President Trump has promised a lower tax environment, including the slashing of the corporate tax rate from 21% to 15%. Combined with a hike in import tariffs, the intent is to incentivise the relocation of companies and manufacturing facilities to the USA. Under a lower tax environment, higher levels of consumption and investment should support GDP growth, with commodity demand also a beneficiary.

The offsetting outcome, however, is a reflationary environment. Inflation could partly come from higher demand as a result of lower taxes (although this is difficult to evaluate over the medium term), but price pressures would primarily be driven by higher tariffs on imported goods. Such a scenario could translate into market pricing in the form of slower Fed rate cuts or possibly a reversal of its recent monetary direction. Depending on the impact of US fiscal and trade policy on the rest of the world, a strengthening USD would be expected in almost any scenario.

Critical material supply chains in the USA

The concept of raw materials as a limiting factor in building supply chains is generally understood. The issue of where materials are sourced from and processed has become more complex as a result of recent legislation (e.g., IRA and CHIPS and Science Act) and is now set to increase in complexity with likely changes to trade policy.

President Trump intends to impose a 10% to 20% trade tariff on all imports, with Chinese imports subject to a potential 60% tariff. Estimates from Evercore ISI suggest that the average weighted import tariff was around 1.5% in 2016. Following the implementation of Trump-Pence administration tariffs, the average weighted import tariff increased to around 2.3%. However, under the currently proposed plans, the average weighted import tariff could increase to around 17.0%, potentially leading to a significant inflationary impact, which could ultimately land on the consumer.

While businesses are expected to increase CAPEX and, therefore, expand their capacity to procure raw materials and grow production under a lower tax environment, higher tariffs would push them towards sourcing domestic materials. Ideally, this should further incentivise the buildout of regional supply chains, but a high-inflation environment typically results in hesitancy to invest amid slower economic growth. It is also worth noting that for many businesses, investing in new supply chains is a strategy that would take longer than the next four years; therefore, the uncertainty around the permanence of a lower tax rate environment could also impact such decisions.

Foreign policy and trade impact on critical industries

Not only could higher inflationary pressures slow economic growth in the USA, but the proposed increase in tariffs would specifically impact China as well. There are significant global ramifications when the two largest national economies slow more than expected, directly impacting commodity demand and consumer sentiment.

Ultimately, President Trump has stated that he wants to phase out all Chinese imports of essential goods, restrict the ability of US companies to invest in China, and revoke China’s most-favoured-nation (MFN) trade status established with the WTO. If implemented, these actions would alter the global outlook, which has shifted towards unilateral protectionism in recent years, with changing trade flows and macroeconomics. China, the economy of which has been supported by export-led manufacturing in 2024, is expected to entrench further into Southeast Asia and continue to diversify its export portfolio as the USA focuses on regionalisation, which will impact trade, economics, foreign policy, and geopolitics over the next decade. However, the possibility remains that Southeast Asian countries will take advantage of low production costs to gain market share from China. Furthermore, Europe is expected to be caught between a more protectionist USA and increasing competition from China, two regions on which Europe is significantly dependent for trade. This could have a potentially greater negative impact on Europe’s economic growth and ability to deliver on green initiatives. Notably, increased regionalisation could lead to further price bifurcation between regions depending on trade flow dynamics.

In line with reshoring efforts, the high-tech industry could accelerate in the USA under the Trump-Vance administration. We expect demand for semiconductors in the USA to grow at a CAGR of 5.4% for integrated circuits and 3.0% for LEDs from 2024 to 2029. This would require an increased supply of critical materials for semiconductor applications, the supply chains for which are currently subject to a trade war. China has already restricted the export of a number of critical materials, such as gallium and germanium, with the increased risk now that higher US import tariffs on ‘essential’ goods could actually exacerbate the bottlenecks in critical material supply chains.

Potential impact on the battery industry

President Trump has vowed to “end the EV mandate on day one” and has labelled climate policy the “green new scam”. Therefore, under the Trump-Vance administration, Project Blue expects tariffs on Chinese EVs produced outside the USA to remain in place. This move is consistent with continued protectionism and greater openness towards localising supply chains.

The US ESS market is currently in a stage of rapid growth, driven largely by incentives and financial support. However, increased negative sentiment surrounding EVs could result in reduced IRA and ESS support as climate concerns are abandoned amid increased domestic fossil fuel production and consumption. While President Trump will likely push for reduced financial support for ESS and renewable projects, the IRA is expected to remain in place as a large number of Republican states benefit from IRA incentives. However, the USA will likely no longer align with the Paris Agreement. Ultimately, on an application basis, the ESS sector is expected to be affected more negatively than the EV sector, but the EV sector will still have the greatest impact on raw material demand over the coming decades.

As a result, Project Blue expects to see a delayed EV adoption curve compared to what would have been expected under a Harris-Walz administration scenario, with the USA expected to fall a few years behind schedule. Therefore, BEV/PHEV penetration rates are projected to increase from 9.2% in 2023 to 29.8% in 2030. Consequently, demand for battery raw materials (lithium, nickel, and cobalt) will falter, potentially giving the USA valuable time to localise supply chains. One wonders, however, if the seemingly growing influence of Tesla’s Elon Musk might soften the new administration’s policies towards putting roadblocks in the way of EV adoption.

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