Published on the 28/09/2018 | Written by Pat Pilcher

More expensive tech, export declines and falling US tech investment…

The US/China trade war of words went largely ignored until the US announced US$50 billion of tariffs on Chinese-produced goods in June. These were, in turn, matched tit-for-tat by China. While US vehicle manufacturers and farmers have begun to feel the pain, fears are emerging that fallout from the spat could spread. But what of its effect on the Australian tech sector?

US president, Donald Trump has now announced plans for a further US$200 billion of tariffs on Chinese goods, to which China has retaliated with tariffs on another US$60 billion of US imports. The move prompted a warning from Apple that this would drive up prices for its smartphones, computers, watches, adapters and chargers, all of which get manufactured in mainland China.

“Knock-on effects are probable for corporates as network switches, routers and other equipment prices see upward pressure.”

While the Apple Watch and iPhone were among products later exempted from tariffs, the rub is that China accounts for around 20 percent of Apple’s revenues. Fallout from the tariffs will no doubt include some nationalistic anti-US/anti-Apple sentiment likely to impact sales of Apple’s finished products in their market of manufacture. It is just one story line in the complex web of downstream impacts, and, despite exemptions on US steel and aluminium tariffs, Australia will not be immune.

An escalating trade war between the world’s two largest economies is likely to be a lose-lose proposition according to Brendan Rynne, KPMG Chief Economist. “Involvement by a significant number of other countries in a trade war would cut Australian national income by approximately half a trillion dollars over ten years – the equivalent of 40 percent of last year’s total household disposable income,” he says. “Around 60,000 jobs would be lost, and real wages pushed down by $16 per week for the average worker.”

While no other countries have joined the fray, Trump’s announcement of the additional $200+ billion in tariffs sent ripples through the world’s currencies, including the Australian dollar.

The first real pain is likely to be experienced by Australian technology consumers as a falling Aussie dollar sends the cost of electronics spiralling upwards. With pundits speculating that the Aussie dollar could head south of US$0.60, the cost of imported consumer and business electronics, software and other technology would increase.

However, currency fluctuations do tend to correct back to a state of equilibrium over the longer term, but other factors are also at play.

In 1990 China accounted for less than three percent of global manufacturing output by value. Since then that figure has grown to close to a quarter. China now manufactures an estimated 80 percent of the world’s air-conditioners and 70 percent of the world’s smartphones as well as a vast amount of other electronics.

Tariff-inflated prices will likely soften US demand and that will translate to reducing the demand for Chinese imports of raw materials sourced from Australia.

Chinese manufacturers hit by tariffs will eventually be forced to pass costs onto customers. The Trump administration’s hit list of Chinese products facing tariffs includes electronic and networking equipment. How much prices could rise remains to be seen as the next round of tariffs won’t be announced for several months (many will increase from 10 to 25 percent in January). While Apple, Cisco, Dell and other US multinational tech companies have deep pockets, their willingness to absorb costs triggered by the tariffs won’t last forever.

It isn’t just consumer tech impacted either. The tariffs will affect infrastructure equipment. Knock-on effects are probable for telcos, ISPs and corporates as network switches, cellular stations, routers and other equipment prices see upward pressure.

Of more concern is the impact on Australia’s tech-led exports. These accounted for 14.8 percent of Australian manufactured goods exported overseas, with China accounting for 25 percent of that. In 2015, China announced its “Made in China 2025” programme, which is intended to decrease China’s dependence on overseas components used by their rapidly growing tech sector. Under the plan, the domestic content of core components and materials is to rise to 40 percent by 2020 and 70 percent by 2025.

Should the trade war further escalate, it is probable that the Chinese government could seek to accelerate made in China 2025 deadlines which could see demand for technology imports to China drop more quickly.

A more indirect impact of the trade war could be a reduction of US investment in Australian tech startups. Earlier this year, a sell-off of US tech stocks happened after reports surfaced that US officials were considering the introduction of restrictions that would block Chinese companies from investing in US tech companies.

If the trade war further escalates, falling confidence in the tech sector could see it lose significant value. A side effect of such a dip could be a slow down of investment in Australian tech ventures by US firms (which in 2017 injected AU$4.2 billion into the Australian tech sector).