Don Jones

Tech | Career | Musings

Earlier this week, the US President said that, should upcoming talks with the Chinese President not go well, additional tariffs could be applied (subscription required; here’s an alternate article)- including Chinese-made products like iPhones and laptops.

What’s a tariff?

Quite simply, a tariff is a tax paid by the importer of a product. Let’s be very clear on that: the shipping country (China, in this case) doesn’t pay the tariff; Apple would. Ultimately, almost all tariffs are passed on to the consumer of the product, rather than eating into companies’ profit margins.

Historically (that is, prior to now) tariffs were typically used to protect domestic competitors. A simplistic version goes something like this:

A US-based toy manufacturer has higher costs, due to our higher cost of living throughout the US, higher salaries, more expensive benefits, and so on. So a US-made toy might cost $20. A Chinese-made version of the same toy might only cost $10, even after shipping it over, making it 50% cheaper. And most consumers will buy to price, regardless of “Made in USA” campaigns and labeling. So the US toy company is essentially punished for doing business in the US, and may even go out of business.

A 50% tariff would “even the playing field.” The Chinese-made toy would now cost $20, just like the US-made one, and the US government would snag a cool $10 per toy for the Treasury.

There are huge economic debates about whether or not tariffs are actually effective in this theoretical situation, and there’s a good bit of international law (which the US President works around by citing national security concerns) at play regarding when you can slap tariffs on products. There’s a lot of US law, too. Originally, Congress could levy tariffs (Article I, Section 8 of the Constitution); over the past decades, that power has moved to the Executive branch. That means there are few checks on the President’s power to levy tariffs, short of (our current deeply divided) Congress passing legislation to restore tariff power to the Legislative branch.

But consider iPhones as a different example: what, exactly, does a tariff do? It won’t encourage you to “buy USA” or “level the playing field;” there are no equivalent US-made smartphones for consumers to switch to. A tariff that gets passed on to the consumer will not encourage Apple to suddenly invest billions in US-based iPhone factories (nor would it tip the balance for other major manufacturers); estimates suggest that an iPhone could not be economically produced in the US, period. Tariffs would not directly punish the Chinese people or governments; the President would have to be working on the theory that a more expensive iPhone would stop selling in the US, thus forcing Apple to cut back production, thus injuring Chinese companies and workers. There’s not much evidence that Apple’s customers are terribly price-conscious, though, as iPhones now easily break the $1,000 per unit mark and continue to sell well (if not gangbusters). So it’s not incredibly clear what the President is aiming to achieve, if in fact he is “aiming” to achieve anything at all. Let’s be clear: the only people who’d pay more or a tariffed iPhone is an iPhone purchaser. Neither the Chinese manufacturers, nor Apple, nor the Chinese government, would end up paying a cent more, unless Apple uncharacteristically absorbed the tariff (unlikely).

One presumes that Samsung’s devices, made primary in Korea, would be unaffected by a tariff on Chinese imports. Devices from Huawei (not a big US presence anyway) would be, as would devices from Lenovo (including all their fantastic laptops). One could argue that the biggest beneficiaries of a tariff of this kind would be the US Treasury and Samsung.

The President is quoted, with regard to a potential tariff rate, as saying, “I mean, I can make it 10 percent, and people could stand that very easily.” That’s kind of a difficult perspective to grasp, as it seems to be indicating that US citizens could “stand” a 10% increase in iPhone and laptop pricing – but those citizens would literally be the only ones impacted by a tariff. If they can “stand” it, then it essentially amounts to a 10% tax on those products, since there are no domestic alternatives to any of them.

This is, in any event, a somewhat unprecedented use of tariffs. Previous tariffs on steel, for example, follow historical patterns and are usually an attempt to force people to buy US-made product (even if the US product prices US businesses out of business). But to levy tariffs on items which simply have no domestic equivalent is… difficult to explain.

 

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