Tech Industry Still in Deep Trouble Despite Tariff Reprieve

The deal reached between President Trump and Xi Jinping gives Apple and other Chinese-reliant tech firms some breathing room. But the danger to their global supply chain is only growing.

President Trump meets with China President Xi Jinping (second from left) during their bilateral meeting at the G20 Summit in Buenos Aires on Saturday.
AP Photo/Pablo Martinez Monsivais
Dec. 5, 2018, 8 p.m.

Watching the surge in Apple’s stock Monday, you would think the sword of Damocles hanging over the company’s head had been finally lifted through a handshake deal struck over the weekend on tariffs between President Trump and Chinese President Xi Jinping.

But Apple’s prospects remain far from rosy, something investors soon discovered firsthand as its stock price imploded over the next two days. And continued anxiety over tech tariffs isn’t confined to Apple—despite the temporary reprieve, American technology firms reliant on Chinese manufacturing aren’t exactly in a celebratory mood.

“We are totally not out of the woods,” said Sage Chandler, the vice president of international trade at the Consumer Technology Association. “There’s three product lists that have come out with tariffs on them, and tech has been on every single one. And industry is just getting killed.”

With hopes already fading that the agreement made in Argentina will stick, U.S. tech companies aren’t just girding themselves for more pain. Instead, they’ve begun to seriously consider what it would take to decouple their operations from a complex Chinese supply chain that took decades to stand up.

“They need to engage in planning for multiple potential futures, but they should assume that the problems in the U.S.-China commercial relationship—commercial, strategic, political—are not going to be resolved quickly,” said Scott Kennedy, an expert on U.S.-Chinese trade relations at the Center for Strategic and International Studies. “In fact, the current uncertainty and tensions may be the new normal.”

American tech companies have suffered from tariffs on goods imported from China since the penalties first took effect earlier this year. But so far, tariffs have centered on the component parts used to build out telecommunications networks, construct data centers, and manufacture consumer electronics within the United States. Firms that build their finished products in China, like Apple, have so far been exempt from the tax, leading some to conclude that the tech industry has largely been spared up to this point.

“Tech has been hit pretty hard; it’s just stuff that’s not sexy,” Chandler said. “The reason why people aren’t hearing about it until people start talking about Apple, iPhone, [and] laptops [is that] those are the things that consumers can understand.” CTA estimates that tariffs on Chinese goods have cost U.S. tech firms an additional $349 million since first coming into effect on July 6.

Last week, ahead of his meeting with Xi, Trump suggested that after Jan. 1 he would nix the tariff exemption his administration had bestowed upon consumer electronics coming from China. In an interview with The Wall Street Journal, the president floated a tariff of anywhere between 10 and 25 percent on mobile phones, laptops, and other goods. “I mean, I can make it 10 percent and people could stand that very easily,” he said.

The news sent the share prices of Apple and other consumer electronics firms tumbling. But after the accord struck over the weekend froze any new tariff increases until March, investors briefly hoped that America’s blue-chip tech stocks could be spared the worst of an escalating trade war.

The news was greeted less optimistically by the tech companies themselves, many of which are using the pause in new tariffs as an opening to advocate a full rollback of Trump’s trade war with China.

“We are encouraged by Presidents Trump and Xi’s decision to pause the planned tariffs increase,” Naomi Wilson, the director of global policy at the Information Technology Industry Council, told National Journal. “However, much work remains to chart an agreement that would result in the elimination of current tariffs and make progress on important tech trade issues. We urge the U.S. and China to make every effort to forge a substantive, durable agreement within 90 days that addresses these issues.”

But several days out from the meeting, there are few signs that de-escalation is in the cards. On Tuesday, Trump took to Twitter to label himself “a Tariff Man” and threaten additional penalties on countries that “raid the great wealth of our Nation.” His message sent tech stocks into a renewed spiral.

With hopes for a final deal fading fast, tech companies are starting to look at extreme measures to cope with the heightened uncertainty.

“Apple and others need to continue to do a 360-degree evaluation of their business in China, both as a final market for their goods and as part of their global production supply chain and innovation ecosystem,” said Kennedy, suggesting that companies who have for years set up shop in China could soon uproot themselves for a more favorable business environment.

The impact of such moves would be dramatic. Industry experts have long argued that the combination of cheap labor costs and Chinese technical capacity is unmatched anywhere in the world. And while many companies are now looking to transfer their manufacturing operations to countries like Malaysia, Vietnam, or Thailand, those transfers would be time-consuming and far from smooth.

“You’re throwing not just certain product lines, but companies that have several different product lines or integrated pieces—they’re having to go off and look to other places that they’ve never operated in before,” said Chandler. “How do you find those suppliers?”

And while U.S. companies are taking the time to move their operations out of China, she added, they’ll face “foreign competitors who aren’t subject to a tariff starting to eat their market share.”

“These are sophisticated networks that have been established over decades,” Chandler said. “And to try to change it in the course of a few months is largely impossible.”

Yet change may be inevitable, even if a suitable trade accord between the White House and Beijing is eventually reached. Congress and the Trump administration continue to accuse China of new efforts to spy on the U.S., and rumors continue to swirl that electronic goods manufactured in China are increasingly compromised. U.S. tech companies, Kennedy said, would be foolish not to consider the impact those concerns could also have on their Chinese operations.

“The boundaries between ordinary consumer electronics and products that touch upon national security and domestic control systems has narrowed,” Kennedy said. “The U.S. and other governments are in the process of expanding their investment restrictions and export controls, and it is not clear how narrowly or broadly these lines will be drawn. And so products that once seemed entirely ‘safe’ and noncontroversial could be seen in a very new light.”

What We're Following See More »
GOP WILL ADD A SEAT AS WELL
Harris to Remain on Judiciary Committee
3 hours ago
THE LATEST
SAYS MCCONNELL
Senate To Take Up Criminal Justice
4 hours ago
WHY WE CARE

"Senate Majority Leader Mitch McConnell said that the Senate will take up criminal justice reform legislation as soon as this week, marking a win for President Donald Trump and a remarkable turnaround for the bill. The latest version of the measure could be released as soon as Tuesday, according to two sources familiar with the matter, and is likely to win over more Republican support on a plan that had sharply divided the GOP."

Source:
FOUR JOURNALISTS AND A NEWSPAPER HONORED
Time Awards Person of the Year to "The Guardians"
7 hours ago
THE LATEST
SAYS THEY'RE BLACKMAILING HIM
Jerome Corsi Sues Mueller, Agencies for $350M
1 days ago
THE LATEST

"The conservative writer and conspiracy theorist Jerome Corsi filed a lawsuit on Sunday accusing special counsel Robert Mueller of blackmailing him to lie about President Donald Trump in the investigation of Russian interference in the 2016 election. The suit, which seeks $350 million in actual and punitive damages in U.S. District Court in Washington, was filed six days after Corsi entered a formal complaint with the Justice Department alleging prosecutorial misconduct by Mueller." Corsi alleges that Mueller illegally leaked information from the grand jury, and that Mueller's team "threatened him with prison unless he agreed to testify falsely that he served as a liaison between WikiLeaks founder Julian Assange and the Republican political strategist Roger Stone."

Source:
BOTH SIDES' POSITIONS HAVE HARDENED OVER BORDER
Trump Meeting with Schumer, Pelosi on Tuesday
1 days ago
THE LATEST

"A year-end spending deal to fund one-quarter of the federal government rests on a critical meeting this week between President Trump and two top Democrats. Senate Minority Leader Chuck Schumer, D-N.Y., and House Minority Leader Nancy Pelosi, D-Calif., will meet with Trump Tuesday morning to talk about what agreement the two sides can reach, if any, when it comes to funding for a southern border wall."

Source:

Welcome to National Journal!

Enjoy this featured content until December 12, 2018. Interested in exploring more
content and tools available to members and subscribers?

×
×

Welcome to National Journal!

Enjoy this premium "unlocked" content until December 12, 2018.

Continue
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login