Trade war: Boxing clever? US hits China with more tech tariffs

Trade war: Boxing clever? US hits China with more tech tariffs

Chris Middleton explains why the technology sector is in the firing line of the US-China trade war, while Apple customers may get a shock – on paper, at least.

Internet of Business says

Tensions rose on 18 September as US president Donald Trump hit China with new tariffs on a $200 billion basket of goods, including numerous technology components.

The full list of new tariffs is online here, and includes networking equipment, disc drives, and optical media.

Combined with the earlier tariffs, the explosive trade measures – ostensibly designed to punish China for IP violations and unfair trade practices – could cause a backdraft that sweeps through the US tech, IoT, IIoT, connected transport, manufacturing, and other sectors.

While the new list of hundreds of affected goods majors on items such as fish, foodstuffs, woods, building materials, yarns, fabrics, films, and tools, it also includes engines, machinery, and machine parts, which could affect the electric and smart transport sectors, which were hit by the first round of tariffs in the summer.

In June, a 25 percent US import tax was applied to over 800 Chinese-made products, including industrial robots, electric cars, and electric bikes and scooters – moves that may damage US businesses that are innovating in areas such as manufacturing automation and frictionless, on-demand transport, including electric bike hire.

What about the tech sector?

In the latest round of tariffs announced yesterday, the long list of metals, alloys, minerals, and chemicals also included may have complex effects on IT and telecoms hardware makers, if they are used in casings, finishings, and internal circuitry on items such as smartphones and tablets.

So far, the rare earth elements that are critical in the manufacture of consumer electronics have not been included.

However, claims that this latest tranche of tariffs have largely spared the US technology sector, which outsources a lot of manufacturing and assembly work to China, are wide of the mark.

Disk drives, magnetic and optical readers, optical media, smart cards, ATMs, routers and combined I/O devices, power supplies, batteries, microphones, voice transmission equipment, printed circuit boards, radios, TVs, monitors, screen parts, electrodes, insulators, lights, and LEDs are all included in the new list.

According to Reuters, a group of tech companies, including Cisco, Dell, Hewlett-Packard Enterprise, and Juniper Networks, asked the government to drop some of those items, but they remained on the list published this week.

In effect, this creates a two-tier technology market in the US, in which the core technologies that keep the internet functioning are subject to tariffs, but mass-market consumer devices are not.

In a comment to trade regulators on 6 September, the group said, “By raising the cost of networking products, the proposed duties would impede the development and adoption of cloud-based services and infrastructure”.

In June, tariffs hit smart thermostats, optical scanners, optical media, tape drives, computer storage devices, electrical components, wires and cabling, conductors, semiconductors, imaging systems, spectrometers, radar equipment, lasers, flat-panel displays, and lithium batteries. Other types of LEDs, smart cards, and optical media were also affected.

Is Apple really exempt?

The latest tariffs have been portrayed by some Apple-obsessed commentators as sparing products such as the iPhone and Apple Watch, ignoring the fact that Amazon, Cisco, Dell, Google, Hewlett-Packard, InFocus, Intel, Microsoft, Motorola Mobility, and Vizio are among the many other US companies to outsource manufacturing to China and its allies.

While one major contract manufacturer, Hon Hai Precision Industry (better known as Foxconn), is technically based in Taiwan, it operates 12 enormous factory campuses in China – in Shenzhen, Zhengzhou, Wuhan, and other sites – where the bulk of the iPhone line is manufactured.

But there’s another area where Apple and its competitors may be hit: packaging. A vast array of paper, card, boards, and other materials is included in the latest round of tariffs.

Apple invests many millions of dollars in designing boxes that evoke an emotional response from its customers – and precision-made, luxury packaging is expensive to produce. With the new iPhone Xs range synonymous with excess in terms of its pricing, packaging will doubtless play a significant role in convincing customers they’ve got value for money.

While details of Apple’s box manufacturing are sketchy, Apple’s environmental statement acknowledges that it helps manage 750,000 acres of forest in China. With the iPhone largely made and assembled in China, it’s likely that the boxes are sourced from there too.

As of today, those boxes may be 10 percent more expensive to produce: a significant cost when over a billion iPhones have been sold in a decade and Apple expects to sell tens of millions more this year.

Many of the tariffs may rise to 25 percent over time.

China responds

China has responded to the latest US move with $60 billion in tariffs of its own on US goods: a significantly lower figure.

This has led some commentators to suggest that China has blinked first in the fight, but that’s nonsense. Beijing is in this for however long it takes, and is doubtless hoping that its consistently moderate response – to date – reflects badly on the US.

When it comes to IP, China may have imitated more than innovated for years – the US is right about that – but Beijing’s careful response is designed to portray the US as the aggressor.

Arguably, that restraint also shows strength. In a boxing match, the odds appear to favour the fighter who is one and a half times bigger – the US, in economic terms. But the fighter who conserves his strength, while his opponent comes out swinging until he exhausts himself, tends to win in a long fight, particularly if he gets the crowd behind him. But such analogies are risky and inexact, of course.

With Trump threatening further sanctions if China retaliates – which it did, yesterday – all of China’s trade with the US could soon be engulfed in a financial war that could force up costs for the US technology sector and its customers worldwide.

Even conservative supporters of the current US administration, such as Fox News, have begun to question the wisdom of that. After all, with an internal market of 1.4 billion people to sell into, China represents a massive opportunity, as well as an economic threat.

With China’s richest man and serial tech entrepreneur Jack Ma – chairman of Alibaba – warning on 18 September that this is a long-term dispute with no short-term solutions, analysts should avoid calling a win for the US in round two.

On 19 September, Alibaba’s Ma recanted his promise to bring one million jobs to the US, blaming the trade dispute. He said, “The promise was made on the premise of friendly US-China partnerships and rational trade relations. That premise no longer exists today, so our promise cannot be fulfilled.”