Of Carrots, Sticks, and BRICS

“Too many people hold a very narrow view of what motivates us. They believe that the only way to get us moving is with the jab of a stick or the promise of a carrot. But if you look at over 50 years of research on motivation, or simply scrutinize your own behavior, it’s pretty clear human beings are more complicated than that.” — Daniel H. Pink

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President Donald Trump’s Sunday evening threat of higher tariffs against countries he deems to be sympathetic to the “anti-American policies of BRICS” was a tacit admission that the trade war he initiated has shaken things up on the world stage, providing much of the world with another opening to pit the U.S. and China against each other. This hasn’t been lost on anyone, China included.

The U.S.-China rivalry for influence and trade advantages on the world stage is hardly new, but it has provided an opportunity to highlight the metaphorical carrot-and-stick choice faced by many nations, with China mostly offering carrots and Trump typically threatening with (large) sticks. 

For example, China garnered news headlines on June 12 when it announced an offer to drop tariffs on imports from any of the 53 African countries with whom it has diplomatic relations. (That’s all African countries except Eswatini, formerly known as Swaziland, which maintains ties with Taiwan; and Somaliland, which China, the U.S., and the United Nations do not recognize as a sovereign nation.) 

Contrast this with Trump’s current plans to impose tariffs on many countries in Africa, notably Lesotho, Madagascar, South Africa, and Nigeria (not to mention his threats to institute a travel ban on people from 36 countries, 25 of which are in Africa). His anti-BRICS statements were seen by many as addressed in large part to African countries that have drawn closer to China in recent years. South Africa, Egypt, and Ethiopia comprise the current African members of the BRICS, with Nigeria and Uganda designated as BRICS partner countries.

The former might matter more than the latter. Collectively, the countries of Africa exported many times more to China than the U.S. last year—$116.8 billion versus $39.5 billion, respectively. 

A similar situation exists in South America, where China has offered carrots to counter Trump’s sticks. The countries of South America also export more to China than to the U.S.—28% to 16%, respectively. In response to Trump’s tariff platform, China has deepened ties to the continent this year, with Colombia joining China’s Belt and Road Initiative and numerous investment and trade deals signed.

As a poll in the Economist shows, public opinion of China in South America is rapidly improving as a result: notably, China is seen as both more fair and more respectful than the U.S. Trump’s blunt rhetoric, even if it’s accurate, has been unhelpful. In the meantime, China continues investing heavily in South American infrastructure. Having opened a deepwater megaport in Peru last November, Chinese officials are turning their attention to building, modernizing, or expanding transcontinental railroads, roads, and other shipping-related infrastructure. 

Both regions remain important to U.S. interests. Africa might be key to helping the U.S. break China’s stranglehold in many critical metals in minerals, with lithium in the Democratic Republic of Congo, Mali, and Zimbabwe; rare-earth elements in Tanzania; and copper in the DRC and Zambia, for example. 

Meanwhile, big tech companies like Amazon, Microsoft, and Alphabet are increasingly looking to build data centers in Latin America, what with the plentiful renewable energy, natural resources, and, in some cases, skilled workforces and favorable regulatory environments. Data-center investment in Latin America is expected to surge to almost $10 billion by 2029 from about $5 billion in 2023. 

In the mid-1800s, the rivalry for influence and power between Britain and Russia came to be known as the “Great Game.” Today the Great Game continues, with the U.S. and China, both vying on a larger, more complicated board–only this time, there’s a greater awareness at play amongst all the players, and implementing a “with us or against us” mentality might not be the most beneficial route for U.S. interests. 

The Day in Markets: Stocks slid Monday but finished off their session lows. The losses were first driven by news of a 25% tariff rate on Japan and Korea and a 10% tariff on BRICS nations. Then later, they extended losses despite the White House announcing plans to delay the July 9 tariff deadline to Aug. 1. Lack of even a miniscule amount of recovery in stocks confused some investors and marked a stark contrast to past deadline delays that sparked monster gains. Notably, when Trump delayed the Liberation Day tariffs on April 9, the S&P 500 gained 9.5%. The reaction may signal that investors are growing impatient with a lack of clarity in trade policies. Trump had promised 90 deals in 90 days, but so far only deals with the U.K. and Vietnam have somewhat materialized. — Ian Bai

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Catch up with Fundstrat

The S&P 500 has faced six Black Swans in the past five years and yet has managed to grow earnings. That is testament to the resilience of corporate America, and unless one expects Black Swans to recur in the next five years, we see P/E expanding substantially.

Technical

As discussed last week, there stands an above-average likelihood of some slowdown to the rally, which should begin sometime this week. However, based on Monday’s close, it remains unclear that this has already begun.

Crypto

CoreWeave’s deal to acquire Core Scientific sent the AI/HPC mining sector lower today, but we think the selloff creates opportunity.

News We’re Following

Breaking News

• S&P 500, Nasdaq futures edge up after Trump extends tariff pause WSJ 

Markets and economy

• Trump issues new tariff rates, still open to negotiations BBG
• Old-school floor traders finally get their day in court against CME WSJ 
• US small business sentiment ticks down in June REU

Business

• UBS grants ‘goodwill payments’ to clients hit by Trump trading losses FT 
• AI data centre group CoreWeave strikes $9bn deal to buy rival Core Scientific FT 
• IBM rolls out new chips and servers, aims for simplified AI REU

Politics

• Musk and Yang have connected on the billionaire’s third party threat POL
• Netanyahu nominates Trump for Nobel Peace Prize SEM
• Minnesota state senator wounded in deadly political shootings is out of intensive care CNBC 

Overseas

• Russian minister sacked by Putin found dead BBC 
• Houthis attack ship in Red Sea for first time since Trump announced a truce WSJ 
• India seeks $1.1 billion reparation after MSC fuel spill in May BBG
• Germany warns EU ready to retaliate unless US reaches ‘fair’ trade deal FT  

Of Interest 

• Archaeologists unveil 3,500-Year-old city in northern Peru JP
• Esports World Cup kicks off in Riyadh with $70M prize pool SEM
• New TSA rules would allow travelers to keep shoes on through airport security BBG