Tariffs Advance U.S. Tech Goals in China, Experts Say

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Editor's Note: This is the first of two articles examining the impact of tariffs -- positive and negative--on the electronics industry.

It feels like the U.S.-China tariff-and-trade war has been waging so long we’ve forgotten how it started, but its goals remain the same. The Trump administration is pressuring China to change its behavior toward intellectual property (IP) theft and how foreign businesses must operate in that nation. The electronics industry has sought action on these issues for some time.

“Intellectual property is critical to the electronics industry,” said Jens Gamperl, founder and CEO of electronics distributor Sourceablity. “Our government uses these tariffs as a weapon and a threat to convince China to treat our IP in the way it should to protect it.”

“We own a lot of IP and so I would support this,” he added. “The stealing of technology and making fraudulent products are not acceptable. I say let’s use [tariffs] for a certain period. It may help us to reorganize expectations about American industry.”

Since July 2018, there have been a series of tariffs and counter-tariffs levied between the U.S. and China. Manufacturing experts say the U.S. is closer to achieving its objectives.

“I think one milestone we can point to is the threat of raising the tariff level to 25 percent has forced the Chinese to the bargaining table,” said Tom Derry, CEO of the Institute for Supply Management. “The issues remain the protection of IP and opening the Chinese market to additional sectors that have been relatively closed off to U.S. companies.”

China’s offer to increase purchases of nonstrategic U.S. goods is a red herring, Derry added. “It would temporarily adjust the balance of trade between the two countries, but it wouldn’t address the structural issues. The balance-of-payments deficit needs to be addressed structurally and not by transaction. It doesn’t address the underlying issues.”

Unintended Consequences

The tech industry strongly supports IP protection and fair trade. The method—levying tariffs on Chinese imports—has had mixed results. Passives- and EM-component manufacturer Abracon, which outsources its manufacturing to Chinese partners, has had to shift production from China to other low-labor-cost nations. CEO Michael Calabria said U.S. tariffs have hurt the Chinese economy and Abracon’s partners lobbied to retain its business. “It’s our responsibility [to our customers] to remain competitive,” Calabria said. Japan, he added, has actively been lobbying to bring foreign manufacturers to its shores .

Increasingly, companies manufacturing in China are exploring other options, Gamperl said. “It is not only because of tariffs, but also the costs of human resources and property. Manufacturing in China on coastline gets expensive. The Philippines and other areas are more competitive. It’s not easy to build infrastructure back in the U.S. though.”

 

Electronics industry associations, such as the SIA, ECIA and IPC, have publicly expressed concern regarding the tariffs. In early January, ECIA released a Technology Partners Consulting survey that showed 35 percent of respondents saw an incremental negative impact from the tariffs in December. In June, the SIA said: “While the U.S. semiconductor industry shares the Trump Administration’s concerns about China’s forced technology transfer and intellectual property (IP) practices, the proposed imposition of tariffs on semiconductors from China, most of which are actually researched, designed, and manufactured in the U.S., is counterproductive and fails to address the serious IP and industrial policy issues in China.”

The Big Picture

U.S. manufacturers might be missing the bigger picture, experts said. China’s industrial policies are influenced by its social policies and China clearly intends to rival other economies. Decades of unfair trade practices, the added, must be addressed now.

“The Chinese have been very transparent in their policy objectives,” said Derry. “China 2025 is out there for all to see; as are plans for the new belt and road initiative. We shouldn’t be taken by surprise that social policy is a major influence on China’s industrial policy.”

Social goals—such as 100 percent employment in China—have driven suboptimal policies, Derry added. “Global oversupply in products such as solar panels are directly related to China. China has also shown through its debt diplomacy it is willing to fund infrastructure in other countries. If those countries don’t pay their bills, China uses that as a lever to take control of these assets. The Chinese are clear in their intentions to become a global rival to the U.S. in all dimensions—economically, socially and militarily.”

Regulations in China are arbitrarily enforced, Derry added, and range from provincial to national policies. “You operate under the assumption everything is OK, but that can change at any moment,” he said.

Not everyone supports tariffs as a trade policy. “U.S. manufacturing would do better if Congress acted more aggressively on a skilled workforce, a lower dollar [in the global market] and a value-added tax.,” said the Reshoring Initiative’s CEO Harry Moser.

The electronics supply chain so far hasn’t shown a severe tariff-related impact, but OEMs are shifting their supply chains. That’s not necessarily bad, Derry said.

“One unfortunate reality that has a positive outcome is that the tariffs are forcing companies to be more agile in their supply chains,” he said. “China was attractive because of its low labor rates so they developed a manufacturing infrastructure and I would say it’s arguable that U.S. firms became complacent in the last decade. They’ve failed to build up their options and recognize the risks associated with manufacturing in China.”

“We have overly concentrated ourselves in one country and that’s a risk,” he added. “As companies shift production to non-tariff countries and forge new sourcing agreements – call it a forced democratization of the supply chain – it’s made them more resilient. Labor is no longer the name of the game –geopolitical concerns are the real risk.”

Tariffs and taxes are fundamental considerations in sourcing, Derry explained, and will drive how supply chains are designed. “The new tax law has two provisions, GILTI and FDII, that create a tax regime that makes the U.S. more competitive than it used to be.” The nation’s corporate tax rate; legal protections and access to talent and education make the U.S. an attractive destination, Derry said. “That is the ‘pro’ argument for tariffs. People need to see them as a means to an end.”

Derry admits tariffs are a blunt instrument, “but China is a much more export-driven economy which can means some real pain.” In the end, the United States has the upper hand. “The U.S. can absorb more pain at the macro level and if the trade war stretches out longer we can outlast China,” Derry concluded.