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President Trump Might Hit Apple With Tariffs After All

By Evan Niu, CFA – Updated Nov 27, 2018 at 5:34PM

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Calm heads may not prevail.

So far, Apple (AAPL 4.86%) has mostly been able to avoid the effects of President Trump's trade war, as its products have been excluded from tariffs on Chinese imports. CEO Tim Cook is on relatively good terms with the White House, which likely contributed to the exclusions. Unfortunately for the global economy, the trade war continues to escalate, and Trump might include Apple with the next round.

That could be a painful blow for the Mac maker, especially after shares have already shed 25% of their value from their October peak.

Chinese worker inspecting an iPhone

Image source: Apple.

Trump is considering a 10% tariff on iPhones

In a recent interview with The Wall Street Journal (subscription required), Trump discussed the distinct possibility of slapping a tariff on popular consumer products like smartphones and laptops coming out of China. When asked if tariffs could include iPhones and laptops, Trump replied, "Maybe. Maybe. Depends on what the rate is. I mean, I can make it 10 percent and people could stand that very easily." As if iPhone prices weren't already climbing fast enough.

Trump also incorrectly asserted that "the brunt of it is being paid by China." Domestic companies and consumers ultimately pay the tariff, as the added costs typically translate into higher prices. The president added, "I happen to be a tariff person because I'm a smart person, OK?"

In order to avoid tariffs, Trump suggested that companies should "build factories in the United States and to make the product here." That's not realistic for many tech companies though, as the global supply chain for consumer electronics is already entrenched in Asia. It's worth noting that Apple had reportedly considered the idea shortly after Trump was elected.

On the July earnings call, Cook had expressed optimism that the trade tensions will "get sorted out," pointing to the "inescapable mutuality" between the U.S. and China. Cook continued:

Each country can only prosper if the other does. And of course, the world needs both the U.S. and China to prosper for the world to do well. With that said, I can't predict the future but I am optimistic that the countries will get through this. And we are hoping that calm heads prevail.

It seems that calm heads may not prevail.

Apple is caught in the crossfire

In terms of the impact, Bernstein analyst Toni Sacconaghi estimates that approximately 25% of Apple's revenue, or roughly $50 billion, could ultimately be subject to a tariff of 10% to 25%. Perhaps more damaging could be how China retaliates, in Sacconaghi's view.

If iPhone tariffs come to pass, Apple would have to either absorb the added costs or increase iPhone prices even further, which would inevitably hurt demand at a time when investors are already worried about soft demand for the newest iPhone models.

Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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