Copper Tariffs Would Short-Circuit An Already Challenging U.S. Electrification Build-Out

 

(Originally published at Forbes.)

Whether the goal is to get Germany to fund its NATO obligations, convince Mexico to crack down on drug traffickers, tout the benefits of U.S. statehood to Canada, or compel Colombia to receive U.S. deportees, President Trump’s international overtures are often infused with tariff threats. Trump’s first term record makes those threats credible, despite the collateral damage his tariffs inflicted upon U.S. manufacturers and farmers. But the administration must not allow tactical use of tariffs to subvert its long-term U.S. economic security objectives, including the imperative of building out and ramping up U.S. electrification infrastructure to meet the demands of our emerging, power-intensive, 21st century industries.

The outcomes President Trump seeks by threatening tariffs differ by country, but common to most cases is his desire for foreign investment in the U.S. economy. In a remote speech broadcast to the World Economic Forum in Switzerland last week, Trump offered a general ultimatum: invest in U.S. manufacturing and enjoy some of the world’s lowest corporate tax rates or produce elsewhere and incur tariffs to sell your products in the United States.

If Trump is fixed on luring manufacturing investment stateside by erecting a tariff wall, he should at least exempt imports of raw materials and other intermediate inputs – especially critical minerals – from those levies.

Whereas tariffs on imported finished goods may provide incentives to produce in the United States, tariffs on production inputs are strong disincentives to do so because they raise U.S. manufacturing costs in both absolute terms and relative to costs in countries where inputs are not burdened by tariffs. This matter needs immediate attention since U.S. producers import significant amounts of raw materials from their North American neighbors and the Trump administration is poised to impose 25% tariffs on imports from Canada and Mexico beginning February 1.

Trump has reserved some of his bluntest criticism for Canada, declaring to a recent gathering of officials that the Canadians have been "very tough to deal with over the years," and that "we don't need them to make our cars, we make a lot of them, we don't need their lumber because we have our own forests... we don't need their oil and gas, we have more than anybody."

As the larger economy, the United States enjoys some leverage in negotiations with Canada. But imposing tariffs would betray a deep misunderstanding of the interdependent nature of the U.S.-Canada economic relationship. America’s resource-rich neighbor is a crucial source of many of the critical minerals required to build, maintain, and upscale the infrastructure needed for the United States to be secure and to thrive at the commanding heights of the 21st century, high-technology economy.

Consider copper. The “mineral of electrification” is essential to manufacturing and construction in traditional and emerging U.S. industries, alike. Electrical uses of copper, which include power generation and transmission; wiring in offices, hotels, and other structures; telecommunications; and electrical and electronic products account for about 75% of total copper demand. But copper is also used intensively in transportation equipment and infrastructure, industrial machinery, and a growing number of products. Lower copper prices enable greater profitability among U.S. manufacturers, and more investment.

In 2022, as economists and geologists were coming to terms with the surging demand for critical minerals spawned by the race to curb carbon emissions, S&P Global produced a report projecting copper demand to double from about 25 million metric tons in 2022 to 50 million by 2035.

Pulitzer prize winning author, energy-sector expert, and S&P Global vice chairman Daniel Yergin noted at the time how unrealistic it was to expect copper supply to meet that demand growth in such a short period, lamenting that “[o]n current trends, the doubling of global copper demand by 2035 would result in significant shortfalls." The report stated that it was unlikely that growth in supply capacity from new mines or expansion of existing mines would be able to keep pace with the surge in demand. The report’s most optimistic projection was that even with aggressive growth in capacity utilization and recycling, supply deficits would persist through most of the 2030s, “exerting tremendous upward pressure on the cost of manufacturing as well as energy costs for consumers.”

Those projections were made to account for the rapid, large-scale development and production of electric vehicles and batteries, charging-station infrastructure, solar panels, and wind towers. They also were made before the artificial intelligence boom was on the public’s radar. Now, demand projections are even greater on account of the growing applications of AI, block chain technologies, and defense-related demands for quantum calculations.

Imports account for about half of U.S. copper usage today – up from only 10% in 1995. That share is expected to grow to as high as two-thirds by 2035. An intensifying competition between China and the United States for critical metals is very likely to have geopolitical implications, the study concludes.

Today, Chile, Peru, and Canada account for a large majority of the imported U.S. copper supply. But to Chile and Peru, the United States is a relatively small market. Most exports from those countries go to China. As their largest market, Beijing has some degree of market power and could exert pressure on Chile and Peru, at any point, to commit more supplies to China, at U.S. expense.

U.S. policy should prioritize securing existing supplies of copper and other critical minerals from reliable allies like Canada and its important industrial facilities like the Horne copper smelter, the largest electronic scrap processor in North America. Tariffs would sink that strategic priority.

The mining, refining, and forging stages of the supply chain are already reasonably integrated. The U.S. portion of the industry employs over 65,000 workers, generates $77 billion in output, and depends on access to imports of refined copper to succeed.

The United States is rich in mineral resources, as well. But historically exorbitant costs of mining and refining, as well as notoriously long regulatory approval processes have deterred development of the infrastructure needed to cultivate activity in these upstream stages of the manufacturing processes. That can change following reforms to U.S. laws and regulations, but that process will take some time. The International Energy Agency has estimates that it currently takes 16 years, on average, to develop a new mine – longer still in the US.

All of the game-changing, 21st-century industrial developments portend massive increases in electricity demand. The challenge of meeting that demand requires openness to trade and a willingness to do what it takes to secure the necessary critical minerals. Tariffs on materials like copper would simply increase the costs of building out our electrical infrastructure, jeopardizing its promise.