Real Asset Chartbook Week 14

Given the copper tariff announcement this week, it seemed worthwhile to sketch out where the US gets its copper from, as the situation is not nearly as dire as a 50% tariff makes it out to be.

We think a little context goes a long way in this situation and leads us to believe that the tariff is a wholly unnecessary impediment to a well-functioning market. If Trump were serious about achieving self-sufficiency in copper, he would focus on permitting reform, as we have plenty of domestic copper and only lack the smelting/refining capacity. Unfortunately, for the US, Tariffs are not the basis upon which businesses build assets with lives measured in decades, especially when the tariffs may have lives only measured in days, weeks, or, as is likely the outside case, a single Presidential term.

The first thing worth observing is that copper’s high imports as a percetnage of demand is not unique to copper. The second important observation is the difference between the US copper imports and net imports which reflects the fact that the volume of copper the US exports (and thus mines domestically) is fairly high as well.

The US is, in fact, the fifth-largest copper miner globally, behind Chile, the DRC, Peru, and China. The US does not produce enough copper domestically to meet demand, and it lacks the smelting/refining capacity to produce anywhere close to the refined copper demanded. However, the US is not a copper afterthought.

Smelting/refining capacity is where the US comes up short. The domestic copper endowment, if miners are allowed to exploit it, is significant. While finding and building copper mines is costly and time-consuming, it can be done in the US, although it could be made much easier and more economical. Even if the mines were built, though, the US only has two primary copper smelters, both of which are running at or near full capacity. For context, in the 1980s, the US had 16 primary copper smelters.

The lack of smelters/refiners is going to make any efforts to achieve self-sufficiency in refined copper challenging, especially given the age of the existing US copper smelters and refiners. The two operating smelter/refinery operations, Freeport's Miami-El Paso and Rio's Garfield smelters, were both originally built more than 100 years ago, and both had their last major refresh roughly 30 years ago. Grupo Mexico owns the Hayden smelter, but it shuttered it in 2019. A restart is being studied and could deliver 150,000-200,000 tons of refined copper.

As previously noted, the US geological copper endowment is strong. The US has a mined copper deficit of about 500,000 tons, which could rise to 1.4 million tons by 2035. Yet the country also has a mine project pipeline that could add about 2 million tons, allowing the US to become self-sufficient, even taking into account 300,000 - 400,000 tons of depletion.

Freeport's efforts to deploy sulfide leach technology to exploit low-grade stockpiles could add a further 250,000 tons, while Rio-BHP's Resolution mine could add almost 500,000 tons by 2035 if it secures approval. Hudbay's Copper World and Mason projects have the potential to add 260,000 tons. Freeport could add 700,000 tons in brownfield expansions, and numerous other domestic deposits are being advanced.

Given the current state of global trade, it became necessary earlier in the year to gain a historically informed understanding of international trade policy, particularly US trade policy. Interestingly enough, the shelves of the library and Amazon, were very bare when it came to general overviews; Jim Grant kindly sent us a copy of “A Tariff History of the United States”, written by Frank Taussig in 1931, the impresario of Bloomberg’s Morning Show, Tom Keene, mentioned “Clashing over Commerce: A History of US Trade Policy,” by Douglas Irwin, published in 2017, and in 2018, Donald Johnson published “The Wealth of the Nation”, which we have not yet read but is sitting on the shelf just waiting to be read.

Beyond those three books, broad overviews are few and far between. There are a few deep dives into trade during the Jacksonian era, the Civil War era, and niche topics, like early US-China trade relations (A World Safe for Commerce: American Foreign Policy from the Revolution to the Rise of China) but the topic of trade, and trade relations has apparently “engendered narcolepsy among generations of American Historians” according to John Belohlavek. That would seem to imply that the average man or woman on the street is even less informed.  We will endeavor to correct this with some historical missives over the next few weeks. To begin, we will present Irwin’s framework for understanding the history of US Trade. With any hope, these short commentaries will make you more informed about trade than anyone in DC, which we suspect is a low hurdle.

The Three R's: Core Objectives of Trade Policy

American trade policy has consistently pursued three primary objectives throughout its history: Revenue, Restriction, and Reciprocity.  To be clear, “reciprocal tariffs” do not represent a fourth R with a new objective; reciprocal tariffs are a tactic for achieving a flavor of reciprocity.  These "three R's" represent the fundamental purposes that have driven tariff and trade agreement decisions since the nation's founding.

Revenue involves levying duties on imports to fund government operations. This was the dominant objective from 1789 to 1860, when tariffs generated approximately 90 percent of federal government income. The revenue motive created relatively moderate tariff levels designed to maximize customs collections rather than exclude foreign goods entirely.

Restriction focuses on protecting domestic producers from foreign competition through import barriers. This became the primary objective from the Civil War through the Great Depression (1860-1934), when tariffs averaged around 50 percent on dutiable imports. The restriction era reflected the political dominance of manufacturing interests seeking protection from foreign competitors.

Reciprocity emphasizes negotiating agreements with other countries to reduce trade barriers and expand export markets. This has been the dominant objective since 1934, leading to the modern system of multilateral trade agreements and historically low tariff levels. 

Three Historical Eras and Structural Breaks in Policy

Within the context of a three R’s framework for understanding US trade policy, the US has experienced only two significant structural breaks over the past two centuries, resulting in three distinct trade policy eras. The remarkable stability within these eras, despite constant political conflict, reflects the deep-seated structural forces that shape trade policy.

The Revenue Era (1789-1860) was characterized by relatively moderate tariffs designed primarily to fund government operations. While protection was sometimes sought by northern manufacturers, southern agricultural exporters successfully maintained "a tariff for revenue only" through most of this period. The era ended with the Civil War's disruption of the existing political equilibrium.

The Restriction Era (1860-1934) emerged from the Civil War's political realignment, which shifted power from low-tariff Democrats to high-tariff Republicans. Protective tariffs became the dominant policy tool, with average tariffs on dutiable imports jumping from less than 20 percent in 1859 to about 50 percent during the war, where they remained for decades. This era was marked by intense political battles over the degree of protection, but the fundamental commitment to high tariffs remained intact.

The Reciprocity Era (1934-present) began with the Great Depression's political realignment and the passage of the Reciprocal Trade Agreements Act of 1934. This landmark legislation shifted trade policymaking from Congress to the executive branch and established the framework for modern trade negotiations. Tariffs have fallen to historically low levels through successive rounds of multilateral negotiations.

Geographic Foundations: Economic and Political Stability

The relative consistency of US Trade policy over more than two centuries owes much to America's stable economic geography, which has historically created predictable political coalitions that persisted across decades. Different regions specialize in various economic activities—cotton in the South, manufacturing in the North, wheat in the Midwest—and these specializations can endure for centuries.

This geographic specialization creates stable regional interests regarding trade policy. Export-oriented regions favor open trade, while import-competing regions seek protection. The correlation between House voting patterns on tariffs in 1828 and 1929—separated by more than a century—was 0.70, demonstrating remarkable consistency in the political geography of trade policy. The stability extends even to modern times: the correlation between 1828 tariff voting and 1993 NAFTA voting was 0.60 for states that existed in both periods. This persistence reflects the deep structural relationship between economic geography and political representation in Congress.

The economic geography of America has also created a "producer-driven" quality to American trade policy, meaning that farmers, miners, and manufacturers have traditionally dominated policy debates, while consumer interests remain largely unorganized. This creates systematic biases toward protection, as the benefits of import restrictions are concentrated among producers while the costs are dispersed among consumers.

Investment Implications

Perhaps most importantly for investors, a historically informed view of trade policy demonstrates that major changes in trade policy require significant external shocks. Only two events in American history—the Civil War and the Great Depression—have been powerful enough to disrupt existing trade policy equilibria and create lasting change. The Civil War shifted political power from the agrarian South to the industrial North, enabling the transition from revenue to restriction. The Great Depression discredited high tariffs and enabled the transition to reciprocity. These disruptions occurred not through gradual political evolution but through dramatic external events that fundamentally altered the political landscape. A future note will deal with the question of whether or not we have experienced the type of shock necessary to create lasting change; we are still uncertain.

Key Takeaways

1)      Trade policy exhibits remarkable stability within eras despite constant political rhetoric and conflict.

2)      The geographic foundations of trade politics create predictable coalitions that persist across decades.

3)      Major policy changes require external shocks of extraordinary magnitude—wars, depressions, or similar disruptions to the existing political order.

Until next week,