With Trump poised to exact high tariffs on goods from China, it’s tempting to declare the gadget party over: everyone is going to pay through the nose for electronics, from makers to Apple, and that’s the end of the story, right?
Wrong. As Andrew “bunnie” Huang explains, the tariffs exempt finished goods like TVs and phones, while hitting components — the stuff that makers use to create and maintain their own tools and appliances — very hard.
That means that small American businesses that buy components from overseas but assemble them into finished goods in the USA, using skilled US workers, will go out of business — but their multinational competitors who can build or contract with factories in China can import their finished goods tariff-free.
Huang advises US companies on managing Chinese manufacturing and he advises his clients to do their final assembly in the USA to prevent Chinese industrial spies from stealing their trade-secrets and violating their patents. By forcing companies to finish their goods in China to avoid US tariffs, Trump is setting them up to have their proprietary processes looted by Chinese competitors, who will then drive them out of business.
But dearest to Huang’s heart is the impact all this will have on STEM education, which relies heavily on components, not finished goods: you teach the next generation of hackers, makers, tinkerers, inventors and founders by showing them how this stuff works at the lowest levels, teaching them to assemble components into working systems. Those components suffer the highest levels of import taxes, while the finished goods that overseas engineers (whose education will not be taxed by these tariffs) create enter the country tax-free.
Some of the most compelling jobs to bring back to the US are the so-called “last screw” system integration operations. These often involve the complex and precise process of integrating simple sub-assemblies into high-value goods such as 3D printers or cell phones. Quality control and IP protection are paramount. I often advise startups to consider putting their system integration operations in the US because difficult-to-protect intellectual property, such as firmware, never has to be exported if the firmware upload operation happens in the US. The ability to leverage China for low-value subassemblies opens more headroom to create high-value jobs in the US, improving the overall competitiveness of American companies.
Unfortunately, the structure of the new tariffs are exactly the opposite of what you would expect to bring those jobs back to the US. Stiff new taxes on simple components, sub-assemblies, and tools like soldering irons contrasted against a lack of taxation on finished goods pushes business owners to send these “last screw” operation overseas. Basically, with these new tariffs the more value-add sent outside the borders of the US, the more profitable a business will be. Not even concerns over IP security could overcome a 25% increase in base costs and keep operations in the US.
It seems the intention of the new tariff structure was to minimize the immediate pain that voters would feel in the upcoming mid-terms by waiving taxes on finished goods. Unfortunately, the reality is it gives small businesses that were once considering setting up shop in the US a solid reason to look off-shore, while rewarding large corporations for heavy investments in overseas operations.
New US Tariffs are Anti-Maker and Will Encourage Offshoring [Bunnie Huang/Bunnie:Studios]
(via Beyond the Beyond)
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