Impacts of Tariffs Against China for Electronics Manufacturers
The trade war was triggered when Trump unilaterally announced 25% tariffs on steel imports and 10% tariffs on imports of aluminum. While the tariffs were broad-based, the real target was always China. That is hardly surprising considering that the US has a trade deficit of $376 billion with China.
Beyond that, according to Trump, America has been short-changed by China in two ways. Firstly, the Chinese government gives its domestic producers enormous subsidies, which enables these producers to supply goods at rates that other countries are not able to match, giving China an unfair advantage when it comes to global trade. The second complaint is that China has been misusing intellectual property (IP) and has been using reverse engineering to build its own domestic industry in high technology areas.
Tariff Impacts on U.S Electronics Manufacturing
Now that the tariffs against China have been implemented by the Trump administration, the question is what the impact is on US electronic goods? In effect from July 6, 2018, the higher tariffs have become effective on Chinese imports into the US worth $34 billion. China reacted as they warned and has enacted tariffs on $50 billion worth of US imports. The direct impact of tariffs will be on goods worth more than $100 billion and the downstream and collateral effects will be much larger.
The list of impacted items leans away from consumer goods and towards components of consumer goods and ready-to-purchase capital goods. Capital goods are the equipment, machinery, and products that companies purchase to expand operations and infrastructure and are part of longer-term investment objectives.
It is clear, from this perspective, that the initial goals are to shift the cost differentials between both US and Chinese suppliers for common heavy equipment, with an eye to shift the balance of favor to US-based heavy equipment suppliers without having short-term impacts on consumer pricing.
Overview of Tariffs on Electronics Components
The interest in electronic manufacturers, however, lies in the items that are going to impact the electronics industry. Overall, they are not heavily concerned about the tariffs on pick-and-place machines, soldering irons, or inspection equipment.
There are two reasons for this: one is that capital investments in equipment for businesses are made based on multi-year plans; and secondarily, their highest-ticket capital expenditures are typically sourced from the EU and US, based on the brands of equipment they buy, which they feel are best suited to production loads here in the US.
The tariffs that affect electronic manufacturers and their customers really begin around section 8532. These tariffs cover a wide range of products used in printed circuit board assemblies, including:
- Capacitors (all including tantalum, aluminum electrolytic, and ceramic)
- Resistors (all including thin/thick film, radial, potentiometers, and rheostats)
- Switches (all, of any kind)
- Connectors and terminals of any kind for making electrical connections
- Any printed circuit assembly covered by two catch-all sections.
The second set of tariffs that have been suggested but have not yet rolled out include the following impacted items as well:
- Integrated circuits (all including processors, controllers, memory, amplifiers, other)
- Low-voltage Insulated wiring
Impacts of Tariffs on Component Shortages
One of the largest factors currently affecting electronics production is a severe under-supply of passives, like resistors and capacitors. In general, any expected increase in cost would be expected to reduce demand, but in this case, higher prices are not expected.
That is because:
Passives are not discretionary.
Companies need to build their products to sell them and increasing the price of individual components would increase the costs of those products. Only if the end product costs were to substantially increase would that reduce demand. Years of haggling on passive component prices reduced their value so significantly that little new production capacity has been brought to market. The net result of this is that passives are a minimal driver on overall product cost for many items, meaning these tariffs alone would have little impact on the final product price to reduce demand sufficiently to overcome the market shortage.
Also, most passive consumption does not happen in the US.
The vast majority of the passive demand these days goes into portable electronics and electronics for automobiles. The bulk of portable electronics (cell phones, tablets) are produced in Asia, and as such, these tariffs would have little impact on their prices. While there is substantial automotive electronics production in the US, overall production is well spread worldwide, with significant capacity in Mexico, Eastern Europe, Japan, Korea, and China.
The primary impact these tariffs will have on US electronics production will be to drive the cost of these components higher, while providing little relief in a tight supply market. Competition for supply in high volume production will get more expensive in the coming months and may result in some orders seeing a substantial Bill of Materials increase to ensure supply in the hundreds of thousands.
Impacts of Tariffs on the Future of U.S. Electronics Manufacturing
Pricing increases on components have already started to affect prices on the tightest supply components like capacitors and resistors, while other component price increases will work their way into the overall US market over several months, as existing stock at distributors in their US warehouses is depleted. Component costs will largely stay fixed for a short period of time before rapidly raising.
If tariffs expand to integrated circuits, counterfeit materials will become a larger risk in the overall supply chain. Driven by high prices, the number of “too good to be true” deals are going to increase and desperate purchasing managers and EMS buyers will be tempted to take the offer. Quality Contract Manufacturers (CMs) will continue to work only with authorized distributors as materials prices go up and availability goes down, as the risks for their customers will simply be too great.
We can expect further uncertainty from OEMs, startups, and small businesses with regards to international manufacturing. As trade issues continue to be front-and-center, we’ll see more low- to mid-volume electronics manufacturing either starting onshore in North America or moving back — even with elevated component prices, while large-volume electronics manufacturing will remain overseas for the near-term.
With longer-term tariffs on existing materials, we’ll see more and more US-based electronics manufacturing purchasing shifting to Mexico to take advantage of low tariffs between China and Mexico, along with low final-product tariffs via NAFTA, unless that is also affected by the plans of the Trump administration.
Overall, we can expect the impact on tariffs on any goods to result in more multi-sourcing, making the same product in multiple global regions, as the risk of retaliatory tariffs increases and OEMs optimize for taxes. For US-based customers, CMs who offer both US- and Mexico-based production capabilities will see a marked increase in demand as customers seek to locate production to lower duty regions as US/China friction heats up.
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