing out then?

Jonathan: The European Union, at least in their declared statements, is very sensitive to all of this. There are tremendous political pressures obviously around tariffs and trade in the European Union, especially around food. So, again, speaking on a Tuesday afternoon, and who knows what might happen tomorrow, or who knows what might happen this evening?

Raghav: Much like the British weather.

Jonathan: Well, but that's the glory of Britain. We have to embrace the uncertainty. Part of the reason we like cricket in the UK, of course, is the weather interferes with the cricket all the time, but that makes it even better, it seems to me. So, with all that uncertainty, what has the European Union said? The European Union has said, as I understand it, that they would reciprocate with those tariffs and reciprocate quite forcefully. So, again, my reading of that is the economics kind of collides with the politics. Once you get these reciprocity in tariffs, then as I say before, Raghav, as we were just discussing, that's probably negative on activity. And I'd expect that that's the way it would push that.

Raghav: Interesting. Thank you. Obviously, China is the biggest consumer in our base metal space. So, let's just spend a few minutes talking about China. How do you assess China's economic trajectory in 2025? We've seen the country implement significant stimulus measures recently, partly because I think they were anticipating U.S. tariffs. What fiscal measures does it need, in your opinion, or what can we otherwise expect to see in the near and medium term?

Jonathan: Well, again, just to carry on with the tariffs discussion, if I may, I mean... Well, let's park the tariffs for a second, actually, having said all of that. The internal issues in China, I mean, again, I defer to those who are many more expert than me, but they look to be pretty serious around property markets and indebtedness and all of that. And the sense, again, as an outside observer, one gets is that the Chinese government are going to have to step in quite drastically in order to keep firms going and keep that sort of stimulus going. So, that's one set of pressures. The other sets of pressures are, again, to go back to it, the tariffs and so on. China manufactures, as best I understand the numbers, a third of the world's manufacturing, which is an absolutely extraordinary number, which tells you that the ability, I think, to switch away from China is there, but not in the short term.

So, again, I think what crucially matters is the various responses that there are to all these tariffs. And here is where the EU and the U.S. and so on come in, which is if the U.S. imposes, as they have done this morning, imposes tariffs on China, what crucially matters is what the other countries actually do. And it's not clear to me whether the EU and various other countries will also impose tariffs on China, in which case, of course, the EU countries might benefit in some sense, which is those goods which would otherwise have gone to the U.S. end up flowing to...sorry, those goods which would otherwise have gone from China to the U.S. possibly end up flowing to Europe, which is sort of, you know, good price of inflation, at least in Europe. So, again, quite how all this plays out, you know, is yet to see.

Raghav: Very interesting indeed. Just shifting focus to the European Union. We saw just last week, the EU unveiling its Clean Industrial Deal, which is focusing on aiding high-emission industries and transitioning to net zero emissions and boosting clean technology sectors. Mario Draghi's recent report further emphasized the need for substantial investments to enhance Europe's competitiveness. You kind of touched on trade tensions between the U.S. and China and how the European Union might actually benefit from all that. But how do you see the European macro landscape evolving as a result of these measures, measures like, you know, Mario Draghi's report, and indeed things like the clean industrial deal?

Jonathan: Yeah, well, on the one side, of course, the European Central Bank is very focused on inflation and doing all of that. And they've been very clear about the type of policies they want to pursue. But, Raghav, you're right, the Draghi report and that whole environment is, I think, really important in thinking about how Europe goes forward. And the additional element to that is, of course, the defense issues around, you know, America essentially withdrawing more or less...well, I wouldn't say withdrawing from NATO because they haven't withdrawn from NATO, but withdrawing their military support. Why don't we just use that general form of words? I mean, specifically, the announcement of withdrawing support to Ukraine this morning, and more generally, the notion that the U.S., you know, might be funding NATO and so forth less than it otherwise might be.

So, I think the interesting question is the sort of intersection between the Draghi report and the need, almost certainly, for increased defense spending in Europe. And the reason I mention all of that is this, the Draghi report, as you know, concentrates enormously on the tech sector. It is essentially a plea for Europe to embrace the tech sector. It's full of sort of counterfactual experiments about how Europe would be much more productive if it had more of a tech sector and all of that. Now, a number of those experiments, I think, are not right. It's true that Europe has got a smaller ICT manufacturing sector than America, but we're just much less productive both in the manufacture of ICT, but also in the use of ICT as well. And it's the use numbers, which are the really big numbers. So, what we've got to focus on in Europe, I think, is enhancing the use of ICT and the use of advanced technology rather than just producing it.

Now, the reason I mention all of that is if we just hold that thought and now think about what the consequences are going to be for an increase in the requirements to spend more on defense, one story about the defense is we're going to need more ships and tanks and boots for infantry soldiers to march about in and all that kind of thing, which is all very low tech. The other interpretation, which is coming out of the Ukraine war, is that modern-day armaments, modern-day warfare are actually very high-tech, drones, software, sophisticated communications, and satellite monitoring, and all that kind of thing. And if that second interpretation is right, then the drive in the Draghi report to a more high-tech Europe weirdly coincides with the demands for a more defense-orientated Europe. And maybe there might be therefore this sort of double impetus to a more, as I say, sort of high-tech, more technology-orientated Europe. And maybe that might be actually rather good for growth if we think that there were these technology spilloffs as well. So, I'm not saying for a second that the disengagement and the sort of change in world defense relations that we've seen, biggest change since 1945, I'm not saying for a second that's a good thing, but just in terms of the narrow economics, it might push Europe much more towards a focus on the technology side, which is kind of what Draghi wanted.

Raghav: I see. That's very interesting. I mean, good that you mentioned the defense sector because, obviously, a key area of focus for market participants in the base metal sector has been sort of the whole EV and the green energy project story. Now, that's a story that gathered huge impetus during the COVID years. But then we've seen a significant slowdown, particularly in Europe and the U.S. for those two sectors. So, if I was to combine those two and maybe ask you about, say, construction and automotive, given the increased spending on defense, where does that leave these sectors, which, you know, in theory, are the more metals-consuming sectors, if I may?

Jonathan: Well, again, Raghav, and this is an amateur just commenting on all of this because these are the sort of the inner details of the industrial structure, but if I had to guess, if what defense expenditure means, as I say, is technology around software, around drones, and things like that, and a bit of tanks and, you know, trucks and army vehicles and all that, I can see increased defense expenditure directly benefiting the automotive sector, automotive writ large, and not only, you know, personal cars, but military vehicles, all that kind of thing. I can see all of those benefits, and that obviously cascades down to the demand for base metals. On the other hand, as I say, if part of the defense expenditure is also these much more technology sides, then presumably the cascade down to base metals is actually much less than people might think. So, I think it's an interesting kind of race between what actually that increase in defense expenditure actually means in terms of, as I say, how that then cascades down to the demand for base commodities.

Raghav: Well, I think that concludes the podcast. Thank you very much for your insights, Jonathan. For more information on our prices and all the rest of our news and analysis coverage, please visit https://url.uk.m.mimecastprotect.com/s/ffXXC4QY1i8zBRRuNFWU46a3O?domain=argusmedia.com.