Front End | Electronic Components Supply Network


Trade tariffs impact the electronic components markets


Countries impose tariffs (taxes they charge on imported goods) primarily as a measure to protect their domestic industries from competition from overseas organisations that they perceive to have an ‘unfair’ technical or commercial advantage. In this article Adam Fletcher, chairman of the Electronic Components Supply Network (ecsn), reviews the impact of the recently announced “2024 Trade Policy Agenda and 2023 Annual Report” produced by the Office of the United States Trade Representative (USTR), which calls for increased tariffs on a wide range of imported goods. The paper looks set to have a significant impact on the US electronic components supply network and will probably knock-on to impact those in the UK and Europe. Targeted imports include semiconductors, lithium-ion batteries, solar cells and electric vehicles.


Report findings


Prepared over two years, the wide ranging 2024 Trade Policy Agenda and 2023 Annual Report concludes that Chinese organisations (often under the influence of their government’s policies and legislation) are using unfair trade practices to negatively affect the US national economy. Under Section 301 of the Trade Act of 1974 the US has already asserted its right to respond to unreasonable, unjustifiable, or discriminatory practices by foreign government practices that burden or restrict its commerce and accordingly, the US Trade Representative (USTR) is proposing further annual tariff hikes amounting to $18bn be applied to strategic industry sectors. There’s plenty of precedent for this move. Currently Section 301 lists over 10,000 tariff sub-headings (products or services) that impact over $516bn of trade with Chinese organisations. Recent proposals by the USTR seek to increase the tariffs on electric vehicles to 100% later on this year and add 50% to the tariff on solar cells in the same time frame. Tariffs on Chinese manufactured semiconductors will increase to 50% in 2025 (up from 25% in 2024) whilst importers of lithium-ion batteries will have to pay an additional 25% in 2026. Readers may find the full USTR report at https://ustr.gov/about-us/policy-offices/ press-office/press-releases/2024/march/ ustr-releases-president-bidens-2024-trade- policy-agenda-and-2023-annual-report


12 June 2024 Types of tariffs


There are four primary forms of tariffs on goods and services, each designed to yield different results in terms of financial return and/or behavioural change:


1. Ad Valorem – a tax expressed purely as a percentage of the goods value, levied according to the value of goods and services.


2. Specific Tariffs – a one-off flat rate tax imposed regardless of the value of the good or service, for example a £100 tax on all new computers.


3. Compound Tariffs - a combination of Ad Valorem and specific tariffs imposed on import goods based on their number and value. This tariff is calculated on both the price per quantity and percentage of value.


4. Mixed Tariffs - a rate of duty based on a conditional choice between Ad Valorem’ duty and a ‘specific’ duty, subject to an upper (ceiling) and/or a lower (floor) limit (e.g. 30% or £2 per kg, whatever is the highest).


Currently the USTR is only proposing Ad Valorem’ taxes, albeit very significant ones, which will simply be added to the unit price of the goods at point of importation regardless of volume or quantity, to discourage Chinese manufacturers from simply discounting the unit price to “shield” their customers from the tariff hikes.


Components in Electronics


The Chinese response It’s perhaps understandable that the Chinese government is not happy with the response from the US and (potentially) other countries. They have referred the matter to the World Trade Organisation (WTO) but this body take a long time to hand down a ruling and when it has there’s no guarantee that China will find the ruling acceptable. In the short-term China looks likely to impose some tariff measures of its own to mitigate the impact on its trade, possibly targeting US manufactured agricultural products and/or luxury cars, although there are a great many other possible actions they could take.


Impact on the supply of electronic components


Whilst there is undoubtedly solid logic behind most of the US’s actions, particularly with regard to electric vehicles, a trade war cannot be considered good news for global trade nor for political and economic stability or for the global electronic components supply network, which has operated very successfully without tariff barriers since the 1970s. The majority of semiconductors are ‘global products’ designed, manufactured, packaged and tested in multiple locations based on factors such as cost and the availability of skilled labour.


Semiconductor products solely produced in China are today largely multi-sourced, lower cost commodity devices but Chinese semiconductor companies are rapidly


progressing up the learning curve and are beginning to establish a strong foothold, particularly in autonomous automotive applications where they are working closely with the leading customers to maintain their current global leadership position. This is US giving rise to concerns by the US Administration that Chinese semiconductor organisations will ‘out develop’ domestic companies often by infringing international IP legislation and start to dominate critical new markets such as Artificial Intelligence (AI). It is also worth noting that Chinese organisations are starting to perfect their own newly created IP, which presumably they will wish to protect by restricting access to other organisations regardless of their location unless they acknowledge use of their IP and pay to licence their technology. Rapidly emerging electronic components markets in India and Asia may gain a competitive advantage if China starts “dumping” Chinese originated semiconductor products that have zero tariffs applied. This may help the domestic technology markets in these countries but the very large system integrators who have migrated to these locations from China are very likely to exercise significant control over both their bill-of-materials and the choice of organisations from whom they purchase components. There are also concerns that third party ‘Brokers’ will try to leverage the arbitrage between pricing in different geographic markets to their own commercial advantage.


www.cieonline.co.uk


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