TARIFF THREATS
Apple is vulnerable if China and the U.S. increase their trade spat to include smartphones,
The phrase on the back of iPhones—“Designed by Apple in California. Assembled in China”—highlights a key reason for the company’s remarkable success but also shows how exposed it is to the escalating U.S.-China trade fight.
By assembling its phones in China, Apple Inc. tapped into China’s vast workforce and formidable manufacturing capabilities. But it also made Apple’s most-profitable product a Chinese export—one that could be subject to tariffs in the trade dispute.
On top of that, China is by far Apple’s most important market outside the U.S., leaving it exposed if Beijing decides to retaliate by squeezing its sales.
“They should be nervous,” said David Dollar, a China scholar at the Brookings Institution, who was the U.S. Treasury’s top official in Beijing during the Obama administration.
Smartphones weren’t included in the levies on $34 billion (U.S.) of Chinese goods imposed on July 6, nor are they targeted in a second round worth $16 billion that is expected in August. They also haven’t been included in a third round of $200 billion in goods that the Trump administration identified earlier this month.
But now, President Donald Trump is threatening levies on a total of $500 billion in imports, which would cover just about everything China ships to the U.S., including iPhones, trade experts say. The U.S. imported about $45 billion in mobile phones from China last year, according to data from the International Trade Centre. China imports much less from the U.S.—about $130 billion in goods annually—which limits its options for tit-for-tat tariffs. But China could retaliate with higher duties and punitive actions against American companies. Apple would be a likely target because of the iPhone’s 9% share of China’s smartphone market, according to Mr. Dollar and other trade experts.
Apple declined to comment.
Chief Executive Tim Cook, who has made the company’s China business a pillar alongside the one in the U.S., has maintained his customary cool as tensions rise, while courting officials in Beijing and Washington.
In March, he visited Beijing and called for open trade at an event hosted by the Chinese government. “Countries that embrace openness, that embrace trade, that embrace diversity are the countries that do exceptionally,” Mr. Cook said.
In a visit to the White House in April, Mr. Cook told the president tariffs weren’t the right approach to trade issues, the Apple CEO said in a subsequent TV interview.
“They’re working to engage the administration to make sure there aren’t unintended consequences both here in the United States and in China,” said Dean Garfield, president of the Information Technology Industry Council, of which Apple is a member.
China already imposes a value-added tax of 16% that affects iPhones. Apple has other potential targets for retaliation, including about 40 retail stores in China and an App Store that is the largest in spending world-wide.
China’s Ministry of Commerce and the State Council Information Office didn’t immediately respond to requests for comment.
For Washington and Beijing, dragging Apple into the trade fight carries risks.
Mr. Trump could anger American consumers if tariffs make the popular iPhone more expensive. He would also be taking on the world’s most valuable company, which has promised to contribute $350 billion to the U.S. economy over the next five years. Included in that figure is a one-time tax of $38 billion on its overseas cash holdings, which came in response to a major overhaul of the U.S. tax code.
China also has an interest in keeping the peace, given the number of jobs Apple provides. About 10,000 people in China are employed directly by Apple, the company said. Indirectly, Apple says it accounts for three million jobs there through its supply chain, which includes contract manufacturer Foxconn Technology Co.
It also says it provides work for1.5 million app developers in China.
“It’s like a double-edged sword. If the Chinese government really tries to do something, that will hurt itself,” said Yuqing Xing, an economics professor at the National Graduate Institute for Policy Studies in Tokyo who has written about iPhones and U.S. trade.
Apple is more vulnerable to smartphone tariffs than rivals because it hasn’t diversified its manufacturing. Though the company looked at assembling iPhones outside China in recent years, including in Vietnam, it found the costs of facilities and training too high and opted to keep exporting most iPhones from China, according to a person familiar with the matter.
In the U.S., a tariff of 10% on a Chinese-made iPhone X would add about $37 to the import cost of $368, according to market researcher IHS Markit. Apple would either eat those costs on the $999 device or pass them on to retailers and consumers, says Mehdi Hosseini, an analyst with Susquehanna International Group.
Rival Samsung Electronics Co., on the other hand, makes more than 80% of its smartphones outside China and would avoid similar duties.
In China, Apple’s business was squeezed in 2016 when the government halted its online music and book services. Such measures show how China can harm Apple’s business in retaliation for tariffs, trade experts and analysts said.
“China can infinitely dial these up and dial them down,” said Nicholas Lardy of the Peterson Institute for International Economics, who focuses on China and trade.