Tariff 'Escalation' Costs ‘Unambiguously Severe’ for Technology Sector, US Chamber Report Finds

March 18, 2019 by Paul Gluckman|Top News

A Rhodium Group report prepared for the U.S. Chamber of Commerce found that the American information and communication technology sector is bearing an especially heavy burden from the “bilateral tariff escalation” between the U.S. and China, senior Rhodium analyst Lauren Gloudeman told reporters on a conference call March 15. The report found the costs of the escalation are “unambiguously severe” on the ICT industry, she said.

The Trump administration’s Section 301 tariffs “raised prices for nearly one-third of ICT imports from China, which is equivalent to nearly 20 percent of the ICT imports around the world,” Gloudeman said. “What we found in some ways isn’t surprising,” she said. “Bilateral tariffs result in lower GDP, employment, investment and trade flows” for the U.S., plus diminished “consumer welfare,” she said. “We see higher import and export prices, meaning higher costs for consumers and businesses.”

Rhodium found that long-term ICT “productivity growth” is at risk through lower U.S. “competitiveness” and production stagnation, Gloudeman said. “Our headline takeaway was that U.S. GDP would cumulatively face $1 trillion in losses within 10 years across all tariff-escalation scenarios that we modeled,” she said. “We’re talking about a range of $64 billion to $91 billion per year on average in the first five years.”

While China and the U.S. “suffer the biggest hits in their potential GDP from bilateral tariff escalation, the rest of the world actually benefits from diverted trade and investment,” Gloudeman said. Rhodium sees much of the ICT production activity diverting to “regional supply chains,” especially in Canada and Mexico, and in East Asia “to a lesser extent,” she said.

Though the report does forecast a 3 percent to 4 percent annual increase in domestic U.S. ICT production, “we do not consider this as a wide-scale onshoring” of manufacturing, Gloudeman said. “The reality is that import tariffs produce import competition for a number of industries,” including ICT, she said. China and the U.S. also stand to “lose the most” in ICT exports, “which broadly shift” to Taiwan, Hong Kong and Mexico, she said.

Tariffs will “disproportionately hit intermediate goods,” Gloudeman said. That has “stronger implications” for sectors that are more heavily “reliant” than others on imported “inputs for manufacturing,” she said. The impact on the ICT sector is “amplified for that very reason,” she said. “We also see, outside of the models, that tariffs undermine the critical role that U.S. ICT services play in facilitating all trade, not just ICT trade.”

The “structure” of globalized ICT supply chains “suggests that the more a given industry relies on processing and assembly in China, the more it will be impacted by the tariffs,” the report said. That’s not just because U.S.-based manufacturers rely on lower-cost intermediate goods from China, “or because U.S. consumers use final ICT goods assembled in or exported from China,” it said.

U.S. tariffs “concentrated in” ICT goods “will punish not just Chinese exporters, but also U.S. suppliers based in China,” the report said. It cited the huge upsurge in “U.S. assets built out in China” in the past two decades. U.S. “multinational enterprises,” including those with direct Chinese subsidiaries, are today a “key link in the bilateral supply chain,” it said.