Apple (NASDAQ:AAPL) has weighed in on the latest round of proposed tariffs the Trump administration is thinking of imposing on China (25% duty on $200 billion of products) and the news isn’t good. In a letter (public version available here) to the US Trade Representative Robert Lighthizer, Apple explained what many people know, namely that on the face of it, tariffs harm economic fundamentals of companies, consumers and countries.
The question really isn’t whether they will, it’s about whether over the medium to longer term, tariffs can force the opposite side to come to terms which are more beneficial. In this sense, we expect everyone with a vested interest to rail against the proposal because ultimately the bottom line is going to show some red ink. If however the real objective is to not just engage in a petty “this is unfair! We’re going to hurt everyone until we get what we want!” trade war but more of a planned approach to extract appropriate concessions, then there may yet be merit in the trade war. The question is ultimately how far will it progress and at what stage will the US be satisfied. Forcing other countries to change things at the governmental level isn’t a quick process and while the war gets waged, real people will pay the price whether in loss of jobs, profits, pension appreciation due to slower growth in capital markets, raised prices etc.
The other side of the equation also says that a reasonable way to corporate growth is to make public noises about how the cost of goods and services has increased due to factor XYZ so prices must rise, but then when that factor is no longer the case, of course prices are then slow to fall to previous levels (or in fact don’t at all!)
Apple goes on to explain what we’ve said (here) in the past about how the US accounting of trade is overly simplistic and only counts the total cost of the final product which is shipped from the last country it hits in its production. This obviously excludes a long list of value realised and distributed elsewhere throughout the production chain in countries other than China.
Apple, the Trillion Dollar Adaptor Company…
The public version of the letter Apple wrote goes into some detail about which products are likely to be hit by the proposed tariffs. It’s a relatively long list that covers such a variety of Apple product offerings as well as items which Apple buys for its US operations. There is a further Annex C which is redacted and termed as “Business Confidential”.
At a high level, the products hit are:
- Apple Watch
- Time Capsule
- Magic Mouse and Trackpad
- Adaptors, chargers, cables and cords
- Leather covers and cases for all manner of Apple products
US Operations get hit due to needs for significant computer components such as logic boards, microprocessing units, memory, graphics cards, sound cards, computer parts such as housings and internal components, R&D equipment, electrical connectors, MacBook keyboards and trackpads as well as the nicely generic “Printed circuit boards”.
Apple does raise a number of relevant points, including that in 2017, it sourced over $50 billion of products and services from its 9,000 US suppliers, specifically calling out Finisar (NASDAQ:FNSR), Corning (NYSE:GLW) and Analog Devices (NASDAQ:ADI). In the event of a hit on sales, look for these (and other) secondary suppliers to also take a hit on revenue, stock price and overall operations.
All in all, Apple reckons that between its various operations, the organisation represents the work of over 2 million US workers in 50 states including its 80,000 employees, 450,000 supplier employees and 1.5 million app developers, estimating that it expects to directly contribute over $350 billion to the US economy over the next 5 years.
While Apple likely has reasonable analytical models to back up its claims of contributions to the US economy, this of course doesn’t particularly address the root of the problem that the Trump administration is taking aim at. China has clearly set itself up as a country to encourage technology and intellectual property transfer over time, effectively cutting international corporations out of its market unless it feels it is getting something in return, namely input into its goal to make its own products and become a global geopolitical power greater than it already is.
Apple says in its letter that “…it is difficult to see how tariffs that hurt US companies and US consumers will advance the Government’s objectives with respect to China’s technology policies”. Realistically, it isn’t that hard to see, Apple just doesn’t like what it sees. If the US can force China to come to terms (and there are mild signs that the tit for tat tariffs are prompting debate in China as to the strength of the country’s hand), the long term likelihood is that the competitive advantage of leading US corporations will be safeguarded over the longer term. Apple is a publicly listed company and has to keep an eye on current earnings projections to ensure it maintains its position of dominance and keeps investors happy.
Realistically, there are probably people at relatively senior levels in Apple thinking exactly about how over the long term this could (if it’s not allowed to proceed too far) help them. I wouldn’t be surprised to see tariffs imposed, prices put up to cater for that and when the situation (eventually) settles, prices remain at a higher level and provide a margin boost. In the short term however, it seems unlikely that we’ll see anything other than another round of tariffs and price hikes hitting consumer wallets.
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