Businesses and policymakers are bracing for what could happen under President-elect Donald Trump's trade agenda. Trump has promised to slap a tax on Chinese goods, possibly as high as 45 percent; he also has said that he will reinvigorate U.S. manufacturing by bringing it home. What would this mean for the goods we buy? To understand the impact of these proposals, let's look at how they'd affect one of the most popular companies on Earth: Apple.
Apple has operations all around the world. It sources components from as many as 28 countries, including the United States, but largely from China, where nearly half of its suppliers are located. IPhones and iPads are assembled there before being shipped to stores worldwide. In short, Apple benefits from a global supply chain that depends on low trade barriers and factories that are nestled relatively close to one another. When Trump talks about disrupting trade, this is the humming machine he's talking about.
Imposing a tariff on imports would mean increasing the cost for companies to bring goods to U.S. shores. To the extent they pass on those costs to consumers, that would result in increased prices. In the case of Apple, whose premium devices already cost a pretty penny, higher prices could drive some consumers to think twice about purchasing a new iPhone.
“If he institutes a 35-percent penal tariff on every export from China, then most of what you buy at Walmart is 35 percent more expensive,” said Roger Entner, a wireless analyst at Recon Analytics.
Other analysts say a tax of 35 percent or 45 percent may not automatically trigger prices that are 35 percent or 45 percent higher as companies could choose to eat the cost rather than passing it on to consumers. But either way, Trump's tariff probably could put Apple in a deeply uncomfortable position. It costs Apple $224.80 to manufacture an iPhone 7, according to the analysis firm IHS, and that doesn't include the cost of R&D, marketing and distribution. A federal markup of 45 percent could drive up that price by more than $100.
Apple could keep its retail price for a basic iPhone at $650, but the decision would cut significantly into its margins. Apple declined to comment on whether a tariff would lead to higher prices, saying in a statement that “Apple is responsible for creating more than two million jobs across the United States, from engineers, retail and call center employees to operations and delivery drivers. We work with over 8,000 suppliers from coast to coast and are investing heavily in American jobs and innovation.”
China could strike back
Apple could be hurt twice over by Trump's policy if China retaliated by raising its own trade barriers, analysts say. On Sunday, a state-run newspaper warned Americans of “countermeasures” if Trump launched a trade war — including a “tit-for-tat approach” that would affect the iPhone.
“A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted,” an op-ed in the Global Times read.
This could all spell very bad news for Apple. Amid a worldwide slowdown in iPhone sales, Apple may face additional pressure to raise the price of its products. The unpredictable consequences of a trade war make the president-elect's approach self-defeating, economists say.
“Trump's stated trade policy would be horribly destructive,” said Adam Posen, president of the Peterson Institute for International Economics.
How else this could play out
It's possible that Trump may not go as far as his campaign rhetoric suggested — either because he recognizes the risks or because of explicit limitations on his authority. For example, under U.S. law, Trump may impose only blanket tariffs up to a rate of 15 percent, and then only for 150 days.
“We might be falling for campaign rhetoric which Trump has zero intention of fulfilling,” said Hal Singer, an economist at the George Washington Institute for Public Policy.
Still, Trump could circumvent those restrictions by issuing a presidential declaration of emergency, or by narrowly targeting specific categories of goods, such as Chinese electronics.
We've been here before. Under President Obama, the United States imposed steep tariffs on imported Chinese tires starting at a rate of 35 percent. It was a raw deal for consumers, who ultimately bore the cost of the tax to the tune of more than $1 billion, according to some estimates. Beyond paying for the tax itself, consumers were hurt when U.S. tire makers — newly insulated from foreign competition — decided to jack up prices even further.
But even a lower tariff, at 15 percent, could send the price of an iPhone soaring close to $700.
Relocating factories is hard
Apple faces even steeper costs under Trump's plan to relocate manufacturing to the United States.
In January, Trump singled out Apple in particular, saying, "We're going to get Apple to start building their damn computers and things in this country, instead of in other countries.”
It's unclear what mechanism Trump would use to force or entice Apple to uproot its manufacturing. But before we go further, it's important to note that the company does boost U.S. manufacturing in some ways. For example, it assembles some Mac computers in the United States. And Apple sources some vital components domestically, including the glass for the iPhone and iPad, as well as wireless antennas and some chips and processors.
The fact that Apple still chooses to ship those U.S.-made parts overseas for further processing, however, is evidence of the global supply chain that keeps Apple's business rolling. And it's a testament to the truly massive benefits Apple derives from manufacturing in China.
What Apple gets from China are really two things. First, analysts say, it extracts tremendous savings from the clustering of many factories in a single place, which creates economies of scale and cuts costs. When the factory that makes one iPhone component is located next door to the factory that produces another, while the assembly plant is just down the road, it makes acquiring the components vastly more affordable, Entner said.
Second, skilled workers are more plentiful in China, Apple chief executive Tim Cook has argued. In an interview on "60 Minutes” last year, Cook said the United States has largely abandoned its practice of vocational education.
“The U.S., over time, began to stop having as many vocational kind of skills,” Cook said. “I mean, you can take every tool and die maker in the United States and probably put them in a room that we’re currently sitting in. In China, you would have to have multiple football fields.”
For Trump, this poses several policy problems. To truly bring Apple's manufacturing back to the United States — meaning not just the final assembly of the phones and computers but the production of components by suppliers — would take tens of billions of dollars in new factory construction costs alone, Entner said.
That doesn't consider the additional investments in education the United States would need to make to staff those factories. Even though Americans have grown accustomed to smartphones as commodity devices, components such as the iPhone's backplate are machined to extremely specific standards that require substantial training.
Considering the deficit in skilled U.S. workers, any plan to move Apple's manufacturing back to the United States probably would require hiring more foreign workers until enough Americans could be trained to take those jobs.
All of this could be occurring against the backdrop of a trade-induced recession. As many as 4 million U.S. jobs would be lost as a result of Trump's trade war, and 3 million jobs would never be created, according to Moody's Analytics. Even if Trump could somehow insulate Apple from these effects, it would be operating in a much gloomier economy, one in which belt-tightening consumers may decide to stop buying expensive smartphones for a while.