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Why U.S. Tech Firms Fear Trump’s Tariffs More Than They Fear China

Sep 27, 2018

For years, U.S. companies in all sectors — from technology to steel to energy — have been concerned that Chinese hackers are infiltrating their computer systems to steal proprietary business documents and intellectual property. But now that the Trump administration has implemented tariffs on $200 billion worth of Chinese goods, intended in part to penalize those acts of cyber espionage, many U.S. companies seem much more worried about the impact of those tariffs than they ever were about the loss of their intellectual property.

It’s striking that a policy supposedly designed to support U.S. companies and protect them from the threats of Chinese espionage and theft is being viewed, especially in the tech sector, as a much greater threat to the U.S. economy than anything China has done. Still, it should come as no surprise that U.S. companies are bracing for these tariffs to backfire given how interconnected the U.S. and Chinese tech industries are, and how dependent U.S. consumers are on technologies manufactured in China.

Some Chinese tech companies compete with U.S. firms, for instance by developing their own smartphones and online services, but many others provide crucial parts or device assembly services to U.S.-based companies like Apple, Intel, and Texas Instruments. So, while the tariffs on Chinese goods will undoubtedly hurt China’s tech industry, they have the potential to be even more devastating to tech companies based in the United States who rely on their Chinese partners.

In a September 5 letter to U.S. Trade Representative Robert Lighthizer, Apple insisted that “the burden of the proposed tariffs will fall much more heavily on the United States than on China.” These onerous tariffs could be viewed as attempts to pressure companies like Apple to reduce their reliance on Chinese manufacturers and make greater use of U.S. workers and suppliers. But there is no reason to believe that strategy will work out as planned, given the disadvantages for the U.S. economy, and U.S. consumers, that Apple outlined in its letter objecting to the tariffs.

“Tariffs increase the cost of our U.S. operations, divert our resources, and disadvantage Apple compared to foreign competitors,” the company wrote. “More broadly, tariffs will lead to higher U.S. consumer prices, lower overall U.S. economic growth, and other unintended economic consequences. As a result, tariffs will ultimately reduce the economic benefit we generate for the United States.” The government took the economic threats outlined in that letter seriously enough to later revise the tariffs to exclude the Apple Watch — in addition to iPhones, Macs, and iPads, which were already exempt.

Apple is not the only tech company with close ties to China and major concerns about the new tariffs. In July, the Information Technology Industry (ITI) Council, an advocacy group representing 67 major tech firms, including Amazon, Dell, Facebook, Google, Microsoft, IBM, Oracle, and Samsung, among others, submitted comments on the proposed tariffs, excoriating them for accelerating “harm to all American consumers, workers, and businesses — both large and small — with no end in sight.”

The ITI Council comments highlighted how damaging the tariffs could be for key U.S. tech products like semiconductors, which are the country’s fourth largest export. Semiconductors have been a contentious issue between the U.S. and China for several months, ever since President Trump announced he would ban the Chinese company ZTE from purchasing U.S.-made hardware and software for its products, highlighting China’s dependency on foreign semiconductors. That, in turn, spurred China to ramp up its efforts to develop and produce semiconductors domestically, creating new potential competitors for U.S.-based chipmakers like Intel and Qualcomm. In the meantime, as China works to build that industry, U.S. companies will face the added burden of paying significant tariffs on their own semiconductors, many of which are assembled, tested and packaged in China before being shipped to the United States.

And relocating those assembly, testing, and packaging plants to the United States — or other countries besides China — in order to avoid the tariffs is not necessarily an option for all tech companies, as ITI pointed out in its comments. “Should supply chains shift, they would shift to Southeast Asia — Philippines, Vietnam, and Malaysia — where this region has global comparative advantage in technical knowledge of this field,” ITI explained. “Those supply chains would not move to the United States due to the U.S. lack of labor density, preparedness, and competitiveness in this field.”

Companies inevitably protest and lobby against policies that will hurt their business and cost them huge sums of money. That doesn’t always mean those policies are misguided, but in this case, where the purpose of the tariffs on China is ostensibly to boost the U.S. economy and help protect U.S. firms from unfair business practices and intellectual property theft, it makes sense to listen to the major U.S. tech companies when they tell us that these tariffs will hurt both them and their American customers. The point of these tariffs was to punish China but, whether intentionally or not, they may well end up hurting the United States more: leaving U.S. tech firms yearning for the days when the biggest thing they had to worry about was China’s cyberespionage and IP theft.

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