Why Trump’s Tariffs Are Disastrous For Elon Musk

Key Concepts

• Tariffs: Taxes imposed on imported goods.
• Protectionism: Economic policy of restricting imports to protect domestic industries.
• Free Trade: International trade without tariffs, quotas, or other restrictions.
• Rare Earth Minerals: A set of seventeen metallic elements crucial for various technologies, including electric vehicles and rocket engines.
• EV (Electric Vehicle): A vehicle powered by an electric motor rather than an internal combustion engine.
• Supply Chain: The network of organizations and activities involved in producing and delivering a product or service.
• Net Worth: The value of a person's assets minus liabilities.
• IBIDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of a company's profitability.
• XAI: Elon Musk's AI startup, an OpenAI competitor.
• Grok: XAI's chatbot, integrated into the X platform.
• Special Government Employee: A temporary position held by Elon Musk to advise the Trump administration.

Trump's Second Term: Tariffs and Elon Musk

• The past three months of Trump's second term are defined by two pillars: tariffs and Elon Musk's influence.
• Trump has initiated, paused, and escalated trade wars with various countries.
• Elon Musk has been a senior advisor and ardent supporter of Trump since July, also being the face of Doge.

Elon Musk's Reaction to Tariffs

• Tariffs have created a point of contention between Musk and Trump, breaking their previous lockstep alignment.
• This break is playing out on X and involves a dispute between Musk and Trump's trade advisor, Peter Navaro.
• The tariff back-and-forth marks the first time Musk has publicly disagreed with President Trump.

Feud Between Musk and Navaro

• Peter Navaro dismissed Musk as a "car assembler," leading to a strong rebuke from Musk.
• Navaro downplayed the feud, and the White House spokesperson characterized it as "boys will be boys."
• The conflict represents a clash between two factions within the Trump base: protectionists (Navaro) and the tech oligarchy (Musk).
• Navaro advocates for restrictive trade measures, while Musk has benefited from free trade and the neoliberal world order.
• Currently, Navaro's protectionist stance appears to be winning, as Trump continues to push forward with tariffs.

Impact of Tariffs on Elon Musk's Fortune

• Trump's tariff policy, unveiled on Liberation Day, caused global markets to tumble, impacting Trump's own net worth.
• Tesla's stock price declined significantly (upwards of 20%) following the tariff announcements.
• Musk initially remained silent on X, then voiced his concerns, sharing economist Milton Friedman's views on free trade and engaging in the spat with Navaro.
• Trump's 90-day pause on tariffs (excluding China) led to a recovery in Tesla's stock price.
• Economists view tariffs as a tax on the American consumer.

Impact on Tesla

• Tesla faces challenges due to lackluster Cybertruck sales, increased competition, and branding issues.
• Tariffs exacerbate these problems, particularly regarding access to rare earth minerals and magnets essential for EV engines.
• These materials are primarily mined and refined in China, posing a supply chain risk for Tesla.
• Musk advocates for increased domestic refining capabilities for these minerals, but this is a long-term solution.
• Tesla's China business is also at risk due to negative sentiment among Chinese consumers towards Musk and his association with the Trump administration.
• China is Tesla's largest market, with a significant Gigafactory in Shanghai.

Impact on SpaceX

• SpaceX, being privately held, has less publicly available information.
• As a manufacturer of complex machinery, SpaceX relies on global imports and is affected by Trump's tariffs.
• SpaceX rocket engines require rare earth magnets, including samarium, which China now requires licenses to export.
• This poses a potential threat to SpaceX's rocket manufacturing capabilities.
• Starlink, SpaceX's satellite internet provider, accounts for two-thirds of its revenue.
• Starlink faces reputational risks due to its association with Musk and the Trump administration.
• Ontario, Canada, canceled a $70 million contract with Starlink due to escalating tariffs.
• Italian officials tabled talks of a $1.5 billion deal for Starlink due to backlash against Musk and the Trump administration.
• Starlink's ability to secure international contracts is threatened by the US's combative stance and Musk's association with it.

Elon Musk's Net Worth and X's Comeback

• Elon Musk's net worth is approximately $370 billion, making him the world's richest person.
• Tesla's stock is down about 30% year-to-date but is still up compared to a year ago and since Liberation Day.
• SpaceX's valuation remains steady at around $350 billion on secondary markets.
• X (formerly Twitter) has experienced a significant comeback following Trump's election.
• Musk announced a $13 billion merger between X and XAI, valuing XAI at $80 billion and X at $45 billion (including debt).
• This is a substantial increase from late last year when investors marked X's valuation at around $10 billion.

X and XAI Merger

• Musk's takeover of Twitter involved significant changes, including staff layoffs, reduced content moderation, and a decline in advertising revenue.
• X's revenue decreased from over $5 billion in 2021 to $2.5-2.7 billion last year.
• However, adjusted IBIDA increased from $680 million in 2021 to $1.25 billion last year.
• The merger between X and XAI is seen as symbiotic, with Grok (XAI's chatbot) integrated into the X platform.
• Critics argue that Musk is inflating the valuations of both companies through this deal, lacking independent oversight.
• Minority shareholders, including Andreessen Horowitz and Sequoia Capital, support the deal.

Impact of X/XAI Merger on Musk's Bottom Line

• The merger boosted the value of Musk's stake in X and XAI by approximately $33 billion.
• This gain occurred since late February/early March when Forbes last estimated his stakes.

Elon Musk and AI

• Musk aims to make Tesla the most valuable AI company in the world.
• XAI is seen as Musk's primary AI venture, receiving over $12 billion in outside investment.
• XAI is building a large supercomputer cluster in Memphis, Tennessee.
• XAI is also a rebuttal to OpenAI, which Musk co-founded but later had a falling out with Sam Altman.

Future Outlook

• It remains to be seen whether Musk will recede from the political spotlight after his stint as a special government employee ends.
• It is also uncertain whether Trump will continue to view Musk favorably.
• The extent to which these two men continue to influence each other is a key point to watch.

Conclusion

The relationship between Elon Musk and Donald Trump, particularly in the context of trade tariffs, is complex and evolving. While Musk initially aligned with Trump, tariffs have created a rift, impacting Musk's companies and net worth. The merger of X and XAI has provided a significant boost to Musk's bottom line, solidifying his position in the AI space. The future direction of this relationship and its impact on global trade and technology remain uncertain.