The latest tariffs enacted by the Trump administration against China are not expected to help solve the problem of intellectual-property theft from American companies, and instead could hurt U.S. companies, especially in the technology sector.
When corporate earnings-reporting season begins this week, investors will hear from companies about what kind of impacts they expect to see or are seeing from the tariffs on $200 billion in Chinese goods, whether on their bottom lines or their overall businesses. So far, a few tech companies have begun to warn about issues in the supply chain, the need to raise prices or take hits to their profits, due to the extra costs that tariffs of initially 10% on a wide-ranging list of goods.
The tariffs will affect a huge range of products, from baby cribs to printed circuit assemblies, and prices are bound to rise, unless companies decide to take a hit to their profit margins instead. In the next few weeks, investors will get a better idea of the impact.
“You are going to see a lot more comments about tariffs,” said Dan Hutcheson, president of VLSI Research Inc. “Here are two ways tariffs will slow industry growth: Prices will be raised, and it will create uncertainty. Higher prices across all goods affected will cause companies to be uncertain about demand for electronics products in the upcoming holiday season. If they are not confident that the market will be there, they will hold off buying semiconductors to build inventories for the holidays.”
Some investors believe worries about the U.S.-China trade war are among the reasons that tech stocks are one of the big contributors to the current market rout this week.
In a survey conducted in mid-September by Blind, an anonymous workplace social network, 75.5% of tech employees responded negatively to a question about whether the tariffs would be good for business. Many employees were from companies that wrote letters to the U.S. Trade Representative during the public-comment period about how the tariffs would be bad for their companies and tech innovation, such as Apple Inc. AAPL, -0.88% AAPL, -0.88% AAPL, -0.88% , Cisco Systems Inc. CSCO, -3.31% and Intel Corp. INTC, -1.27% .
Already, a few tech companies have made cautionary comments about the impact. Memory-chip maker Micron Technology Inc. MU, +0.87% warned that its profit margins will take a slight hit due to the tariffs on Chinese goods. The Boise, Idaho–based company has an assembly plant in China where its memory modules are assembled.
Last week, at its annual meeting with analysts, HP Inc. HPQ, -5.15% said that it included the impact of the tariffs in its forecast. “We’re expecting a gross headwind before mitigations,” HP Chief Financial Officer Steven Fieler said. “However, we’ve been actively working mitigation plans to anticipate the net headwind to decline throughout [fiscal] 2019 as our strategies take full effect.”
An HP spokeswoman said the company will “continue to manage” but did not expand on that remark.
“Mitigation” is likely a reference to price increases. Price hikes, especially if they come around the holiday shopping season, could backfire with consumers looking at consumer electronics as a gift idea. Another mitigation option could be moving some manufacturing or assembly facilities.
With the tariffs, the U.S. appears to be trying to punish China for some of its trade policies, such as forcing U.S. companies to share some intellectual property, so-called forced technology transfers, in exchange for gaining access to the Chinese market, the world’s largest market. “Rather than hitting the administration’s intended target — Chinese firms that may have unfairly obtained American technology — the proposed tariffs would actually inflict damage on U.S. high-technology sectors,” wrote Mary Lovely and Yang Liang of the Peterson Institute for International Economics in a policy brief this year.
Instead, the moves are hurting U.S. companies, which see the tariffs as additional taxes on goods and not doing anything to alleviate the real core problem. In addition, China is so entrenched as the leader in global manufacturing that many companies might find it too costly or time consuming to move their manufacturing elsewhere.
“It’s pretty implausible to manufacture consumer electronics anywhere else,” said Aaron Emigh, the chief executive and co-founder of Brilliant, a startup in Silicon Valley making a control panel for the smart home. “It is unique in its ability to scale, and particularly in the way the supply chain is integrated in China.”
There is a whole ecosystem of suppliers “that you don’t get anywhere else in the world,” Emigh said, adding that there are lower-cost manufacturing options outside of China, but those are seen as too risky to pursue, including shipping and customs.
“China is really unique in the way that a small company can tap into this ecosystem and get all the benefits of this supply chain and manufacture a high-quality product at high volume,” he said.
Doreen Edelman, an attorney with Baker Donelson in Washington, D.C., where she is co-chair of the firm’s global business team, said she has been advising clients that this is a good time to do an internal review of their entire global supply chain.
“If you are a global company you are better situated,” Edelman said, adding that larger companies have the resources to investigate other manufacturing options, double check their tariff numbers, file for exclusions, and take other actions that might delay some of the impact. “The small companies are less apt to absorb these duties, and they will shut down or lay off workers.”
Investors will be waiting to hear more about the impact, which could eventually hurt the economies of both the U.S. and China. Already, economists are predicting that the trade war will reduce growth, and a recent report by the International Monetary Fund said that the U.S. could lose more than 0.9% of gross domestic product in 2019.
“If I was on the Chinese side, I would bet there would be a huge stock-market fall-off that would cause Trump to break down [on tariffs],” said VLSI’s Hutcheson. “If I were on Trump’s side, I would say we want to make their economy slow down enough. They are both playing with fire when it comes to their own economies. It’s like two cars racing to the cliff to see who is going to hit the brakes first.”
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