The “trade war” is a topic that everyone is familiar with. Since 2017, there have been ongoing trade disputes between China and the United States. The disharmony between these two countries has drawn the attention of industry leaders worldwide. In 2018, Trump used the significant Sino-US trade deficit as an excuse to take various actions against China, including prohibiting domestic technology companies from selling parts, commodities, software, and technology to foreign countries. Regardless of its form, as the two largest economies globally, the disharmony between China and the United States will affect the development of the electronics manufacturing industry. This impact is not limited to the two countries alone but extends to the global market and could cause irreparable harm. In this article, TechSparks will analyzes the details of the Sino-US trade war from the inside out, explaining its impact on the electronics industry and how industry practitioners can reduce the harm caused by the disputes between the two countries.
China-US Trade War Negotiation Process
The US-China trade war began in July 2018 and lasted until December of the same year. The Trump administration imposed tariffs on $50 billion worth of goods imported into the US, followed by an additional $200 billion in tariffs in September. In response, China imposed tariffs on $110 billion worth of US goods imported into China. Both sides accused each other of unfair trade practices and intellectual property theft. As a basic consumer, I am not qualified to judge this competition between countries, but it has caused a lot of damage and uncertainty in the global market. Here, I would like to discuss the direct impact it has had on me, including:
- As a member of the foreign trade industry, the competition has directly affected my career and income.
- As a stock trader, I have indirectly lost nearly 10,000 RMB.
The trade war between the United States and China escalated from December 2018 to January 2020. At the G20 summit in Argentina, the two countries agreed to a truce and initiated trade negotiations. The U.S. postponed some tariff increases and China resumed purchasing certain U.S. agricultural products. However, negotiations have stalled over various issues such as enforcement mechanisms, technology transfer, market access, and structural reforms. In May 2019, the U.S. increased tariffs on $200 billion of Chinese goods from 10% to 25% and threatened to impose tariffs on all remaining Chinese imports. China retaliated by imposing higher tariffs on $60 billion worth of U.S. goods and announcing a blacklist of “unreliable” foreign entities.
Since January 2020, negotiations between China and the United States have continued without reaching a comprehensive trade agreement. In January 2020, the two countries signed a “Phase One” trade deal at the White House. This agreement included China’s commitment to increase imports of U.S. goods and services by $200 billion over two years, strengthen intellectual property protection and enforcement, avoid currency manipulation, open its markets to financial services and collaborate on agricultural issues. The U.S. agreed to reduce some tariffs on Chinese goods but kept most of them in place. Both sides regarded the agreement as a positive step, although they acknowledged that more work was needed to resolve remaining differences. However, relations have deteriorated further since then, due to various factors such as the Covid-19 pandemic blame game, Hong Kong national security law, human rights abuses in Xinjiang, arms sales to Taiwan, South China Sea disputes, TikTok ban, Huawei sanctions, etc. Implementation of the Phase One deal has been slow and uneven, with China failing to meet its procurement targets. The outlook for a Phase Two deal or further negotiations is unclear and unpredictable.
The trade war threat to the electronics industry
Electronics Import Tariffs
The trade war is centered around the imposition of import and export tariffs. As consumers, we may not fully comprehend the impact of this economic conflict. I, on the other hand, can share my personal experience as an employee, a B2B and B2C foreign trade company.
The year 2015 marked an unprecedented response for China’s foreign trade industry. In the following years, almost all Chinese sellers in this industry were able to generate significant profits. However, due to the escalating trade disputes between China and the US, further increases in tariffs would prove fatal for the electronic products industry.
In 2020, I was employed by an Amazon-affiliated company that specialized in data cables and related products. Our company employed approximately 70 people, and we generated sales of up to 450 million yuan within a year. Despite these impressive sales figures, the reality was far from glamorous. Amazon primarily focused on pay-per-click (CPC), and the trade dispute had severely impacted tariffs on consumer electronics products, resulting in very low profit margins.
Despite achieving high sales volumes, the company did not earn substantial profits. Eventually, the combined effects of various factors led to major layoffs, and unfortunately, I lost my job. The direct impact of the trade war on the electronic products industry has led to significant job losses and financial losses, affecting not only China and the US but also the global market.
Supply Chain Disruptions
Disrupting the supply chain is a major hidden danger that the trade war has brought to the electronics industry. The electronics manufacturing industry is highly globalized and labor-divided, relying on complex global supply chains to purchase various components, semiconductor chips, display screens, and other key components from different countries and regions, and finally delivering the products through the logistics network to consumers around the world.
However, since the United States restricted local companies from providing key technologies and services such as IC chips and software to Chinese technology giants in 2018, the global supply chain has become chaotic, seriously affecting the development of electronics-related industries. As an example, I will take the PCBA (PCB assembly) industry I am currently engaged in to show the harm of the Sino-US trade war.
Since 2022, our company has been deeply involved in the turmoil of being unable to deliver on time. In fact, our company’s PCBA service fee is relatively high (compared with JLCPCB and PCBway) because our main focus is on services, including on-time delivery. However, due to the global component shortage caused by the trade dispute, we had to spend more time purchasing the chips specified by the customer, and delivery was delayed. This has had negative effects on our company, such as damaging our reputation and reducing revenue.
In short, in the trade war, China and the United States have launched fierce competition and games in the electronics industry, attempting to break each other’s dominant position in the global supply chain. Consequently, many multinational companies have to readjust their production layout, procurement channels, and market strategies, and bear higher risks and costs. Beyond the trade war, the electricity industry is also affected, and it is crucial to find solutions to stabilize the global supply chain.
Manufacturing Costs Increase
Raw material costs increase: As a manufacturing giant, China supplies many electronics manufacturers with raw materials, but the high tariffs imposed by the United States have forced suppliers to increase their prices. To make up the difference, manufacturers have to pay more for the materials.
Higher transportation costs: The electronics manufacturing industry is global, and due to tariffs, some manufacturers cannot afford to pay the increased material costs. As a result, they have to switch suppliers, which lengthens the supply chain and results in increased shipping costs.
Increased storage costs: Many companies purchase components as needed, but the trade war has caused shortages, making it difficult for this strategy to meet market demand. To adapt, electronics manufacturers have to purchase large quantities of necessary electronic components in advance, increasing the risks and costs of storage.
Although consumers may not be aware, they are ultimately affected by the increased manufacturing costs. As a result, manufacturers are forced to raise prices, which can significantly impact consumers’ purchasing decisions.
How can electronics manufacturers avoid the impact of the US-China trade war?
Focus on brand benefits
The electronics industry operates at a fast pace, but prior to the start of the Sino-US trade war, most electronics manufacturers focused on mass production, disregarding the importance of building a brand. Although this rapid operational mode has provided short-term benefits, the market demand may decline due to the impact of the trade war. The traditional production mode may no longer be suitable for the low-margin electronics industry, and it is essential to reduce output to avoid various uncertainties in the future. Hence, electronics manufacturers must now prioritize brand marketing. Only by consolidating brand awareness and enhancing brand image can they gain an advantage in the intense market competition.
To achieve this, enterprises must establish a robust marketing team and formulate effective marketing strategies, such as displaying their brand image on various media platforms and providing high-quality after-sales services.
Strengthen R&D and Innovation
The trade war has provided important guidance for electronic industry giants around the world. On one hand, they need to further reform, and on the other hand, they must enter a phase of independent innovation in technology. In fact, the tax measures implemented by both China and the US are secondary. The main issue is the restriction on technology.
Therefore, during the Sino-US trade war, TechSparks believes that increasing technology investment is crucial. By continuously learning, imitating, introducing, digesting, and absorbing, can increase its research and development efforts while saving R&D costs. The success of an electronics manufacturer is primarily determined by the proportion of new products and sales volume. From production technology to product technology, the higher the level of maturity and mastery of core technology, the better the electronic manufacturer will be. By being brave enough to enter the technology’s birth period and persisting through the industry’s turbulence, electronics manufacturer can ensure long-term success.
Consider origin transfer
The long-standing cooperation model between manufacturing industries and their fixed supplier services has been significantly impacted by the Sino-US trade war. As a result, companies need to carefully consider shifting their origin, expanding their own supply chain, or transferring their manufacturing plants to mitigate the effects of this trade war.
To explore alternative sourcing options, manufacturers can look at purchasing components from distributors, brokers, or independent suppliers that may not be affected by tariffs and can provide access to a wider range of components. Negotiating with suppliers to reduce prices or share tariff costs is another option that can be explored. In cases where this is not possible, manufacturers can consider choosing a new EMS service provider.
By being proactive and exploring these options, electronics manufacturers can better navigate the challenges brought on by the trade war and maintain a competitive edge in the industry.
Leverage the "first sale rule"
To reduce tax costs and mitigate the impacts of the Sino-US trade war, small and medium-sized electronics manufacturers can effectively use the “first sale rule”. This rule involves arranging middlemen to purchase their own products at a reduced price, thereby reducing the tax base. As long as the intermediary is a legal company and the transaction complies with the “first sale rule”, the tax cost can be significantly lowered. In such transactions, the U.S. importer buys goods from a middleman who has contracted with a factory to produce the related product, and the price of the goods is calculated based on the selling price between the middleman and the factory. Although the process may seem complex at first, careful planning and proper documentation can help businesses meet the requirements of the U.S. government. When assessing compliance with U.S. Customs’ first sale rules, the following three criteria must be considered:
- There must be a genuine sale transaction between the parties involved.
- The goods must be intended for sale in the United States.
- The arm’s length principle must be adhered to.
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