With the news that the Trump administration is considering levying a whole new round of tariffs on Chinese goods--on top of the $50 billion introduced in March--the time is now to consider how the world's most populous country will react. A hint: It doesn't look good for you.
"We have so many U.S. clients that are selling to Chinese consumers, and if one company in their industry sneezes, they might all catch a cold," noted Dan Harris, an analyst and author of the China Law Blog, who focuses on legal matters related to doing business in China. In particular, Harris is concerned that tariffs on Chinese goods could negatively impact Chinese consumer sentiment vis-à-vis American brands, leading them to bypass those products for foreign competitors. "These tariffs could give companies in other markets a real competitive advantage against the U.S.," Harris added.
The U.S.'s most recently introduced tariffs of 25 percent--set to take effect on July 6--encompass a wide array of Chinese goods, including industrial products such as aerospace, information, and communication technology, robotics, and industrial machinery. Late last week, China announced its own round of retaliatory tariffs, which target $34 billion worth of U.S. goods including soybeans, electric cars, orange juice, and salmon. And on Monday, Trump threatened an additional round of tariffs of 10 percent on up to $200 billion worth of Chinese goods, should Beijing proceed with its countermeasures.
While China's tariffs don't overtly impact many technology companies, at present, industry trade groups are concerned that they could extend to tech products in the future.
"Tariffs go against the interest of the American people," said Michael Petricone, senior vice president of government and relations at the Consumer Technology Association, a trade group, in a statement emailed to Inc. on Friday. "The economy will respond to the president's tariff agenda by increasing the cost of goods that people use everyday, harming the U.S. economy and sinking the stock market."
The administration, for its part, says that tariffs are necessary to punish China for what it has deemed unfair and predatory trade practices, including currency manipulation and intellectual property theft. Trade representative Robert Lighthizer has described the tariffs as a defensive move, stating: "China's government is aggressively working to undermine America's high-tech industries and economic leadership through unfair trade practices and industrial policies."
Here's a look at four ways those tariffs, and any retaliatory action by Beijing, could impact tech entrepreneurs:
1. Costs for component parts made in China could surge.
Although China's retaliatory tariffs don't target American tech products per se, many firms that rely on the Chinese market to manufacture their goods could get pinched. Dozens of companies--including Amazon and Microsoft--use Chinese semiconductors as the processing power behind items such as smartphones and car consoles, for example. Tariffs on semiconductors could therefore lead to increased costs for those businesses in the months to come.
"A lot of semiconductor design houses are in Silicon Valley. They might be controlling the 'value add' part of production, but in terms of the mechanics, a lot of it happens in China. These tariffs are going to really hit them," noted Adams Lee, an international trade attorney with the Seattle-based law firm Harris Bricken. "Big companies will find ways to absorb the cost or pass it on to customers. Startups don't have the margin to take on the extra 25 percent."
Circuit Interruption Technology is one company on notice. Rick Hampton, the co-founder and chairman at his Rogers, Minnesota-based firm, has suggested that a 25 percent tariff on certain electrical components imported from China could seriously impact the 24-person business, as CIT sources the lion's share of its relays at a factory in China. Last year, CIT generated around $15 million in revenue, selling to makers of everything from school buses to thermostats. "We are anticipating that we will lose half of our business, [and] there would be up to a 50 percent layoff," Hampton told Inc. in a phone call last month.
2. Anti-American sentiment could take the shine off U.S. brands.
China Law Blog's Harris notes that there is a precedent for China boycotting foreign brands, and warns that the same thing could happen to American companies that sell to the Chinese market. When Norway gave the Nobel Peace Prize to pro-democracy dissident Liu Xiaobo in 2010, for example, Norwegian salmon exports to China plummeted. "The really big companies will probably do fine, but for some midsize companies, China could be 40 percent of their business," suggested Harris.
Still, major technology brands aren't exempt from the potential side effects of new tariffs. On Monday, Google announced that it would invest $550 million in the Chinese e-commerce titan JD.com in an effort to expand its footprint in the Asian market and better compete with Alibaba. But Richard Liu, founder and CEO of JD.com, has warned that a brewing trade war could seriously hurt U.S. companies, since Chinese interest in imported goods is poised for a downturn. "If it's a long-term trade war, it will be horrible," he told CNBC. "It would hurt a lot of American brands."
Harris meanwhile suggests that sales of products made by Apple could decline in the weeks to come--although it's unclear whether the company will be spared from tariff-related fireworks. "There are plenty of very good, Chinese-made cell phones that are considerably less expensive than the iPhone," he said. "If 90 percent of the reason you're buying the iPhone is to show prestige, and all of a sudden people are mad at the U.S., then how valuable is that prestige really?"
3. Added red tape could drive costs higher for tech companies in China.
U.S. companies with a physical or operational presence in China are concerned that it could soon become difficult to continue doing business there, should the Chinese government introduce new regulations in response to tariffs. Firms including Intel, Boeing, Caterpillar, and Qualcomm all generate a significant portion of sales in China, for instance, and could be negatively impacted by new red tape, analysts say. "The Chinese government has a full tool belt to work with, and tariffs are just one of many possible tools they could use," said trade attorney Lee. As a result of tariffs, "technology companies are likely to see extra administrative burdens, inspections, and audits--all things that create more costs."
Fred Crosetto, the founder and CEO of Ammex, a disposable glove distributor based in Kent, Washington, has raised similar concerns. Ammex has seen its Chinese business grow by nearly 70 percent year over year, and by 2020, the company expects that market could account for 40 percent of its $110 million in annual sales. With new tariffs, however, "the Chinese government would make it exceptionally hard on American companies in the short term and probably the long term, too," Crosetto told Inc. last year.
4. Intellectual property theft could spike.
The Office of the United States Trade Representative has called out China for failing to protect U.S. intellectual property, accusing the nation of stealing trade secrets, pirating information online, and forcing the transfer of American technology to Chinese partners. Indeed, the Commission on the Theft of American Intellectual Property has estimated that annual costs from the losses of IP range from $225 billion to $600 billion, at least some of which is attributable to China.
Yet analysts suggest that increased tariffs on Chinese goods could exacerbate the problem rather than solve it. "That issue isn't going away, and in some ways, it might make it harder to get China to improve their IP protections," said Harris Bricken's Lee. "China may be happy with the idea of conceding on tariff issues--as long as they don't have to change how they conduct their business on IP."
Ultimately, while it may not seem apparent, tech founders may have more to lose than the farmers being targeted by China's retaliatory tariffs. "It's one of those things where tech companies probably do have the most to worry about," Lee added.