In US’s Consumption Economy, Tariffs are just pointless Government Accounting Tricks
First, a simple case of fact of what happens to a massive tariff against Chinese made products.
In 2011, US imposed a massive tariff against Chinese made solar panels and cells. In 2013, EU followed with a 50% tariff against Chinese made solar panels and cells. In order to “keep US and EU solar companies competitive against unfair dumping”.
Now, 3-6 years after that, the tariffs are still in place, but nothing else changed much. Chinese solar companies grew in market share. No US or EU solar company booms. Solar panels and cells prices continued to drop. (Solar module prices dropped from about $0.70 per watt 2013 to about $0.55 per watt 2016).
There is no teeth in the tariffs, when big international companies are involved. (They simply hire lawyers to get around the tariffs, or they find a way to make the consumers pay for it).
This is the same for iPhones and cars.
President-Elect Donald Trump and his unabashedly anti-China economic adviser Peter Navarro proposed a 45% tariff on all Chinese made products imported into US. (and even urged Apple CEO Tim Cook to “build a big plant” in US).
On the second urging, a point of fact: Apple isn’t in the business of building factories. Apple doesn’t even own those factories in China. Apple “subcontracts” assembly work to Foxconn and Pegatron (both Taiwanese owned companies in China).
Apple has asked Foxconn and Pegatron to “investigate” the possibility of building factories in US. (YES, that’s 2 FOREIGN companies building factories in US, with jobs that Apple never had in US). Foxconn has said “we will get back to you”, and Pegatron has flatly refused. https://9to5mac.com/2016/11/17/report-apple-asked-foxconn-and-pegatron-to-investigate-manufacturing-iphones-in-the-united-states-as-donald-trump-import-policy-overhangs/
Setting aside the idea of Trump forcing a US company to haplessly BEG a foreign company to create jobs in US, whatif the 45% tariff is slapped on the future iPhones made in China??
Well, much like what happened in the solar panel market, NOT MUCH.
First, a side note: Did you know that iPhone raw price (before tax) in US is about $80 cheaper than the same in Europe and Asia?? (and yes, that’s with all taxes and tariffs taken out).
Do you know why?? (It would seem strange to people that an iPhone made in China would cost more in China)
It’s because US government (in a round about way) subsidizes iPhone sales:
(1) Wireless services like AT&T actually pays Apple a “kickback” for every iPhone sold through AT&T service, estimated about $200 per iPhone.
(2) AT&T gets a tax deduction from US government (for things that AT&T would do any ways, like installing network cables, which it usually charges the consumers for. 2011 alone, AT&T got a tax reduction of $420 million).
In the end of that circle of money, US consumers end up pay for iPhone basically at probably higher price than normal, because the tax reduction to AT&T gets passed onto the consumer taxpayers any ways.
- So what happens when the iPhone 8 gets slapped with a 45% tariff, and its price gets to about $1,200 per phone? Nothing.
Apple sells the iPhone through AT&T, and AT&T puts it on a lower price in its stores (which Apple will emulate in Apple stores), then AT&T gets a bigger tax refund from Donald Trump by the virtue of AT&T corporate attorneys. (AKA giant circle of money in accounting books).
In all that, AT&T will probably raise its data plan fees, just like before.
Why would Apple and AT&T do all of that??! To protect China??!!
Nope, because Donald Trump and Peter Navarro fundamentally forgot, US is a Consumption driven economy.
Since the 1970’s, US shifted from a production economy toward a Consumption economy. Here is a discussion about that (though I’m not sure I agree with all its conclusions): https://innovationandgrowth.wordpress.com/2011/08/10/production-economy-vs-consumption-economy/
The Consumption economy also means the possible worst scenario of a Democracy: “Bread and Circuses”, where the government incentivize and give the People food and entertainment as a way to survive.
The Consumption economy also means that US companies are beholden to the investor and the public to DRIVE the public to continue to “consume”, even beyond rational ability to pay and sustain the consumption.
If the Public can’t pay? Put it on installments, tax credit, loans, mortgages, debts, etc.. Anything to get that sales number up.
How do you think the housing bubble happened? Or the Big Short?
China doesn’t have to worry about the tariffs, because some American sales VP will figure out how to make US consumers pay for it in sub-prime loans.
Afterall, that’s what the stockholders care about too. So why would Apple risk building its own factories in US??