The clouds are gathering fast in the United States’s trade relationship with China, with potentially damaging repercussions for both countries and their main industries, including tech firms. Fortunately for Apple, its clout as a massive job creator in both countries may keep it out of the fray—for now.
Donald Trump is basically right that China is getting the better of Sino-U.S. trade relations, and has for quite some time. China exports $375 billion more in products to the U.S. than the U.S. exports to China.
It goes further than that. It’s an open secret that the Chinese government makes it very difficult to do business in China. U.S. companies have been forced to hand over technology and intellectual property to the Chinese. The country also requires U.S. companies to store the user data of Chinese citizens in servers owned by Chinese companies.
But Trump is very wrong about the blunt instruments like tariffs he wants to use to remedy these problems. And the reckless nationalist remedies could end up hurting U.S. tech companies, and maybe even Apple.
Trump last week imposed tariffs on steel (25%) and aluminum (10%), an order that will go into effect in the coming weeks. The tariffs will apply to all countries that export those products, with the notable exclusions of Canada (the biggest exporter of steel to the U.S.) and Mexico.
The tariffs are clearly aimed at China, experts say. Trump has railed for years about China’s “dumping” of cheap steel on the U.S. market, hurting domestic steel makers. But while China is indeed the world’s largest steel producer, it’s not even in the top 10 largest steel importers to the U.S. So that tariff is largely symbolic. But in trade relations, symbols can mean a lot.
Apple isn’t likely to be harmed by the raw materials tariffs because only a small amount of its product assembly happens in the U.S.–only a small number of Mac Pros, in a facility in Austin, Texas. Others might not be so lucky.
Targeting Chinese Imports
Earlier this week we heard about a new package of tariffs now reportedly being assembled by the Trump administration, and this one is targeted at Chinese imports specifically. Initial reports said the tariffs would focus on tech and telecom products made in China, but other reports have said all product types are on the table. The tariff package is intended as a more direct response to the Chinese government’s onerous “pay to play” requirements for U.S. companies operating in the country.
U.S. companies “pay” via the loss of technology and intellectual property to the Chinese. A government study in 2011 found that U.S. companies lost $26 billion a year from copyright violations alone. And a software industry report that same year said annual losses from stolen software come to $60 billion. The current administration is now studying IP losses to China, and intends to tie the extent and scope of the tariffs to those estimates.
The new suite of tariffs, if enacted, could be far more provocative to China than the steel and aluminum tariffs. Technically, they could target consumer electronics like iPhones imported from China. The greater danger to companies like Apple is that the U.S. action might provoke China to levy its own set of tariffs against tech products produced in the U.S. Apple imports component parts from suppliers in the U.S. (among other countries) to its factories in China for assembly. These components could be targeted with tariffs by the Chinese government, which could force Apple to raise the prices of its products.
But it would likely take a serious Sino-U.S. trade war for Apple (and Apple consumers) to get pulled into the fray. The simple reason is jobs. You may have noticed that Apple has been far more vocal about the number of jobs it creates, either directly or indirectly, in the U.S. Apple claims it’s created more than 2 million such jobs.
Nor would China likely be eager to design a retaliatory tariff package that would harm Apple, one D.C. source told me. That’s because Apple also creates thousands of jobs in China, through its contract manufacturers like Foxconn and Pegatron, and through its broad network of Chinese parts suppliers.
Apple is watching the situation closely, one person with knowledge told me, and will respond when the Trump administration produces a formal plan for tariffs on Chinese goods. Reports said could arrive as soon as next week. It’s also possible that the administration will first release a preliminary set of concepts, and open up a discussion period with trade experts, policy people, and potential stakeholders. Apple and other tech companies may have the chance to present their case, either directly or indirectly through trade organizations.
Mr. Cook Goes To Washington
Actually, Apple may have decided not to wait. Tim Cook was in Washington Tuesday meeting with lawmakers, and the proposed tariffs may have come up in casual conversation. Cook may have dropped in to remind lawmakers of that “2 million U.S. jobs” number. (He may also have been there to talk about encryption and privacy, a subject closely related to protection of intellectual property.)
— Frank Thorp V (@frankthorp) March 13, 2018
So Apple is, to a certain extent, protected from a potential trade war between the U.S. and China.
But it depends on the breaks. Forces are at work. Much of Trump’s base craves the aggressive “America First” posture on trade relations that they heard from candidate Trump in 2016. Trump is more likely to assume that tone with the Congressional mid-terms coming up later in the year; he’s under tremendous pressure to get the GOP base fired up and out to the polls for a series of races that are collectively being viewed as a referendum on his presidency.
And like most things it does, the administration’s approach to China trade this year will likely be noisy, overdramatic, highly public, and fairly unpredictable. This made-for-TV approach is exactly how the Chinese don’t like to do business. In the end, it might be that disconnect–more so than costs of the tariffs themselves–that pushes Chinese leader Xi Jinping toward a trade war with the U.S.