For those of you who would prefer to listen:
Trade wars are picking up again. The 90-day truce on tariffs expires next week. Talks continued all week with varying degrees of urgency and speed. This week, the American President announced a new twist on tariffs. It’s squarely directed at chips and digital devices. President Trump threatened 100% tariffs on semiconductors made overseas. But he said companies that have committed to building manufacturing facilities in the US will be exempt. The President did not specify when it would go into effect. The Market rallied on this news. Tech led the charge higher, as it has done all Summer.
Apple has been caught squarely in the crossfire of trade wars from day one. The coveted iPhone is expressly designed in Cupertino but manufactured overseas. CEO Tim Cook has dynamically adjusted Apple’s complex supply chain the last couple of years. Covid taught everyone a lesson. Apple has reduced its dependence on China, moving much of its manufacturing to India and Vietnam. But Cook’s most strategic move of all perhaps was his visit to the White House this week.
Tim Cook has proven to be a master politician himself. He established a close rapport with President Trump in his first term, one of the few Silicon Valley executives to do so. This second go-around has been quite different. Apple has been targeted by the White House for still not making products in America. The stock has been sluggish all year. With the perceived goal of turning the tables, Mr. Cook went to Washington with a plan to manufacture more in America, expand the current investment by $100 Billion and brought a golden gift for the President. Cook outlined an end-to-end silicon supply chain on US soil. When remains a big question. Even though there is no visibility for the iPhone to be completely made in America, the gesture seemed to work for now. The two leaders are back on good terms.
There was no stated guarantee of Apple’s exemption from the 100% tariffs. That would be devastating for the company. But the stock rallied as the Market is clearly assigning an implicit exemption. That put a charge into the Dow and S&P, with the Tech-heavy NAS leading all. Apple shareholders enjoyed the best weekly move for the stock in years. Employees in Cupertino were likely less enthusiastic about their boss’s move in the Oval Office. This, from many of our sources in Silicon Valley. It shouldn’t come as a surprise though. Politics are everywhere.
News broke Friday about a possible Trump-Putin meeting next week. President Trump has been looking for ways to pressure President Putin to end the Russian war in Ukraine. Putin had been seemingly ignoring the demands for months. A risky and controversial tactic took place this week. The White House slapped additional 25% tariffs on India and threatened more fines. India is a strategic American ally, but is also the second-largest purchaser of Russian crude. The strategy is seemingly to force Delhi to stop buying Russian Oil, shrinking revenue for Moscow’s “war machine”. At 50%, India now pays amongst the highest tariffs of any nation. That’s an action generally geared more towards an adversary than ally.
Here’s some perspective: India is a major Oil importer. It lacks its own natural reserves. India imports over 4.5 Million barrels per day. Before the Russian invasion of Ukraine in 2022, India sourced a mere 0.2% of its Oil from Russia. Now, Moscow provides roughly one-third of all Indian imports. Russian Oil sells at a discounted price due to sanctions. The discount is roughly $3 per barrel. But it adds up. According to one of our sources, Indian refineries save close to $1 Billion every month by buying Russian crude. India uses most of this fuel for its own energy needs. But it also uses the discounted Oil to generate significant revenues from exporting refined petroleum products like diesel and jet fuels. Much of that goes to Europe. Buying cheap Russian crude and refining it for export has allowed India to not only maintain its political and economic relationship with Russia, it’s also made it more profitable.
In response to the sky-high tariffs, Prime Minister Modi struck a defiant tone, saying India won’t back down and is ready to pay a heavy price. India suspended its plans to buy more American aircraft and weapons. New Delhi had been planning to send its Defense Minister to Washington for an announcement on some of the purchases. That trip has been cancelled. What’s more, India has been expanding its relations with fellow BRIC (Brazil, Russia, India & China) nations. This week, Modi held scheduled talks with Brazil President Lula to discuss strengthening trade ties. Lula has also sparred with Trump over tariffs. Modi will meet with China President Xi in the coming weeks. That will be the Indian Prime Minister’s first visit to China in 7 years.
India sees itself as fiercely independent. The nation has a long history of “non-alignment” to any one global power since leaving British rule. That said, India’s relationship with the United States had become closer as both nations share a mutual distrust of China. For India to back down in the face of US tariff threats and essentially downgrade its relationship with Russia would not play well among the Indian public. It would signal weakness. Prime Minister Modi cannot be seen kowtowing to any US administration. There’s also this: Modi is keenly aware that the American President can change his mind in an instant as a negotiating tool.
This is all a chess game on the global stage. India values its decades-long relationship with Russia, principally because Moscow is a hedge against its chief Asian rival, which is China. Delhi has long had tensions with Beijing. Issues have ranged over border disputes, water rights, technological advancements, and China’s support for Pakistan. While relations with China have thawed a little this year, India doesn’t want to anger Russia by caving to Washington. Such a move would risk pushing the Kremlin even closer to Beijing.
Further complicating the situation is this: India and Pakistan, both nuclear armed neighbors, had recently been in military conflict. President Trump claimed victory for brokering a ceasefire, something that Delhi disputes. President Trump also hosted Pakistan’s military leader at the White House recently, further angering India. Trust in the relationship is being tested.
India is the world’s second-largest importer of military supplies, behind Ukraine, and Russia has been its top supplier. However, Delhi has shifted to importing from Western powers, with the majority coming from the United States. The shift in suppliers was driven partly by constraints on Russia as it is mired in the 3-year war in Ukraine. What’s more, many Russian weapons have proven poor, and in some cases ineffective in battle. India is unlikely to completely extricate itself from Russian-made weapons. Delhi has been a trade partner with Moscow for decades. To maintain those weapons, Indian military systems will continue to require Russian support.
The White House has used the Russian Oil purchases to justify the pressure on India. But there is likely another trade interest in play. India has long charged high tariffs on American exports, and the US wants better access to its vast agricultural and dairy markets. And even more significant, the Trump administration could be targeting India in order to send a message to China before the trade truce expires next week.
Deep in all of this is China, the second largest economic power and America’s greatest rival. They’re also heavily intertwined economically. China is the number one buyer of Russian Oil, yet the White House is not driving up tariffs on Beijing. At least not yet… Our sources believe there will be another 90-day extension issued next week as talks continue. But how President Trump addresses Beijing’s Russian purchases will be closely watched.
The rivalry between the United States keeps heating up. The quest for technological, economic, and military supremacy is at stake. Both are in it to win it. This week, the iPhone and India found themselves in the middle. Talks between Washington and Beijing will be front and center next week with an extension of the trade pause likely. Everything seems so transactional. Short-term deals are good. But it’s the long-term that matters most. The Market seems more than ok with it for now. There’s nothing Bearish about all-time highs. We’re just always trying to make sense of all of it, best we can. That helps us anticipate what’s next. It sure isn’t easy. It also helps us explain to you what we think and what we do. Informed opinions are the best kind. I’ll never stop believing that.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
