US-China trade war: Will technology companies suffer?

Everyone agrees that a trade war between the two countries isn't the smartest move, and no matter who wins, tech giants across the world have a lot to lose.
18 April 2018

Trump announces intellectual property tariffs on goods from China, at the White House in Washington. Source: Reuters

How did the US-China trade war start? Well, it’s been brewing for quite a while now and seems to be doing no good to businesses in either country. In fact, it’s disrupting global supply chains and will ultimately lead to higher prices for consumers across the world.

Probes, accusations, and tariffs

Experts say that it all started in April last year when Trump launched an investigation into the country’s steel imports — a bulk of which is exported from China.

In August 2017, Trump launched another probe into China’s “unfair” trade practices, focusing on theft of US intellectual property — which the government estimated cost it between US$225 billion and US$600 billion every year.

This year, the US announced a 30 percent tariff on imported solar panels and a 20 percent tax on large residential washing machines, 25 percent on steel, and 10 percent on aluminum, all of which significantly impact China’s exports to the country.

China, in retaliation, imposed tariffs on US$3 billion worth of goods. We then proposed a 25 percent tax on close to 1,300 products we import from China — worth about US$50 billion. They too, proposed a 25 percent tax on 106 products we export to them — worth about US$50 billion.

Finally, President Trump made a statement calling for the “broadest wave of new tariffs yet — worth US$100 billion”, directing US Trade Representative Robert Lighthizer to look into which products his administration can target.

The following day, the US stock market fell 2.3 percent while markets in other parts of the globe are still reeling from the impact of the announcements.

On Monday this week, concerns over the trade war reached Hong Kong where stocks fell to a one-week low, according to the South China Morning Post (SCMP). Chinese internet giant Tencent also fell 1.2 percent as result of rising tensions between the two countries. The SCMP also reported that the Shanghai Composite Index fell by 1.5 percent to touch the lowest level since June last year.

Is the widening US-China trade deficit a problem?

The US-China trade war will have serious implications for supply chains. Source: Shutterstock

The US’s biggest exports include food, beverage, and feed; crude oil, fuel and other petroleum products; civilian aircraft and aircraft engines; auto parts, engines and car tires; industrial machines; passenger cars; and pharmaceuticals. Our biggest service exports include travel and transport, finance and insurance, and sales from intellectual property.

America’s biggest imports include electrical machinery, equipment; machinery including computers; vehicles; mineral fuels including oil; and pharmaceuticals.

However, numbers suggest that the US has a trade deficit with China, which as of 2017, stood at US$375 billion.

US exports to China last year were only US$130 billion while imports stood tall at US$506 billion. But it’s not just our love for Chinese electronics that has boosted imports, a significant role is played by US companies that send their raw materials and components to China for assembly – which, when brought back, counts as an import.

Take our tech giants, Apple, HP, or anyone else for example. They import chips and other components from a number of countries to build their products, assemble them in China, and bring home the finished product into the US for sale in local and foreign markets. Therefore, what they produce isn’t really an import.

And that right there highlights the complexity of today’s supply chains. A story Bloomberg published recently said that the traditional methods to calculate the trade deficit are now outdated as the “vast streams of manufacturing components now crisscross borders to feed globally diverse and fragmented production networks.”

It makes the point with the help of an example:

Simply measuring gross exports and imports, which the trade deficit does, fails to capture this new reality.

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 US. Yet, according to official trade statistics, the entire value of the phone counts as an import from China.

Although this means that the trade deficit shouldn’t alarm us too much, the truth is that China is a major player in the global scheme of things. If the US and China trade war escalates, the rest of the world will feel more than a pinch in the coming months.

So, what does this mean for the tech giants of the world?

Apple assembles almost all of their products in China. Source: Shutterstock

Technology giants in China and US will be equally impacted by the US-China trade war, but the US seems to have a little more at stake.

Apple and Amazon, who assemble products in China will take a beating on their costing and therefore their margins. Consumer electronics companies such as Xiaomi, Lenovo, and Huawei too will have to overcome new challenges if they want to supply to the US.

Industry analysts suggest that Apple would, however, be the biggest loser with almost all of its production coming in from China, whether you consider its mobile or tablet division.

For Chinese smartphone manufacturer Huawei, the trade war wouldn’t have too much of an impact as the company was already struggling to establish itself in the US marketplace amid backlash from lawmakers who prompted telecom companies AT&T and Verizon to cut ties with Huawei.

According to experts, the semiconductor industry could also face serious consequences if the Trump administration decides to take new steps to protect American interests in different industries. Alibaba, Baidu, and other Chinese companies buy chips from American companies like Qualcomm who might look elsewhere if the trade war makes transactions difficult for them.

In conclusion, the immediate negative impact on technology products isn’t the only result of the trade war – for either countries.

KeyBanc Capital Markets Equity Research Analyst John Vinh worries that future American laws limiting information sharing with China could clamp down on the US technology sector. It could also limit the spread of 5G internet connectivity, which has been led by American companies like Qualcomm and Texas Instruments. Cloud computing and machine learning could also be vulnerable to regulation.