When Donald Trump hit the campaign trail, he reiterated the same economic arguments that american economists and trade analysts had been arguing over for years: that China employed unfair trade regimes to shore up its position as a net exporter of goods. From artificially setting an exchange rate that favoured the RMB to using government support to undermine the tenets of the World Trade Organisation, many have bemoaned the actions that have made China the world’s manufacturing basket. In importing over $500 billion worth of goods from China in 2017, America experienced a deficit of more than $375 billion. It is this deficit that Trump vowed to address before he became president; less than 24 months in office, the president seems to be living up to his own lofty expectations.

So far, the Trump administration is imposing tariffs on $250 billion worth of Chinese exports, representing almost half of all goods imported by American households and corporations. President Xi Jinping has retaliated with tariffs on products worth $60 billion dollars, leading to a full-blown trade war. While a lot of the product categories are related to agriculture, chemicals, and healthcare products, many tech products face serious price risks. Already, the US-China trade war is showing a potential to affect the global supply chain of the tech industry.

Computing Devices

Computer parts and accessories have already come under a barrage of scrutiny from both sides of the China-US trade war. For years Washington has cast an accusatory glance at everything coming out of China. For instance, American firms have accused their Chinese counterparts of forcing them to reveal trade secrets. They claim the Chinese do this by arbitrarily enforcing standards that compel American firms established in China to reveal in detail all technical specifications of inputs brought into the country.

In the Big Hack, a Bloomberg investigation detailed how the Chinese allegedly infiltrated US companies by secretly installing tiny chips on servers imported by American tech giants like Amazon and Apple. Recently, the DoJ indicted two firms, one of which was owned by the Chinese state, for stealing information from US chip manufacturer, Micron.

Whether it’s because of the alleged hacks or the huge trade deficit, the Trump administration is imposing 25% tariff on computer accessories and inputs. Chips, processors, memories, and amplifiers are some of the product categories affected by the tariffs. Companies like Dell who have to import parts from China will now face a hike in prices because of these tariffs.

Intel too could suffer a huge hit on its operations. Of the six wafer fabs that produce its raw chips, three are located in America while one each is located in Israel, Ireland, and China. The Chinese plant, exporting parts to America to be placed in American computers, could incur the full amount of the tariff, potentially causing the prices of end products to inch up.

The Semiconductor Industry Association says up to $6.3 billion worth of goods will be impacted by the tariffs. The taxes could cause a full-blown panic within the digital infrastructure space as routers, switches, and servers are all likely to be severely affected.

An FT report makes compelling analyses about how taxes on these components could affect the cloud computing industry by dampening growth within the value chain. This comes at a time when Alphabet, Facebook, and Microsoft are all increasing their capital investment in data centres. Even racks on which servers are mounted are likely to suffer the effects of implementing the full tariff regime.

There were already hiccups in the acquisition of NXP by American chipmaker, Qualcomm, because of some ‘delay’ on the part of Chinese regulators. That deal has long since collapsed. America chip manufacturers, Intel and Nvidia, are prevented from selling certain military-grade chips into China for security reasons. The frozen relationship between the two countries could end up affecting both global supply and demand for devices that rely on these parts.

Cars of the Future

China accounts for 17% of Tesla’s global sales, making it the electronic vehicle maker’s largest market. In retaliation to US tariffs, China imposed a 25% tariff on American cars. Tesla has consequently increased the price of its electric vehicles by up to 20% in some calculations. This significant increase in price could have important structural effects in the EV market specifically, and the automobile market generally.

For one thing, more American automobile manufacturers may need to move their production to China if they wish to sell to the domestic market competitively. It’s the lesser of two evils. There are two options to this, one of which is to set up in the free trade area (FTA). The problem with this is that goods produced in the FTA enjoy zero customs duty if they are exported outside the country. If the manufacturers decide to sell them in China, however, they’ll be treated as imported goods and suffer the full impact of the new tariff. But at least, if they were produced with cheap costs such as labour, prices may still be slightly lower than if they were imported directly from the USA. This absolutely clever move on the part of the Chinese ensures that US companies do not get a leeway to circumvent the effect of the tariffs on the American economy at the expense of China.

Manufacturers who move their production to China would clearly help boost the Chinese economy but won’t be able to reap as many benefits in the area of increased sales in China, because selling in China would make their prices uncompetitive as a result of the import tariffs that would be slapped on them. Exporting their goods back to the USA also makes the goods subject to the tariff hikes on the American side since goods produced in China (whether in the FTA or not) would still count as Chinese exports to America.

In other words, Jinping is ensuring that American businesses would not be able to competitively set up manufacturing bases in China to solely feed the Chinese market and make locals lose their edge in the production cost dynamics. Also with that singular move, Jinping makes American’s hang their competitiveness with their own ropes. Although products made in the Chinese FTA are tariff-free when they leave China, they get slapped with the Trump tariff hikes once they reach American soil.

The other option for American automobile companies is to partner local Chinese manufacturers. Ford and General Motors both have plants in China to produce for Chinese buyers. This kind of partnership is not always preferred by international firms for the reason that it ‘encourages’ the transfer of technology from the investing firm to the local partner. More so when China has demonstrated ample second-mover expertise.

For companies that do not want to be forced into partnerships, there is the option of completely shifting assembly plants to other locations. This has the double effect of avoiding both Chinese and American tariffs.

Alleged Dragonfly

America holds itself as the home of democracy. Free speech and the freedom of expression are both enshrined in the American culture. And, for years, America has purposely exported this dream to its allies and other countries of the world alike. Nations that are deemed to be attacking human rights or are judged to be suppressing free speech are treated at arm’s length. And any nation that works with these countries without the explicit permission of Washington can see itself suffer back home. It was for this reason that Google, the world’s largest search engine, quit China in 2010.

Before then, Google had operated in China on the agreement that it would allow its website to be censored by Chinese regulators. The effect of censorship is that words and phrases that celebrate western ideologies over Chinese culture can be struck out of results pages. Also, dissenting websites could be easily identified and pulled down from Google’s servers. For years, Washington had bemoaned this arrangement and accused Google of promoting anti-American agenda. US senators chided Google for this ‘un-American’ practice and in 2010, the company pulled out of China.

However, in an operation termed Dragonfly, the Intercept claims Google is attempting a return to China. This return would mean more censorship, something that would do more than raise eyebrows in Washington. The current climate of hostilities could put Google under a harsh spotlight in America. Big tech like Facebook and Twitter are already facing major challenges regarding their handling of hate speech and social media misuse. If Google follows through with its plans, sanctions and fines will not be far either. Eventually, Google will have to decide between its image in America and the potential ad revenue from China’s billion-people population.

If Google should go on with its alleged plan, the average user outside America and China could benefit from more search results than usual. Google’s knowledge graph could become richer with more China-based responses providing more real-time information for searchers outside the mainland. It might be a case of ‘between a rock and a hard place’ for the Silicon Valley firm, but the US-China trade war might deliver more than just ad revenue to Google.

A Virus in the World’s Supply Chain

The US-China trade war has the potential of devolving into a contagion because of the interconnections inside the world’s tech supply chain. Many electronic products involve parts and accessories produced in countries from different parts of the world. Many Chinese exports are embedded with inputs created in countries like Japan, Taiwan, and South Korea. And so even though a tariff is labelled on a made in China product, the ripple effect will spread across borders in ways that could affect the world’s supply chain.

For instance, a laptop assembled in South Korea could have a processor from Taiwan, a chip from China, and another conductor from India. A tariff on Chinese chips would end up affecting South Korean laptop manufacturers as well as the American households who buy them.

Companies might have the opportunities to relocate their manufacturing and assembling plants to other countries because of the US-China dispute. But the realities are far from simple. While Mexico and India might offer plausible solutions, none quite has the capacity that China’s tech savvy and dense population promise. Also, moving production could be too expensive to consider in the short to medium term. Intel reports it will need over $800 million just to relocate out of China.

The overall effect of the US-China trade war could become the computer virus that eats into the world’s tech supply chain one bit at a time. If the dispute protracts any further, companies might just need to bite the bullet and move productions away from their current locations, causing a redistribution of resources across the value chain. Jobs will be lost, incomes will fall, talents will migrate further until, eventually, the capacity to lead the next generation in AI and 5G technology will be decided by a 10-25% tariff. But in the same vane, new opportunities may emerge. Have you spotted a potential opportunity emanating from the burgeoning US-China trade war?