Photo: AFP
Photo: AFP

What’s the Apple link in US’s trade war with China?

On 3 January, Apple's stock price fell by 10% to close at $142.2, after it revealed that last November, iPhone sales in China had fallen sharply. It's expected that this will get China and the US talking on the trade war they have unleashed against each other. Let's understand how.

What’s the US-China trade war?

US President Donald Trump wants to make “America great again". To achieve this so-called goal, he has imposed tariffs of 25% on Chinese imports worth $50 billion and a 10% tariff on Chinese imports worth $200 billion. The idea is to make Chinese imports into the US expensive. As Chinese imports get expensive, the hope is that products made in the US will become more competitive, likely leading people to buy them more than they do at present. This will benefit US businesses. As businesses do better, they will expand and create employment opportunities. This is what Trump had hoped for.

How have things actually turned out?

Take a look at the above chart. It plots the trade deficit in goods that the US has run with China, over the years. Between January and October last year, the US ran a trade deficit of $344.5 billion with China. This means the US had imported goods worth $344.5 billion more from China than it had exported to that country. The trade deficit in October 2018 was $43.1 billion, the highest last year. This, after tariffs came into play. Chinese imports into the US remained competitive because the yuan has depreciated against the dollar. Also, China resorted to a few other tricks to keep its export figures ticking.

Is there any other reason for Chinese imports remaining strong?

US importers have been importing more in order to hedge themselves against further tariff increases, which were supposed to take effect this year.

What about US exports to China?

In October 2018, US exports to China dropped to $9.1 billion, the lowest in more than two years. In response to US tariffs, China also imposed tariffs. The country stopped buying soybean, an important US export to China. This resulted in problems for Trump, who has a support base among farmers. It ultimately stopped higher tariffs from being implemented this year. The deadline now is 1 March. If the US and China do not reach a trade deal by then, US tariffs on Chinese imports will go up.

What has Apple got to do with all this?

If the US imports lesser stuff from China, the Chinese earn fewer dollars to buy American products. While that hasn’t happened, the Chinese have started waking up to the possibility. This is reflected in falling iPhone sales. Further, Chinese retail sales growth in November 2018 was the slowest in 15 years. China is now taking into account the possibility of losing out because of the trade war. It has started buying soybean again from the US.

Vivek Kaul is the author of the Easy Money trilogy

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