Higher Tariffs Starting 1st September – Trade War Escalates

Aug 31
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With the start of September, the ongoing US-China trade war kicks into high(er) gear with an additional round of tariffs in the tit-for-tat war. The tariffs set to go into effect from September 1st are retaliation against Chinese tariffs put into effect on $75 billion of US goods after the countries failed to reach an agreement and trade negotiations broke down. US President Donald Trump had also “ordered” companies to leave China in the wake of the unsuccessful negotiations. The tariffs were formally entered into the federal register on Friday – ending hopes by analysts for any last-minute relief to major firms like Apple (NASDAQ:AAPL)(over 46 out of 50 Apple products could face tariffs by year-end).

The latest round of tariffs is set at 15% (after Donald Trump slapped an additional 5% on top of the originally announced 10 %, shortly after a meetup with Apple CEO Tim Cook) and cover an additional $300 billion worth of imports from China. These are set to go effect in batches, the first tranche will activate on September 1 with the second following on the rest of the goods on December 15.

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Higher Tariffs Lower Earnings

The tariffs will add to the overhead of major American firms operating out of China – particularly those with a large and global supply chain linked to the Chinese market. According to analyst predictions, the 15% tariff will thankfully not affect major Apple products like the eponymous iPhone, but it will still impact some of the other product categories which although generate less revenue are still the fastest-growing segment for the company like the Apple Watch.

It is estimated Apple will lose 5 to 10 cents per share annually when the tariffs go into effect bringing Apple’s earnings per share in the current fiscal to $11.63 according to Bloomberg. The second round of tariffs to be imposed in December are a much bigger source of worry to the company given that it will have an even wider scope of application in the consumer electronics industry and yes, will be applicable to the iPhone – which generates over 50% of Apple’s revenue. Analysts from JP Morgan expect Apple, once hit with the tariffs, to absorb the cost and not pass it on to the consumer, despite the firm saying it would do just that. Apple has a Foxconn manufacturing plant in China employing over 1.4 million workers at peak production, it is a giant and delicate supply chain which is very sensitive to regulatory and currency disruption.

Apple is expected to absorb a loss of $500 million on account of the hike and other manufacturers are expected to start raising prices by November. Bronwyn Flores, spokeswoman for the Consumer Tech Association, a large trade group for the consumer electronics industry said “You’re not likely to see price increases for consumers starting Sunday” and further “But you might start to see it in November for Black Friday, so if you want a new TV for the Super Bowl, you might want to get it soon”.

The companies adversely affected may wish to apply for an exclusion to the next batch set for December. “List4b” – the next round of tariffs as they are known (as opposed to “List 4a” the current September batch) will affect $115 billion worth of consumer electronics in contrast to $52 billion affected by the September tariffs. Originally part of the same package and set to go into effect in September together – List4b was delayed to December by the US trade representative as part of Donald Trump’s decision to protect US customers. This means there may be hope yet for Apple and other big manufacturers desperate to avoid further fallout from the trade war in the form of the aforesaid exclusion – although the application for such exemption is not yet open.

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