A worker inspects an iPhone at a final assembly facility in Zhengzhou, China. Image source: Apple.
Like many tech companies, Apple (AAPL -1.22%) shares have been rather weak in the wake of last week's election of Donald Trump. While most of the big names in Silicon Valley are most threatened by the possibility of tighter immigration laws cutting off their supply of high-skilled engineering talent coming from all around the world, Apple has some unique risks related to President-elect Trump.
Specifically, Apple is one of the few major tech companies that predominantly sells hardware and gadgets -- devices that are imported from contract manufacturers based in China. During his campaign, Trump made vows to impose a wide range of protectionist import tariffs. Shares fell 2.5% yesterday on fears that Trump will provoke a full-on trade war with the Middle Kingdom, which China's state-run Global Times vowed would be painful for both countries, even calling out the iPhone by name:
China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.
How much should Apple shareholders be worried?
No one can predict what Trump will do
The market hates uncertainty, but unfortunately there's no real indication as to whether or not Trump will follow through on his plan to impose an import tariff. That's actually true of many parts of Trump's campaign, given his fundamental unpredictability. No one knows what will prove to be just rhetoric, or what Trump will actually try to do.
For what it's worth, Trump told The New York Times earlier this year that he would attempt to impose a 45% import tariff on goods coming in from China, only to deny a week later that he said that. (The New York Times responded by releasing the audio recording of Trump citing the 45% tariff.) Jacking up the entry-level price of an iPhone from $650 to over $940 would certainly hurt Apple and its competitiveness. The silver lining is that a 45% import tariff isn't likely to happen. Trump will have some ability to raise tariffs if he really wants to -- just probably not by 45%.
Presidents are only allowed to impose tariffs of up to 15% for 150 days in order to address balance of payments deficits, thanks to the Trade Act of 1974. However, a president can raise tariffs under the Trade Expansion Act of 1962 if the purpose is to strengthen national security. There's also the International Emergency Economic Powers Act of 1977 that allows the president to restrict trade due to a "national emergency."
Even if Trump can't implement a massive 45% tariff, the president does have the ability to unilaterally impose some type of tariff under various circumstances.
Apple can't bring manufacturing back
On the campaign trail, Trump called out Apple by name on numerous occasions, saying he would force the Mac maker to bring manufacturing back to the U.S. In January, Trump said, "We're going to get Apple to build their damn computers and things in this country instead of in other countries." A couple months later, he said, "Apple and all of these great companies will be making their products in the United States, not in China, Vietnam."
Unfortunately for Trump, it's simply not possible for Apple to bring back manufacturing. Steve Jobs bluntly told President Obama in 2012, "Those jobs aren't coming back." It's not just about labor costs, either. Over the past couple of decades, the U.S. shifted away from type of mid-level manufacturing engineering that's needed to manufacture things at this scale. When Apple was developing the original iPhone, it needed almost 9,000 industrial engineers to work on manufacturing. It would have taken 9 months to recruit that army in the U.S. Apple did it in China in two weeks.
Not to mention the fact that beyond contract manufacturing, the majority of Apple's component supply chain is based in Asia. If Apple were to theoretically even try to bring manufacturing stateside, the massive logistics costs of shipping components and other parts of the value chain all around the world would offset a meaningful portion of what it would be trying to avoid in import tariffs, particularly as those components would presumably be subject to import tariffs.
In other words, short of the entire global consumer electronics supply chain moving from Asia to the U.S., no U.S.-based consumer electronics company could completely escape the potential of increased import tariffs. But more importantly, if the end goal of bringing a meaningful number of manufacturing jobs back to the U.S. via a trade war is unrealistic and literally impossible, and the consequence would be to devastate the U.S. economy, then hopefully Trump won't pull the tariff trigger.
