US Companies’ response to the Trade War with China

Trade War between China and the U.S. has been clearly impacting businesses inside the United States due to high tariffs imposed on Made-in-China goods. Even though the initial idea was to pressure China and affect Chinese exporters, this situation ends up hurting American companies. Tariffs increase costs for retailers, since they import a huge amount of goods from China. In this case, one option would be to increase prices to customers, which could have a negative response in case consumers cannot really afford higher prices in the long term. However, retailers could also consider importing products from other countries, which takes a lot of time and effort. Moreover, companies may not find products as cheap as it used to be getting them from China. Another option for retailers is trying to deal with high tariffs as long as their customers can afford to buy them.

One of the biggest sectors negatively impacted by the trade war between the United States and China is the U.S. automobile industry. China increased its tariffs on U.S. made cars entering the country by 25%. Since the increase, the sales of cars in China have fallen for the first time in many years of business. Due to increase of the China tariffs, a basic Tesla Model S is currently sold at the cost of about $129, 000, including tariffs and value added tax. It intends to reduce the prices of its two models by 12 to 26 percent to make the cars more affordable. Although its revenue for 2018 is double that of 2017, its income from China dropped by 13 percent, which is estimated at $1.8 billion.

One way to avoid the tariff burden is to produce goods in China through foreign direct investment. Tesla struck a deal to build its third Gigafactory in China. The factory has been put in Shanghai, China. It means that the company will ultimately be able to produce cars locally and completely get around the tariffs. Having an industry in China is intended to increase the affordability of its cars.  Production is scheduled to start later this year.

Last November, President Trump threatened that he would impose a 10% tariff on iPhones coming out of China. In response to this, Apple has started to alter its production and export strategy in China. It intends to reduce the iPhones manufactured in China. Due to the uncertainty of future tariffs, Apple has decided to slash its plans to produce 70 million phones of their latest model, the iPhone XR. Instead, Apple will only provide a third of what it produces and will shortly reduce the production of all its other iPhone models in 2019 (Volodzko, 2019).

Additionally, Apple has also moved the production of its high-end iPhones to India.  Apple’s top manufacturer, Foxconn, has already invested 356 million dollars in developing a plant in Tamil Nadu near Chennai. The objective here is to start reaching an untapped market segment while the US and China trade war simmers down. India is also the second largest smartphone market, next to China, and with India having tariffs of 20% on imported phones, Apple avoids the heavy taxes by manufacturing them inside the country.