As we have come to learn in recent weeks, Global Times of China Editor Hu Xijin has the inside track on what message the Chinese government wants to send the U.S. and its government.
The most recent telegraphing of how China intends to squeeze the U.S. and get back for Huawei and other grievances, is to starve the U.S. from "rare earth materials."
Such rare earth materials are used in electric cars made by U.S. manufacturers such as Tesla (TSLA) - Get Tesla Inc Report , which rely on batteries, electric motors and inverters to operate. This has enormous implications for what kind of cars we want to rely upon, in order to keep America safe (full disclosure: I'm short Tesla).
Economic free-traders recognize that there are special cases where a country may not want to trade with another one. The obvious example is war. During World War Two, for example, the U.S. was not looking to exchange industrial goods freely with Italy, Germany and Japan.
The national security argument also stretches to preparedness for war. This means self-sufficiency in terms of critical production and natural resources. The resource that's been subject to constant debate since 1973 has been oil. It was viewed starting in 1973 that the U.S. was vulnerable to an oil embargo, and among other things we kept a Strategic Petroleum Reserve to handle at least a brief interruption.
Over the last decade, a miracle started to happen with new oil exploration techniques leading to record U.S. oil production and inflation-adjusted oil prices that are about as low as they've been in generations, if ever. In other words, access to oil is no longer a large national security concern, and it's getting smaller by the day.
One of the rationales for electric cars was this national security argument. By using coal and nuclear power, the U.S. would be able to produce enough electricity to allow most Americans to drive Battery-Electric Vehicles (BEVs), aka electric cars and trucks. This technology did not rely much on oil imports.
Now, this equation has shifted 180 degrees. I already mentioned that we are no longer particularly vulnerable to an oil embargo. That eliminates the rationale for electric cars, period.
However, it appears that the argument against continuing to subsidize and mandate electric cars is actually a lot stronger than that.
I'm talking about cobalt and China. China's threat to stop selling rare-earth metals to America is putting the focus on industrial materials that the Chinese have cornered the market on, such as cobalt. While not technically a rare-earth metal, cobalt is nonetheless key to electric-car manufacturing, and China could be about to control much of the world's supply.
Cobalt is what is used to make the batteries that go into electric cars. Sixty percent of all cobalt supply currently comes from Congo. Tell me again why being dependent on Congo is better than being dependent on Saudi Arabia? Not even Saudi Arabia had anywhere near 60% of the world's oil supply.
Now, the Chinese are buying up all of this cobalt supply. The CEO of Glencore recently said that means the Chinese are on a path to become the dominant player in one of the materials necessary to make electric vehicles.
So why are U.S. automakers so stupid, making electric cars that are only a tool to enable China to potentially control the U.S. transportation system?
Because the U.S. Federal government and California are forcing them to, that's why!
Specifically, via these four counterproductive policies:
A few U.S. states have joined California in mandating electric cars and plug-in hybrid cars. For 2018 it's 4.5% of the number of cars sold; by 2025 it has to be 24%. Look at page 32 of California's presentation where it dictates how many electric cars automakers must sell: Basically, regardless of consumer preferences or willingness to pay for these cars, this will be the electric car sales mix, increasing from 4.5% in 2018 to 24% 2025. This is what we used to call "a planned economy" -- in which politicians decide what products consumers must use, and in this case what producers must sell.
A Federal U.S. tax credit of up to $7,500 for those who buy an electrified automobile over a certain battery size.
U.S. state incentives that vary widely from state to state. Many U.S. states offer no incentive, especially the ones in America's heartland. Some U.S. states have cash rebates that can often be around $2,500 per car (again, California) and up to $5,000 (Colorado).
Some U.S. states give electrified automobiles other privileges, such as being able to drive in the carpool lane alone. This is a huge draw for prospective electric car buyers.
Each of these electric vehicle incentives cause the U.S. transportation system to become dependent on China's looming control of the battery market, thanks to its control of the critical raw material inside batteries: cobalt.
Now, if you are President Trump, what do you think about this? Do you like the idea that the U.S. Federal government, along with several states and California in particular, incentivize and indeed mandate some Americans to buy cars that are dependent on a Chinese near-monopoly raw material?
It looks to me like President Trump has a compelling argument, from his point of view, to reverse the policies that make the U.S. transportation system dependent on China. He should therefore take these steps to turn the ship around 180 degrees:
- First, stop subsidizing, incentivizing and mandating electric cars.
- Second, tax electric cars heavily. Put a 200% special tax on electric cars.
- Third, simply ban the sale of any more electric cars in the U.S.
Considering the fact that all established and profitable automakers are losing vast amounts of money on electric cars, the U.S. national security interest would be best served by simply banning the sale of electric cars right away, period. These established automakers -- General Motors (GM) - Get General Motors Company Report , Ford (F) - Get Ford Motor Company Report , FCA (FCAU) - Get Stellantis N.V. Report and others -- would make more money by producing and selling regular gasoline cars instead.
With GM, Ford and FCA making much more money making gasoline cars instead of electric ones, that would also be good for the U.S. economy and the stock market. President Trump would have major hit on his hands, with a policy that both secures U.S. national security and improves the profitability of the U.S. automakers. It would be a major win-win for the U.S., the economy, the stock market and President Trump.
President Trump should be especially peeved about California's "sanctuary" electric car policy, in which consumers in other states have to subsidize the losses automakers take in selling Chinese-dependent electric cars in California. How does this work? If an automaker has to sell, say, 14%, of its volume in California in a certain year as electric cars -- but isn't able to do so in order to earn their standard profit margin -- then all the other consumers, mostly in America's heartland, have to pay higher automobile prices in order to subsidize these sales in California. This is infuriating and unfair.
For example, FCA's former CEO Sergio Marchionne explained in 2017 that FCA loses $20,000 per electric car it is forced to sell in California. This hurts the FCA stock price and its employees, and it benefits only China's monopoly play in the cobalt market. It has now forced FCA into a proposed merger with Renault -- selling out the iconic U.S. assets of RAM, Jeep, Dodge and Chrysler to the French. The French! The losers are the U.S. economy, U.S. net worth and U.S. national security.
Trump, of course, talks a lot about California being a "sanctuary" state in a very different context. However, he totally forgets -- or didn't know to begin with -- this other way in which California is inflicting major harm on U.S. national security, as well as automotive industry profits. Unlike the other type of sanctuary policy, the Federal government would be able to stop this aspect of China-dependent electric cars immediately and without any ability of California to complain or appeal.
Why should the U.S. subsidize a kind of car that doesn't solve a problem (oil dependency) anymore, and only makes the U.S. dependent on China instead? No, the Trump Administration needs to stop this practice immediately. Trump should propose an immediate ban on the sale of electric cars, in the interests of U.S. national security and avoiding the U.S. transportation system becoming beholden to the Chinese government.
On balance, GM, Ford and FCA -- as well as all other established automakers -- would also be major winners, as they would no longer have to sell electric cars at a loss in California and the other zero emission vehicle states.
At the time of submitting this article for publication, the author was short TSLA and long FCAU. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and the equivalent, hosted by most major automakers.