Trade war impacts electronic components markets

Going back as far as the age of tea clippers trade disputes have been viewed as rational economic interactions as governments attempt to level the economic playing field and rebalance inter-country trade in their favour. Import tariffs are usually not imposed with the aim of collecting additional tax, welcome as that might be. Governments impose tariffs to force up the price of imported goods, thereby enabling and encouraging their domestic organisations to compete effectively. The huge trade imbalance that currently exists between many western governments and China is the result of an over reliance on their national economy’s ability to absorb this imbalance, compounded by a reluctance to directly confront the issues presented. The governments of more managed economies such as Japan and Korea have historically been much quicker to respond and in the current situation have already focused their economies to reduce their exposure to Chinese markets and products.

Organisations in the US electronic components supply network are already having to pay import duty of 25% on many commodity electronic components that can only realistically be sourced in volume from China and manufacturers importing populated PCBs may soon have to pay an additional ten percent duty. This price increase is expected to have only a marginal impact of the profit margins of the majority of US-based electronic equipment manufacturers and in the short-term at least, will probably be absorbed rather than passed on as price increases to customers. Sadly, electronic manufacturing services (EMS) companies will not be able to absorb this price rise and prices charged to OEMs for populated boards will inevitably rise.

Section 301 action
In April 2018 the US invoked a Section 301 action against some 1,600 Chinese manufactured imports including many electronic components, asserting that the country’s industrial policy has resulted in the transfer and theft of intellectual property (IP) and technology to the detriment of the US economy. The Chinese government lost no time in announcing its imposition of tariffs on US products at a similar financial level. On July 10th the US Trade Representative proposed imposing a tariff of ten percent on an additional $200B of imported Chinese goods across over 6,000 products, commencing in September 2018. A quick review of this list reveals that data switches / routers and printed circuit assemblies do figure among China’s high-value exports to the US but the majority are primarily low tech manufactured goods and foodstuffs, suggesting the US is seeking to target a much wider range of Chinese exporters. Perhaps the Chinese government will soon respond with some similar tariffs on US goods, but it is also possible that they may choose an alternative strategy because they realise that they have very little chance of economically winning an out-and-out trade war with the US.

The US does not stand alone. The EU has raised concerns with the World Trade Organisation (WTO) over Chinese state-controlled companies abusing the IP of European organisations, but no action is possible until a full investigation has been completed and reported upon. In the event that the WTO does find in the EU’s favour, the most effective punitive measure the community could take is by imposing its own import tariffs, raising the spectre of an increasingly global trade war. The hope is that with the increased commercial pressure the Chinese Government will address the concerns of the US and EU and modify the behaviour of its state-controlled organisations appropriately.

Out sourced manufacturing
Quite how international electronic components manufacturers with a significant presence in the US, but who manufacture primarily in China, will handle the east/west trade issues that currently face our industry remains to be seen. Established international factory transfer pricing schemes may go some way towards helping them to avoid increased charges but smaller organisations will have little hope of doing so. International distributors operating in the US who have warehouses outside the US will be able to continue shipping to these locations from China without paying duty but they won’t be able to avoid the duty on goods shipped into the US from China (or shipped via one of its overseas subsidiaries). That said, if the goods are subsequently exported out of the US they will be able to claim the duty value back. However, their cash will be tied up for longer, but most organisations already have sophisticated ERP systems that can be set up to manage this process. The additional level of bureaucracy is also likely to slow the free movement of goods as theoretically at least, customs officials will need to ensure compliance by inspection.

The US administration will also have to deal with issues surrounding the shipping of duty payable products from China via a third party country. With a margin of 25% duty this ‘arbitrage’ is probably profitable for organisations willing to work on the edge of legitimacy but it also exposes the revenue collectors to the risk of criminal duty deferment accounting fraud (where goods aren’t shipped but documentation trails pretend they do, just to defraud the duty element). This is far less likely whilst duty remains at ten percent or less, simply because it’s not as profitable.

The balance today
Whilst the US and EU still dominate in core IP for semiconductors and many advanced electronic components, companies in Asia-Pac have become dominant in both the manufacturing and consumption of commodity semiconductors, passive components and PCBs. There is an obvious mutual dependency for both production and consumption of electronic components and the manufacture and consumption of the end products produced. Research by Custer Consulting concluded that in 2016 for example, over 80% of PCBs were produced in Asia-Pac, whilst Japan was responsible for <9% and the US and Europe produced <5% and <4% respectively.

The manufacture of electro-mechanical products is more geographically dispersed, but China is still the largest market. These figures suggest that Western economies have become over reliant on Asia-Pac economies for the manufacture of electronic components.If this trend continues for the next 20 years western economies are likely to surrender their current lead in advanced components’ IP too. That cannot be in the best interests of the global economy and certainly not of western economies.

Political leaders in the west are at long last beginning to realise the potential negative economic and social impact of a loss of IP leadership in a diverse mixed economy. With all the political leaders in the UK myopically focused on Brexit perhaps the unconventional intervention of President Trump will provoke debate on a wider longer term vision and rebalancing of western economies.

In the meantime, I suspect increased protectionism compounded by extended manufacturing lead times will become the new reality for electronic components over the next few years. Ensuring good communication both up and down your organisations supply network and by reacting diligently to the information received, will help all parties to maintain supply equilibrium across the electronic components market.