US-China Trade War Might Increase Consumer Tech Prices
Late last week President Trump stoked the flame of a possible trade war with China. Trump’s message can be traced back to campaign trail promises that he would take the necessary measures to curtail or even equalize the trade deficit between the US and other countries. China is easily the largest trading partner of the US with over $650 billion traded between the two super powers just in 2017 alone. It seems things are getting serious and people are scrambling to get an idea of how they might be affected. We recently examined the possible macro effects on companies and their bottom lines that would result from additional tarrifs. Today let’s delve into how that might play out for consumers.
Brief overview of China and US trade
In 2017 the trade deficit (read: the $ amount the US imports from China, minus the products the US exports over to China) grew by a massive 8% to a total of $375 billion, up from $347 billion in 2016. When you consider that the US total global trade deficit is $566 billion, you begin to understand just the scale of how much the US buys and consumes products coming out of the Chinese export market. Adding up all the deficits with every other country Americans trade with won’t come close to the deficit with China alone. These are the figures that are reported by the US Department of Commerce.
And despite the fact that the true deficit may be much less than the nominal official figure, some say a deficit is actually a positive sign. Bryan Riley, director of the Free Trade Initiative at the National Taxpayers Union, stated that an increase in the trade deficit from the prior year “should not be viewed as a problem to be fixed, but as a predictable result of a growing economy that enables people to afford more imports.”
Now, having said all of that.. what exactly is being targeted in the initial salvos of this pre-trade war? Weeks back Trump announced tariffs on steel and aluminum, neither of which are imported in any major amounts from China relative to other partners. Now this past week Trump has started to drill down to some more specific targets.. washing machines and solar panels – both of which China DOES manufacture and export in significant quantities.
Yet.. even what we’ve seen thus far shouldn’t alarm many consumers. What may come next will probably mean much more to the typical consumer.
Its fair to say that a large majority of people reading this article owns either an (NASDAQ:AAPL) Apple or Samsung product, and while these companies are American and Korean, respectively, they both utilize component device assembly lines in China. What could happen to the prices of devices like these? That really depends on what the Trump administration hopes to gain from these initial taxes on Chinese produced goods.
Trump tax on trade to be specifically aimed at tech industry supply chain?
An alarming realization is that Trump has been almost laser focused on Chinese production and assembly of tech gadgets that find their way into eager American consumers’ hands since he was first running for president. He mentioned Foxconn non-stop throughout his campaign to be elected US president and he’s openly called for Tim Cook, Apple CEO to move manufacturing of Apple devices to US shores. So its obvious Trump is very aware of the fact that the world’s most valuable company, Apple, manufactures almost all of its devices in China. Could imports of these “Chinese” products face focused tariffs?
Apple is well known for building devices like iPhone, iPad and Mac computers in China through manufacturing and assembly partners like Foxconn and others. A reminder of the critical role China plays in Apple’s business is branded on its products, “Designed in California. Assembled in China.”
Is Trump really focused on tech companies? Remember, just a few days before this latest development, Trump claimed a national security risk, and helped block the Singapore-based Broadcom’s $117 billion bid for US-based Qualcomm. In addition to that, a few months ago the administration pressured AT&T into dropping Huawei’s excellent range of phones from a deal that was close to being finalized that would have seen the nation’s #2 telecom provider offering Huawei handsets.
Trump recently bragged about convincing Foxconn (by way of over $2 billion in tax breaks) to build a new TV production plant in Wisconsin, USA. He claimed it will be an over $10 billion investment and add thousands of jobs to the local economy.
If such tariffs are enacted, and depending on their severity and scope, domestic companies that rely heavily on the Chinese supply chain could face an uphill battle. Thanks to cheap labor, government incentives and increasingly advanced technologies, the Chinese manufacturing industry is a vital resource for a wide swath of American electronics producers. China wins with its raw materials and mature value chain that see it procuring cheap, and timely (always important in today’s supply chains) sub components from nearby Asian neighbors.
Apple’s own value chain is deeply ingrained and matured in China. Its been polished over years and years of optimization which provides Apple a reliable, scaled, and fast upstream pipeline of its products. It’s not just Foxconn either; Apple also relies on other Chinese partners like Inventec Corp., Jabil Inc. and Wistron Corp in its supply chain. Foxconn’s plant in the central city of Zhengzhou and the Shanghai plants of Taiwanese assemblers Quanta and Pegatron Corp. were the top exporters to the U.S. in 2016, according to customs data. Any disruption to this could cause prices of Apple devices to skyrocket or even worse, mass unavailability.
Beyond Apple, don’t forget one of the top laptop OEM’s, Lenovo computers are all manufactured in China. Huawei and Xiaomi have been ramping up cutting-edge, flagship handsets that deliver big on cost versus features. All of the products produced by these companies could be at risk for steep tariffs that would essentially price them out of the American domestic market – leaving consumers with less choice and higher prices.
When it comes to which brands may be affected in terms of pricing the list is probably a bit larger than you would imagine. Chinese produced electronics include:
- Oppo (One Plus)
.. and the list could go on.
Looking forward to the specifics of Trump’s trade plan
America’s goods deficit with China indeed hit a record level last year — around $375 billion. But, that’s possibly only a data point from a bygone era. The rise of global value chains in the 1990s and 2000s has fundamentally recast the landscape of world trade. Gone are the days when cargo ships primarily carried finished goods from one country to another. Instead, vast streams of manufacturing components now crisscross borders to feed globally diverse and fragmented production networks.
Simply measuring gross exports and imports, which the trade deficit does, fails to capture this new reality. Take mobile phones. Inside any “Made in China” phone, you’ll find all manner of processors, circuits and parts from South Korea, Taiwan, Japan and elsewhere — even the U.S. Yet, according to official trade statistics, the entire value of the phone counts as an import from China. This begs the (more than) million dollar question” What will be the specifics of Trump’s Chinese tariffs? Will he give Apple a get out of jail free card because its an American company and extremely popular with his constituents?
A coalition of 45 trade groups urged President Trump to back off his threats of additional tarrifs.
“We urge the administration to take measured, commercially meaningful actions consistent with international obligations that benefit U.S. exporters, importers, and investors, rather than penalize the American consumer and jeopardize recent gains in American competitiveness,” they said.
As I’ve stated a few times already, we really do need to learn of the specifics of Trump’s plan. He may very well be trying to force Apple and others to shift production to US soil by heavily taxing goods they are currently making in China.
..The President reminded the audience that he previously said he wouldn’t consider his economic efforts to be a success unless Apple built plants in the United States.
Its clear Trump would definitely like things to work out that way. I have a sneaking suspicion the aim here is to ultimately have US tech companies shift more manufacturing stateside while simultaneously taxing the Lenovo’s and Hauwei’s of the world into a state of uncompetitiveness. Consumers will likely wind up footing the bill in the form of more expensive tech devices if so.