The first round of tariffs on Chinese goods were seen as maybe a short term bluff — a small bargaining chip in a larger effort. It’s now been nearly a year and a half and things are still heating up. China is devaluing its currency after the U.S. just announced that it will be levying additional tariffs on Chinese goods, up another 10% on top of the previous 25%. Now that this dispute is looking prolonged, or at least the present reality is sinking in, international trade is changing in ways that may take years to settle.
GoPro, the camera maker, said this month that it was shifting some production from China to Mexico. Universal Electronics, a manufacturer of remote controls, announced a similar move late last year. And Varex Imaging, a Utah-based maker of X-ray equipment, said this month that it was working to “redirect our supply chain away from China” in response to the tariffs.
“Most companies took a wait-and-see attitude” at first, said Pete Guarraia, who leads Bain’s supply chain practice. “That was absolutely the mind-set. Now it’s: ‘I can’t wait any longer. I have to take some action.’”
If moving your business improves your bottom line and provides price stability/predictability, it’s hard to see how staying in China would be the best option.
At ControlTek, tariffs have eaten into profit margins, although business as a whole hasn’t suffered. On one level, the trade war is no different from health care costs, labor issues or any of the other challenges that businesses encounter. But Stacey Smith, ControlTek’s vice president for human resources and marketing, said that for an American manufacturer, the tariffs were particularly hard to stomach.
“The tariffs are different because it’s your own government,” she said. “I understand the negotiating tactics. But it really is quite painful to be one of the pawns.”
Chip makers are perhaps one of the largest groups of companies affected by the trade war.
Already, big American chip makers have taken a financial hit from the China bans. Micron Technology, which sells two of the most widely used varieties of memory chips, disclosed Tuesday that the Huawei ban had lowered sales in its most recent quarter by nearly $200 million. Huawei is Micron’s largest customer, accounting for around 13 percent of its revenue.
The U.S. is no longer a reliably buyer, but its also no longer a reliable seller. This will in turn affect the supply side of the American economy that sells chips abroad.
One major sign of trouble, he said, is that some customers in China have backed away from plans to ask Efficient Power to customize its chips to meet their specifications. They are still buying some standard products, he said, but have decided to avoid technical relationships that would cause a longer-term dependence on his company.
The loss of sales sting, but will be gone on next year’s balance sheet. The scars that may yet to be revealed are the damage to the structures of global trade. Some business may falter due to the latest obstacles, but they may find other paths towards success. The real losers in this are those who have worked to build a successful Chinese-American relationship and the opportunity cost of not developing those in the future. It may be decades before these precarious relationships are fixed.