Tech stocks will take a hit in any U.S.-China trade war

While concerns about a looming trade war between the world’s major economies, the United States and China, have been in the headlines for some time, U.S. tech giants have largely stayed on the sidelines. Many tech industry leaders have expressed dismay at Trump’s environmental and immigration policies, but they shy away from tariffs. In fact, Silicon Valley supports the government on issues of intellectual property theft and local trade barriers, such as those set up by China for its local tech companies. However, the technology sector — known for working in a borderless fashion because a large part of it is online — has begun to feel the heat of the trade conflict. (See also: Getting Started with Investing in the Tech Industry.)

The impact of tariffs on the U.S. tech industry

Major tech giants operating in the U.S. that provide online products such as cloud computing solutions will take a hit as the Trump administration is considering imposing tariffs on network equipment imported from China. Such companies include Alphabet Inc.’s Google (GOOGL), Facebook Inc. (FB) and Inc. (AMZN). These large organizations either run their businesses online, provide online solutions, or both.

Additionally, there are a number of tech hardware companies, such as chipmaker Intel Corporation (INTC), that could be affected by the tariffs due to their current operating model. For example, many of these hardware companies send their manufactured products to China for the necessary configuration, testing and packaging. Although U.S.-made products, they may face tariffs when shipped back to the U.S. from China.

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Modems and routers were added to a list of Chinese goods that could face a 10 percent trade penalty after Aug. 30, according to proposals announced earlier by the Trump administration. This hardware is necessary for the continued operations of the tech industry, as they need it to support their vast networks processing vast amounts of data for their products and services. Dean Garfield, president and CEO of the Information Technology Industry Council, which represents tech giants such as Google and Microsoft, said in a statement: “Trade is critical to economic growth and supports digital growth from Silicon Valley to the heartland prairie. Millions of jobs. Yet the administration continues to impose more tariffs without a clear goal or objective, threatening U.S. jobs, stifling economic investment, and raising the price of everyday items.” He urged President Trump Delay this unnecessary escalation until more consumers and workers are harmed.”

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The ripple effect of trade tariffs

The impact of the trade war is not limited to increased costs for U.S. companies. This major development has the potential to disrupt established businesses, supplier networks and entire supply chains. If many businesses in China — large and small — cannot weather the effects of the trade war for an extended period of time, many may be forced to close, leaving only a handful of suppliers. This can lead to price hikes, shipping delays, and quality control issues, and could impact the entire ecosystem that is currently running smoothly. While larger U.S. tech organizations have deep pockets to absorb incremental costs, other smaller companies may find it challenging to bear the brunt.

US-China tech trade in numbers

The numbers tell the story of the potential impact. The Asian powerhouse accounted for nearly $23 billion of U.S. imports of IT networking equipment in the 12 months to April 2018, CNN Money cites data from Panjiva, a global trade research firm owned by S&P Global Market Intelligence. 50%.

U.S. semiconductor makers also face 25 percent tariffs on $3 billion worth of products in the semiconductor sector. Most of them are made by U.S. companies, but go through Chinese workflows and supply chains, which puts them within the reach of the tariffs. The tariffs, proposed in June by the Semiconductor Industry Association, which represents major companies including Intel, Texas Instruments (TXN) and Qualcomm (QCOM), are considered “counterproductive.” CNN Money further added that in the context of the developments, ratings agency Fitch has placed TI and Intel “on a list of “vulnerable tariffs because they ship product components globally.” Working locally in the U.S. requires time, effort, cost, and the necessary training for local employees. (See also: How have chip stocks been killed by the trade war?)

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bottom line

Importing U.S. companies may need to find alternative non-Chinese suppliers or pay increased costs for essential products imported from suppliers that may be in reduced quantities. On the China side, while a small number of suppliers may explore the option of relocating to Malaysia or Vietnam, the process will be difficult or expensive and may only be available for larger players. Uncertainty could weigh on the tech business in the coming months, weighing on profits. (See also: 6 tech stocks that could be slammed in the trade war.)

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