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Trade war

Trump's latest China tariffs to shock global supply chains

Suppliers shift production bases as duties target goods like iPhones

A new round of tariffs would directly tax imports of the devices for the first time.   © Reuters

WASHINGTON/PALO ALTO, U.S. -- The Trump administration will unveil details on Monday of its tariff expansion to all goods imported from China, a move that is sure to affect Asia's supply chain as prices are set to rise on smartphones, laptops and other consumer products.

U.S. President Donald Trump "ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion," U.S. Trade Representative Robert Lighthizer said on Friday after ministerial-level talks with China ended without a deal.

New levies typically take over two months to enact as the USTR consults with businesses about the timing and list of subject goods.

The Trump administration placed tariffs on $250 billion worth of Chinese goods from July through September last year. With trade talks stuck at an impasse, however, the president raised 10% duties on $200 billion of those goods to 25% Friday.

The newest volley of tariffs would target the remaining imports from China worth $325 billion. The largest product by value is cellphones at $43.2 billion, following by laptops at $37.5 billion. Digital cameras, in which Japanese companies boast a high market share, may also be targeted.

All of these items are high-tech products with parts sourced from around the world and assembled in China. These items had been excluded from previous tariffs because they represent a high degree of reliance on China by total import value and alternative suppliers outside China will be difficult to find, a senior USTR official said.

The tariff hike would not only deliver a blow to U.S. companies and consumers but also disrupt the technology supply chain that spans across Asia.

Apple's iPhone has become a symbol of this globalization. The smartphone's supply chain is built of roughly 200 major suppliers around the world that provide the parts that are assembled in China to make the final product.

Hon Hai Precision Industry, the Taiwanese iPhone assembler also known as Foxconn, said in April that it is planning to expand production in India to diversify its supply chain, but building factories that rival plants in China will be difficult.

The cost of Apple's iPhone XS could rise by about $160 if 25% tariffs are implemented, Morgan Stanley analyst Katy Huberty said. The U.S., home to upstream companies in product design and downstream businesses in after-sales service, will be the most significantly impacted. If sales are affected, higher duties would end up damaging the U.S. more than China.

The latest tariffs would also land a direct hit on consumer's wallets. The Peterson Institute for International Economics predicts that 40% of all new duties will target consumer goods, including information technology products and toys. In earlier rounds, by contrast, consumer goods only accounted for 25% of the item list to avoid a direct effect on consumers.

The USTR excluded products for which there is little alternative besides China to avoid higher prices. Toys, footwear and textiles have all avoided being subject to the duties because the U.S. relies on China for over half those imports. A significant expansion of tariffs this time, however, will increase the risk of a downturn in consumer spending, which accounts for 70% of gross domestic product.

Uniqlo operator Fast Retailing exports some goods from Chinese factories to the U.S. market. Its leather belts have been subject to tariffs, but more popular items may now become subject to them. "We want to monitor the situation," a company spokesperson said.

The tariff expansion will bring U.S. trade barriers to an unprecedented level. The average U.S. tariff is about 1.5%, but that will rise to 8% if the proposed tariffs are imposed. The hike could exceed the 6% increase under the Smoot-Hawley Tariff Act that placed additional duties on 20,000 goods and exacerbated the Great Depression.

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