‘There’s a confusion about China. The popular conception is that companies come to China because of low labour costs. I’m not sure what part of China they go to, but the truth is, China stopped being a low-labour-cost country many years ago’
Tim Cook, Apple CEO, 2018
Donald Trump is trying to end the economic system that made the US the richest economy on earth, with the declared aim of moving much manufacturing that is currently spread around the world to the US.
You probably already have an opinion about this, and you can read plenty of others from economists. The stock market is crashing, including tech stocks, as investors react to the prospect of a recession, inflation, and a major new tax burden. But as I said above, you don’t need me to tell you this – what does it mean as a tech analyst?
All about Apple
The company with the most obvious hit is Apple. Most of its products are assembled in China, which now has combined tariffs of 54%, and the ones that aren’t are mostly made in other countries with equally massive new tariffs – for example, Vietnam, at 46%.
Hardware is 75% of Apple revenue, and it probably has a 35-40% gross margin on the hardware, so a $1,000 iPhone will probably face a $300-350 import tax in the US.
To state the obvious, neither Apple nor its suppliers have the margins to absorb that even if they wanted to, so prices will go up. And then, while the US is about 40% of revenue, ‘Greater China’ itself is another 17%, and how will the Chinese government (or indeed Chinese consumers) react to this over time?
Can’t you recreate manufacturing in the US, though? Isn’t this short term pain for long-term gain? Well, here there are three answers that apply to a lot of the sectors where that is suddenly being asked.
Home is expensive
First, yes, but it would be expensive and take a long time. It’s taken TSMC years and huge amounts of money to get to its first plant in the US, and that’s just one company, not an attempt to replicate an entire ecosystem. Foxconn has struggled for years to make iPhones in India, and again, it takes time. Meanwhile, much of the capital equipment you’d need is itself subject to the same import tariffs (though chips themselves are not).
Second, how do you plan to change your entire supply chain and invest tens of billions of dollars over 5-10 years when you have no idea what these tariffs will be next week, let alone in five years?
This is a contradiction in many defences of these tariffs: if Trump is just negotiating to try to get a deal, and all this will look different in a week, what plans can you make?
And third, go back to your high school economics class about Riccardo and comparative advantage: you’ll invest all of this time and money to get more expensive, less efficient production.
Meanwhile, imagine you’re a hardware startup that grew up in a world where the Shenzhen electronics cluster provided on-demand contract manufacturing to turn out your product on demand? Before, you were worried about the Chinese government – now your own government has added 54% to your Bill of Materials.
Platforms and data centres
Then there’s Meta. Shein and Temu (see above) got a lot of their customers with aggressive advertising on Meta’s properties, as indeed did TikTok. About 10% of Meta’s ad revenue comes from Chinese companies – however, it’s not clear how much is e-commerce and how much is games and video (which are not taxed, yes). And then, a third to a half of Amazon Marketplace (which is 60% or more of total volume) is Chinese sellers. How price-elastic is that?
A third thing to wonder is data centres, where Google, Microsoft, Amazon and Meta have said they plan to spend something in the region of $300bn this year. At least three-quarters of that is in equipment, and most of that is imported.
Of course, traditionally most data centres are distributed to be close to users, so they’re not all in the USA, but a lot are, especially as they’re focused on training (where having the compute all in one place is important, at least for now).
Trump’s tariff announcement exempted ‘semiconductors’, but does that include the highly complex custom computing systems that Nvidia sells? This week? Next week? What about the transformers and gas turbines, and the HVAC, and the new liquid cooling? How much of that is made in the US, or could be quickly? It would be ironic if Trump’s tariffs pushed big tech companies to move their AI development out of the US.
And that’s just the start …
These are just a few initial and obvious places to think about, but there will be a lot more: this is a very blunt change to an enormous number of complex systems. As I suggested above, every company that sells to consumers or enterprises is now thinking about a recession and inflation, and that will change how they think about budgets.
Any company that imports, well, anything, now at a minimum has to spend a lot of time thinking about ways to avoid these tariffs, or just waiting them out, or wondering how much it can put up prices, and that inherently means doing things that are more expensive and less efficient than you’d be doing without the tariffs – or you’d already be doing them.
Mario Draghi, author of the EU’s call to arms for more growth and less bureaucracy, called the EU’s regulation and especially its tech regulation as the equivalent of a giant tariff that the EU had changed itself, but all of this actually is a giant tariff that the US has charged on itself, and on the tech industry as much as anything else.
Benedict Evans is an independent tech analyst whose weekly newsletter goes to 175,000 subscribers. Find out more here
