Front End I Electronic Components Supply Network
US – China trade dispute: where do we go from here?
It now appears that industries well outside the technology sector will feel the impact of the most recent developments in the trade dispute between the US and China. Even US consumers are likely to feel the pinch. The global electronic components supply network has already been impacted by this spat but according to ecsn chairman Adam Fletcher, the effects in the UK and Europe are currently minimal but continued market growth, components shortages and possible escalation of the dispute, could change this situation
Adam Fletcher O
n the 17th September 2018 the US Trade Representative (USTR) finalised a second round of tariffs to be imposed on some $200bn of Chinese goods imported into the US. The full list details some 5,745 harmonised tariff codes ranging from consumables like fish and fruit that will directly impact US consumers to industrial necessities such as chemicals and semiconductor manufacturing equipment, the impact of which will be felt across numerous US industries. The initial import levy of 10 per cent started on the 24th September 2018 but will rise to 25 per cent on 1st January 2019. In retaliation China has announced new tariffs on US imports worth $60bn that also came into force on the 24th of September. The tension between the two countries has been further exacerbated by President Trumps tweet that he’s considering imposing tariffs on an additional $267bn of Chinese imports in a yet-to-be- announced third phase of this spat.
10 September 2018
Why is this happening? For many years, technology companies in US (and other Western countries) have justifiably complained to their governments that the Chinese administration made access to its markets conditional on the transfer of key intellectual property (IP) to their domestic organisations or joint venture companies with a majority Chinese shareholding. This has resulted in an erosion of the competitive position of non-Chinese companies in the Chinese market and beyond as it has enabled Chinese state- owned enterprises to compete with them using their own IP or by forcing IP licencing agreements or prices for Chinese organisations below the market price. Diplomats and trade bodies have repeatedly raised their concerns with the Chinese Government only to be met with ongoing denial of the practice and absolutely zero improvement in the situation. The Chinese Government and its agencies have a clear public intent to become self-sufficient in the production of the advanced semiconductors and software and have also been unashamedly leveraging other means such as corporate acquisitions and coercion to achieve this goal. And they have been successful: over the last 20 years the domestic Chinese market for electronic components has grown rapidly and today represents over 50 per cent of the global market, a share that seems likely to increase further.
This is quite an inditement and amid continuing frustration at the slow progress of other forms of trade negotiation has been cited by the US government as justification for direct action on tariffs. And in a document filed on the 1st June 2018 the European Commission took an almost identical complaint to the World Trade Organisation, an action supported by Japan and Taipei and of course, the US. As usual the WTO is already behind its stated deadlines and based on past performance it’s likely that this action will take months or years to reach a
Components in Electronics
conclusion. My personal view is that Western Governments should have started vigorously pursuing the complaints of IP holders 20 years ago, but some blame must rest with the IP holders who took decisions that in hindsight were short-term and sub- optimal. It’s high-time that everyone - including the Chinese government – realise that regaining a reasonable level of control over IP is in the interest of all parties. Without this protection individuals and organisations in the west have little incentive to develop significant IP in future while Chinese organisations are already moving to protect IP currently in development.
But what is the likely outcome? The outcome of the trade dispute is very difficult to predict in the short term as both sides have virtually unlimited resources and many alternative options at their disposal. But the structure and phasing-in of the tariffs together with WTO action backed by influential member countries suggests that the US and western economies would prefer a negotiated settlement. Sadly, achieving a settlement that doesn’t look like total climb-down by the Chinese Government is not going to be easy. That said, Chinese governments are very skilled at playing the longer game as unlike their Western counterparts. they aren’t subject to re-election every five years. Until this dispute is resolved US
electronic equipment manufacturers will have to bear the burden of the increased tariffs on electronic components but these components only represent a relatively small value in the total cost of their end products bill of materials (BOM) and many Original equipment manufacturers (OEMs) will simply absorb this within their overall cost structure. Manufacturer authorised distributors and Electronic Manufacturing Services organisations (EMS) however are expected to pass on the tariff increase directly to their customers. The additional level of bureaucracy is unlikely to slow the free movement of goods in the short term as theoretically most manufacturers and their authorised distributors are classified by revenue authorities as “Authorised Economic Operators” with approved ERP systems that are open to compliance inspection at any time. International manufacturers and authorised distributors based in the US who have warehouses outside the US will be able to continue shipping to these locations from China without paying duty, but they won’t be able to avoid the duty on goods shipped into the US from China (or shipped via one of its overseas subsidiaries). However, if the goods are subsequently exported out of the US they will be able to claim the duty value back.
Inditement
The USTR inditement asserts that China has…
• used joint venture requirements,
foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies.
• deprived U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations.
• unfairly facilitated the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer. • conducted and supported cyber intrusions into U.S. commercial computer networks to gain unauthorised access to commercially valuable business information.
Their cash will be tied up for longer, but most organisations already have sophisticated ERP systems that can be set up to automatically manage this process.
Conclusion
China will eventually become self- sufficient in the design and manufacture of advanced technologies such as semiconductors, but this will probably take another 20 years and hopefully, will be the result of international collaboration and cross- licencing agreements, where all parties benefit from the advances and investments made.
In the meantime, a wide range of industries and consumers in the US and China are going to be burdened by the increased tariffs on many items before the IP rights of primarily multi-national technology organisations are fully protected. Directly or indirectly all economies are likely to see a small contraction in global GDP growth but we have to hope that any future actions in this trade dispute won’t impact the wider global economy too much. I urge all in the electronic components supply network to actively engage with their partners both up and down their supply network, I’m convinced that collaboration can be a major contributor to longer- term synergistic gains for all parties and costs almost nothing.
www.ecsn-uk.org
www.cieonline.co.uk
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