Tech companies girding for punishing tariffs from President-elect Donald Trump are looking to move factories, reroute supply chains or stockpile imports from China to avoid prohibitive levies.
In a bid to force manufacturing activity back to the U.S., Trump has floated a few plans, ranging from a 10% to 20% tax on most foreign goods, to a 60% tariff on Chinese products that would hike the surcharge American importers pay to their highest level in decades.
“If these tariffs are imposed, it will be next to impossible for vendors to avoid raising prices, especially tech hardware vendors, who almost always have components built overseas in their designs,” Guy Currier, a tech analyst at The Futurum Group, said in an email. “These vendors pay the tariffs themselves, so it is a simple added manufacturing cost for them.”
“Those with heavy exposure to China will need to carefully assess supply chains and start to develop plans for materials sourcing, manufacturing, assembly,” Daniel Newman, CEO of The Futurum Group, said in a Slack message. “Also, those that have substantial sell into China will need to consider those risks as well. We are already seeing this in AI as those controls have been put in place. Tariffs may add similar uncertainty for tech companies that are in less-sensitive spaces.”
Barring exemptions, the tech industry is likely to be caught in the crossfire of an escalating trade war.
Since the first Trump administration initiated a trade war with China, and President Joe Biden upheld and expanded them, China has retaliated, slapping tariffs on U.S. goods and limiting access to rare earth materials critical to manufacturing a wide range of popular products, such as critical components for semiconductors.
There are more than $300 billion in tariffs on Chinese imports, but none yet on popular consumer goods such as smartphones, laptops, tablets, and game consoles because the tech industry successfully lobbied for exemptions on the premise the U.S. economy would be badly harmed.
But if Trump tariffs go into effect on China, and the tech industry is not granted exemptions this time around, the cost to tech companies and consumers could be debilitating. Laptops could nearly double in price, game consoles would spike 40% and smartphones would be 26% more expensive, according to a Consumer Technology Association (CTA) study.
Should consumers decide to overpay, the additional cost to a “typical US household in the middle of the income distribution” will be more than $2,600 a year, concludes a research report this summer from nonprofit, nonpartisan Peterson Institute for International Economics.
Higher pricing is likely to hurt corporate sales, in turn.
Hamstrung by exorbitant prices, and dinged by Chinese tariffs, tech companies face “a permanent loss of revenue” as well as the threat of more than 800,000 net job losses by 2025 because of slackening sales, warned the nonpartisan, nonprofit US-China Business Council in a report.
Facing such a daunting economic challenge, the only mediation is that the vendors aren’t likely to pass on the tariff costs 100% because of the hit to sales volumes, Currier said.
“They will balance loss of margin against loss of sales volume,” he said. “Possibly some creative financing options will appear to help customers pay the cost increases later. But that is speculative and is only really attractive if there is an expectation that the tariffs will not remain in effect for long.”
The pain will be especially deep for small tech businesses lacking exemptions that are “paying more in tariff costs or they’re paying more in administrative costs, and they’re not spending money on research and development, or they’re not hiring new people, because they’re just trying to stay alive,” Ed Brzytwa, vice president of international trade at CTA, told Ars Technica.
Other companies without exemptions for current Chinese tariffs are pursuing several tactics: Buying from new overseas suppliers (Hasbro began sourcing from companies in India, Vietnam and Mexico the last five years); moving existing suppliers out of China (Goertek, a supplier of Google’s Pixel watch, and Foxconn, a manufacturer of Apple Inc.’s MacBook, have both relocated production to Vietnam from China); and investing in domestic manufacturing (Intel Corp. has expanded American manufacturing capabilities, supported by new subsidies).
Still others have circumvented tariffs by rerouting exports through intermediary countries such as Vietnam and Mexico.
“Trump knows a strong market and strong economy is going to be among the most important indicators of a successful second term in the eyes of many Americans,” Newman said. “His desire to create more balanced trade has the opportunity to be a good thing — but can easily go too far and be costly to many companies and harmful to the continued growth of tech. Especially in hardware spaces like semis, devices, and other infrastructure.”
“The impact on software companies, I imagine, would be minimal given their labor-driven cost structure and hardware companies obviously face more challenges,” Ilan Kogan, an attorney specializing in tech, said in an email. “Immigration reform could have a much more significant influence on start-ups than tariffs.”
Eric Sundheim, CEO of consultancy Mercovus Valuations, said it is imperative for tech companies “to be cautious of relying on a supply chain that runs through China or the countries in eastern Asia that are heavily subject to China’s influence.”
“I would also maintain an agile supply chain that can easily ramp up operations domestically or in countries with low risks of trade wars with the U.S.,” Sundheim said in an email.
With so many trade issues soon to confront them, tech companies would also be wise to brush up on international trade policy, academic experts advise.
“Businesses need to understand that the policy tools in the U.S. — including export controls, investment reviews, entity listings, investment restrictions and even industrial policy — are dynamic and evolving areas of change for transnational commerce. These factors are likely to remain important for the foreseeable future,” Meg Rithmire, an associate business professor in the Business, Government and International Economy Unit at Harvard Business School, said in a recent white paper.
