Trade War Stupidity: US Chip Makers to Pay Tariffs On Their Own Chips

Mish

Trump's trade war with the world shifted into a higher gear today. The US imposed tariffs on China. China retaliated.

Trade War Tit-for-Tat Escalates

On Friday, the US announced a 25% tariff on $50 billion of Chinese goods “that contain industrially significant technologies.” It took China a few hours to retaliate.

The Wall Street Journal reports China to Impose Tariffs of 25% on 545 U.S. Products.

US Tariffs

  • A list of products issued Friday by the U.S. Trade Representative’s Office covers 1,102 separate U.S. tariff lines, focusing on products from industrial sectors that contribute to or benefit from the “Made in China 2025” strategic plan. That includes industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles.
  • The USTR said the list includes an initial group of products that cover approximately $34 billion worth of imports from China for which Customs and Border Protection will begin collecting duties on July 6, and an additional group of products covering approximately $16 billion in imports from China that will undergo further review.

China Response

  • China to impose tariffs of 25% on 545 U.S. products on July 6: State Council
  • U.S. products subject to immediate Chinese tariffs include farm, automobiles and seafood products: State Council
  • China to impose tariffs on additional 114 U.S. goods on a future date: State Council
  • Additional U.S. goods subject to Chinese tariffs include chemicals, medical devices and energy products: State Council

US Chip Makers to Pay Tariffs On Their Own Chips

Thanks to complicated trade rules , and of course the imposition of tariffs in the first place, US chip makers complain We’ll End Up Paying Tariffs on Our Own Goods.

The U.S. semiconductor industry bristled at President Donald Trump’s plan to impose tariffs on about $50 billion of Chinese goods, arguing they will hurt American business and make the country less competitive.

The new rules will place 25% tariffs on a variety of semiconductors when they go into effect July 6. China immediately vowed to respond with its own duties on American goods with “equal scale and equal strength.”

While the U.S. tariffs may impair Chinese companies that use semiconductors, among others, the fallout will also extend to U.S. businesses that participate in the complex supply chain of chip manufacturing, according to the Semiconductor Industry Association, a U.S. trade group.

That is because the vast majority of chips American companies import from China are designed in the U.S. The manufacturing of many components in those chips often starts in the U.S. as well, before they are shipped to China for assembly, testing and packaging.

That US Chip makers will end up paying tariffs on their own chips is not only stupid, it calls into question the true deficit numbers in the first place. What exactly is an "import"?

Regardless of the answer, the foolishness if this trade war is readily apparent. Forcing US manufacturers and consumers to pay more for goods will harm US growth and cost US jobs.

Mike "Mish" Shedlock

Comments (14)
No. 1-14
Carl_R
Carl_R

Cool. Since chips are a manufacturing input, not a finished good, this is much like the tariff on steel and aluminum. It will crush American manufacturers. Any American manufacturer that uses chips in their product is now at a significant cost disadvantage to foreign manufacturers who can use the same chips without having a tariff imposed.

tz1
tz1

So China is also stupid for raising their tariffs, but why is Trump criticized over Xi?

Tengen
Tengen

This was inevitable as soon as Trump decided to play this game. With corps becoming ever more multinational, what constitutes an import/export is often unclear.

Best way for corporations to play this is to follow the ZTE model whenever possible. Play hardball and threaten to eliminate a slew of jobs, claiming that the tariffs are unaffordable. Slashing labor is the one thing proven to get Trump's attention.

Realist
Realist

Trump is complaining about a trade deficit with China of 370 billion, but is is closer to half that amount. Much of what the US imports from China originates in the US, follows a complex path of assembly in many countries, gets finished in China, and imported to the US. Semi conductor chips are just one example. China might add 10-15% value to the chip, but the whole value is counted in the trade deficit. An iPhone is another example. When China ships the finished iPhone to the US, it counts as a $500 import by the US, but in reality, China adds a mere $15 in value to the finished iPhone. Korea adds $150 in value, but that’s ignored in the trade figures. Trump is a simple man. He sees a number that he can make political hay from, and he runs with it. It doesn’t matter if the number is correct. As long as it suits his purpose. He does this over and over again, and even brags about making up the numbers sometimes. But it doesn’t matter if his number is correct, as long as it serves his political purpose of appealing to his base, by getting them to focus their anger on some imagined enemy, while heaping praise on him for standing up for them.

Realist
Realist

This repeated strategy works well for Trump. The risk is that he actually starts a trade war with China, and possibly every other country. That will turn out to be a huge loss for the US. The upside, is that a trade war will make Trump even more popular, as Americans rally around him in the struggle against those evil foreigners. Trump isn’t the first politician to rally voters around him by picking fights with some imagined enemy. It is a well used strategy.

Carl_R
Carl_R

Two reasons. First, Trump was first, while China was retaliating . Second, China is, in general putting tariffs on finished products, while Trump is putting tariffs on manufacturing inputs. The net effect, when you combine them, is double. For example, a Smartphone manufactured in the US would face a 25% tariff on it's parts, then another 25% tariff if imported into China, raising the price 50% compared to a similar phone made in China. If sold in in the US, the Chinese tariff wouldn't apply, but it would still be at a 25% disadvantage compared to phones made in China.

Casual_Observer
Casual_Observer

This is music to my ears. It will cause my former employer to go down in flames as 40% of their revenue in exporting products to China.

Casual_Observer
Casual_Observer

So what about companies that ship finished goods to the United States from China and then ship them back to a customer in China ? Do they have to pay tariffs twice since its both an import and an export at various points ? Tariffs will be a big disruption on supply chains. There is also nothing preventing countries like Malaysia, Philippines and other countries that have semiconductor test facilities from imposing more tariffs.

Six000mileyear
Six000mileyear

US companies that are importing their own chips from China are effectively being taxed on cheap Chinese labor and lose regulations.

pgp
pgp

It's all a game.... want to trigger inflation, put tarifs on everything we buy. It looks like a trade war but no one would be surprised if the new trade war economy was hatched at the last G7 summit. Who better than bad-boy Trump to make the first move...

Stuki
Stuki

Chipmakers are productive people. Of course, they’ll end up paying. Doesn’t matter whether they’re nominally Chinese or American.

The ones benefitting, as always in financialized, progressive dystopias, are the usual gaggle of leeches: lobbyists, lawyers, rent seeking, inefficient but well connected executives, as well as “investors” and “financiers” of the whole sham. Since making money in the Chip business will now be less about having enough of a brain to be competitive at something useful and productive, and more about being close enough to government to have them throw you some of the loot they steal from your betters.

RonJ
RonJ

"US Chip Makers to Pay Tariffs On Their Own Chips"

The only way that could happen is if they closed down American factories, to make chips in a foreign country.

Carl_R
Carl_R

It's actually a tax on US manufacturers. If the chips are brought back to the US to be used in US-made products, there is a tax. If the chips are used in products made anywhere else in the world, there is no tax.


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