The latest flare-up in the US-China trade war, heralded by what we now expect as the norm by way of a tweet from US president Donald Trump, was as unexpected as it was pointless.
Businesses across the US are being disrupted; US consumers are already paying more for their goods from the earlier round of tit-for-tat tariff increases; and now the weekend marked a further escalation.
US importers now face higher costs; US manufacturers in China face challenges in getting their goods back to their home market; while Chinese exporters have to pay a 25% tariff on good sold to US buyers.
The target of the White House with its latest penal tariffs include much of the electronic gear used in data centres but also extends to many consumer gadgets ranging from Apple phones and watches to electronic vehicles, which all use semiconductors as the core part of the devices.
The new 25% tariff levels imposed by the US will hit exports of the finished electronic gear from China but crucially will also affect the imports of the semi- conductors that drive these devices. Chinese companies import €240bn of semiconductors each year from a range of countries around the globe. Ireland has a reputation for exporting high-end chips, mainly from Intel.
Last year, over a third of the €5.4bn on semiconductors produced in Ireland, was exported to China. The value of exports was down from the previous year, as the Chinese economy slowed under the trade tit-for-tat trade dispute.
China’s growth is projected to slow from an estimated 6.6% in 2018 to 6.2% in 2019 and it is widely expected the latest 25% tariffs will have a significant impact on the overall sales of semiconductors, hitting sales of data devices, as well as devices for personal computers. The tariff increases will be particularly disturbing for Intel which last month cut its 2019 revenue outlook.
The revenue warning came with the bad news that it was exiting the 5G smartphone modem market, where Intel was the sole iPhone chip supplier for the past year. That helped push Intel shares lower in recent weeks.
Other sectors of Irish industry could also be caught in the collateral damage of the heightened trade dispute. China has in its early response vowed to implement the “necessary counter-measures” in response to the US decision.
In the earlier round of the dispute, the Chinese government’s counter-measures were quite modest and mainly focused on commodities. The most critical of these, the soybean import duty increase, was later dropped as a measure to placate the US negotiators and move towards what was then expected to be a resolution of outstanding issues.
The Chinese government will have noted that this concession hasn’t paid off. Hence, this time its response is likely to be much more aggressive and focus more on technology products which could catch many more Irish producers in the crossfires.
For most companies, enduring a 25% rise in cost is very tough. Some firms will not survive; some will increase prices, but all will have their profits reduced. Whatever the industry, few companies have a bottom line of 25%. Irish businesses trading with China, often supply part components that go to make the final product, which is frequently shipped on to the US. This is the nature of the globalised world we now trade in.
Many firms are likely to lose business, payment delays, and in the worst cases, where the Chinese company collapses, a total loss of payments.
John Whelan is managing partner at The Linkage Partnership