How the US-China Trade War Could Hike iPhone Prices

It’s been a week since the Trump administration raised tariffs from 10 percent to 25 percent on $200 billion worth of Chinese exports, and tech companies are still grappling with the consequences. Adding to the confusion are possible US tariffs on an additional $300 billion worth of goods, and China’s own retaliatory tariffs on US exports.

The existing tariffs cover a wide range of goods, but few finished consumer electronics. The next round could include laptops and smartphones, referred to as “automatic data processing machines” in the government’s proposal. But even if finished electronics get a pass, existing tariffs on computer components such as power supplies and printed circuit boards could increase costs for consumers.

The effects could go beyond higher consumer prices. For years, the US and China have been closely linked, particularly through the supply chain for electronics, many of which are assembled in China. The trade war threatens to disrupt that relationship. Beijing has already announced increases in its own tariffs on US goods, which gives companies in other countries an edge in selling to Chinese consumers.

It’s still possible that the US and China could work out a deal that largely preserves the status quo. But Brian Keare, an executive at business analytics company Incorta, says the failure to reach a deal last week led to a growing fear among the companies he works with that the tariffs could continue for years. Meanwhile, the US continues to clash with China over security issues. The US has long worried that the Chinese telecommunications giant Huawei, which makes gear used by telecom networks around the world, could assist in Chinese spying efforts. The US has also accused the company of stealing intellectual property and violating sanctions against Iran. This week the US Department of Commerce added Huawei to a list of companies that pose a national security threat, meaning it will have to seek permission from the US government before using US-made technologies, including chips made by US companies like Qualcomm or operating system software from Google.

It’s too early to say how drastic the results of the conflict will be. Keare says companies he works with are still assessing the impacts of the increased tariffs on their businesses. “It quickly morphs into questions about absorbing the tariffs versus passing the prices on to customers,” he says. “Dozens and dozens of actions might affect the outcome.” For example, some companies might have to give customers advance notice of price increases, limiting their ability to raise prices in the short term.

One concern is that the tariffs will help foreign competitors. “Samsung does its chip fabrication and higher-end phone assembly in Korea, with low-end phones assembled in Vietnam,” says Jason Dedrick, a professor at the School of Information Studies at Syracuse University. “So in the short run, Samsung is hurt less than Apple by tariffs on assembled smartphones, meaning that US policy might hurt a US company relative to its biggest non-US competitor.”

Even companies that do manufacture in the US could be affected by the tariffs. Intel, for example, makes many of its chips in the US. But if the US tariffs lead to higher prices for the phones, laptops, and other gadgets that use those chips, Intel’s sales could suffer.

Analysts at JP Morgan estimate that Apple would need to increase the cost of iPhones by 14 percent to make up for the tariffs, though it could also opt to absorb some of the costs, at least for now.

That should, in theory, be an incentive for Apple to build its phones in the US, as Trump has long said it should do. But coercing technology companies like Apple to relocate their manufacturing to the US was never realistic. Dedrick and other researchers say US manufacturers lack the equipment and expertise to build iPhones. Even assuming Apple could move iPhone production to the US, Bank of America estimates that Apple would have to charge an extra 20 percent to make up for the higher cost of domestic production. It might be cheaper for Apple to simply keep building them in China and pay the tariffs.

There’s another option. Instead of moving manufacturing from China to the US, companies are eyeing new places to do business. Supplier contracts and manufacturing that might otherwise have gone to Chinese companies are going to companies in India, Thailand, and Vietnam, says Naomi Wilson, senior policy director at the trade group Information Technology Industry Council. Last year, Apple announced that it would move some of its high-end iPhone assembly from Taiwanese manufacturing company Foxconn’s facilities in China to its facilities in India. Meanwhile, a government program in Taiwan to encourage Taiwanese companies to move production back to the island has persuaded 52 companies to invest $9 billion in Taiwan, Bloomberg reports.

China has been working to cut its reliance on technologies produced by foreign companies. The country, which imports about half of its chips from US companies, is trying to become a player in the global semiconductor industry—including through a $20 billion government-controlled fund. The result might be a gradual disentanglement of the two nations’ economies. It won’t happen quickly. But the two countries are already drifting.


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Source: Klint Finley. The content of this article does not necessarily reflect the views or opinion of Global Diaspora News (www.GlobalDiasporaNews.com).