ONE way that US president-elect Donald Trump has suggested that he will “Make America Great Again” is by imposing tariffs of 60 per cent or more on products imported from China and a 10 to 20 per cent tariff on those from other countries.
Robert Lighthizer, the US trade representative during Trump’s first administration, told Wall Street investors last month that Trump would swiftly implement his tariff plans once he takes office.
Trump has a distinct fondness for tariffs, lauding them as “the greatest thing ever invented” and “the most beautiful word in the dictionary”, even dubbing himself “Tariff Man”.
In 2018, Trump used tariffs to start a trade war with China. During his tenure, about 60 per cent of imports from China into the US were hit with an additional 25 per cent tariff on top of the standard most-favored-nation duties.
Trump’s obsession with tariffs seemingly stems from a misunderstanding of who bears their costs. He believes that it is the foreign exporters who pay the tariffs on US imports.
Using tariffs to fleece foreigners appears to be immensely gratifying to him. According to Trump, tariffs not only offer Americans a free lunch but also mitigate losses from his tax cut plans. This understanding is obviously flawed.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
When Chinese companies export their own products to the US, competitive pressures prevent them from raising prices. In such cases, they cannot pass the tariff costs onto US importers or consumers. Exporting Chinese firms must bear the full tariff costs themselves.
I doubt any Chinese company can make a profit from US exports while shouldering a 60 per cent tariff. Consequently, the likelihood of Chinese firms halting exports to the US becomes significant if they cannot shift the burden onto another party.
Passing it on
Chinese firms are not obligated to pay tariffs for the products they make or assemble at the behest of American firms, such as HP’s computers and Apple’s iPhones.
Since these products belong to American companies, the Chinese enterprises derive only minimal assembly fees, lacking both the obligation and capacity to pay tariffs. Instead, American companies must cover the full tariff costs.
In recent years, Apple has started assembling some of its products in India and Vietnam. However, about 90 per cent of Apple products are still assembled in China.
When iPhones, iMacs, iPads and Apple Watches assembled in China enter the US, China-based contract manufacturers such as Foxconn Technology and Luxshare Precision Industry have no tariff obligations. Apple must pay these costs, and if tariffs increase, it will likely significantly raise its products’ retail prices in the US.
According to Apple’s annual report for its fiscal year ending Sept 28, its average product gross margin is 37.2 per cent, with total US sales of around US$167 billion.
I estimate hardware sales in the US are about US$125.2 billion. If Apple’s worried about competition from Samsung Electronics and others in the US market, it might not pass its tariff costs onto local consumers. Should it fully absorb the 60 per cent of tariffs, its average US gross margin could plummet to zero.
If Apple decides to pass on the costs of tariffs to consumers, it would need to raise US prices sharply. Yet, as luxury items, Apple’s products already command a premium. A significant increase could force investors, including Warren Buffett, to ponder how much Apple’s US sales will drop and how much its stock might fall.
In an October interview at the Economic Club of Chicago, Trump claimed high tariffs could compel foreign firms to manufacture in the US, creating jobs. However, persuading Apple to repatriate assembly is an impossible mission.
In 2011, Apple co-founder Steve Jobs reportedly told then-president Barack Obama: “Those jobs aren’t coming back.” Simply put, assembling Apple products is labour-intensive, and there are not millions of Americans who would accept 3,000 yuan (S$557) monthly wages for such work, nor forgo their weekend to boost earnings.
Transferring Apple’s entire assembly capability from China to India or South-east Asian countries can’t be achieved overnight either.
Apple CEO Tim Cook recently remarked that the reason the company shifted assembly to China was not cheap labour but the country’s robust supply chain. India, where about 20 million iPhones were assembled in 2023, offers cheaper labour than China but has no significant supply chain yet. CAIXIN GLOBAL
