Introduction
Apple Inc. is a highly competitive technology company based in the U.S. The company is widely known for its products, including the iPhone, iPad, and MacBook. Apple has managed to expand its business around the globe by “diversifying its value offering and focusing on maintaining its brand image” (Li, 2021, p. 72).
For instance, by 2021, the company had a total revenue of $365.8 billion – it was ranked third among its peers (Li, 2021, p. 73). However, the August 1 proposed levy of a 10 percent tariff, targeting electronics sourced from China to the U.S., had a major impact on Apple. This new tariff affected the price of Apple’s products arriving in the country from China. Therefore, the recommended trade policy for the U.S. executive is to lower import tariffs on Apple products to enhance Apple’s competitiveness, encourage development investments, and reduce consumer spending.
Background Information
Technological advancement, especially in electronic companies, has shaped the focus and the development of several trade agreements. For instance, both the World Trade Organization (WTO) and the Basic Telecommunications Agreement (BTA) responded by reducing the tariffs on several computer and telecommunications products in 1997 (Eckebrecht, 2019). The move was informed by the need to curb the ever-increasing cost of living. Most of the goods targeted were diverse and critical to economic development.
It is imperative to note that BTA introduced a new approach to the old national economic policies, specifically in countries that adopted relatively high tariffs to protect their technology industries. The proponents of free trade and low tariffs argue that WTO provides the most reliable option for offering lower prices to consumers on different products (Eckebrecht, 2019). In addition, it offers the best platform for equal and favorable competition with respect to internal suppliers.
How the Tariff Reduction Could Be Beneficial to Apple
Benefits to Consumers and Suppliers
President Trump’s tariffs on Chinese imports were projected to have a significant impact on consumers and suppliers. This is the case because Apple’s iPhone was one of the most exposed consumer products. According to Lange (2019), the proposed tariffs are intended to squeeze profit margins, which, in the end, will force companies, including Apple, to raise their product prices to meet the demands of high costs. The author further added that the increase in tariffs “puts consumers in the middle of President Trump’s trade war” (Lange, 2019, para. 7).
Similarly, cell phones are another product on the list that was hit hard by tariffs. For example, in 2018, the total import cost of cell phones from China was slated at $43.2 billion (Lange, 2019, para. 6). The same is the case with laptops, which are the second most exposed products – at $37.5 billion (Lange, 2019, para. 6). These products, cellphones and laptops, are among the Apple’s widely purchased products. Research shows that Apple’s overall earnings could be negatively impacted depending on the nature of the tariff adapted – from 10 to 25 percent (Lange, 2019). Unless there is a reduction, the company may be forced to pass the additional costs to consumers.
The suppliers, on their part, will be forced to make pricing concessions in order to mitigate the tariff impact if any attempt to reduce it fails. Here, the company may be forced to pass some of the cost to suppliers instead of the consumers in an effort to reduce the amount lost in the form of profit. The failure of the company to absorb the price of tariffs by passing some to consumers will see it incur an 8 to 10 percent drop in its earnings per share by the year 2024 (Salinas, 2018).
Moreover, the company may be forced to increase the cost of its iPhones, iPads, and Macs by 5 percent (Salinas, 2018). Consequently, Apple will be hit by “lower gross margins and the number of shipments to China and the US each fall by at least 10% year-on-year” (Salinas, 2018, para. 4). However, the company will eschew the gross margin challenge if the executive opts to reduce the import tariff on the three products – iPhones, Mac, and iPads.
Overall, investors and consumers will be forced to pay a substantial price unless the executive considers reducing an import tariff on Apple’s products. It is estimated that Apple would continue selling a few iPhones – approximately 8 million fewer due to the high cost of the product globally. The decision to increase the price of iPhones by 5 percent, as elucidated above, will end up reducing the demand by 20 percent. The high prices of iPhones, iPads, and Macs will have a negative impact on shipment forecasts.
Competitive Advantage
Apple, in a letter to the United States Trade Representative (USTR), maintained that the new tariffs could damage its competitive advantage by shifting the playing field to favor its competitors. The overriding argument in the letter was that the Chinese producers that Apple competes with at the global level do not “have a significant presence in the U.S. market” (Tibken & Carson, 2019, para. 2). This implies that the competitors would not be affected by the U.S. tariffs – the same extents to non-U.S. competitors. In other words, reducing import tariffs on Apple products would allow the company to compete favorably with other players in the global market.
Development Investment
The proposed levy of a 10 percent tariff would impact the development investment by reducing Apple’s U.S. economic contribution. This is the case because the additional fees would have a negative impact on the company’s main products and other accessories, such as monitors. According to Salinas (2018), Apple plays a massive role in the growth of the U.S. economy, “it is responsible for over 2 million jobs across all 50 states, including Apple’s direct employees and manufacturing” (para. 3). As a major player and the most significant corporate taxpayer in the United States, Apple contributes directly to the country’s development investment since it is
Conclusion
The specific trade policy recommendation to the U.S. executive is an import tariff reduction on Apple products. This is necessary in an effort to increase Apple’s competitiveness and development investment and reduce consumer expenditure. As discussed above, the proposed tariffs aim to tighten profit margins, which will require Apple to increase its product prices in order to meet the demands instigated by high costs.
The suppliers will also be forced to make pricing concessions as a way of mitigating the tariff impact on consumers. In addition, lowering import tariffs on Apple products will enable the company to compete more effectively with other industry players. Overall, reducing import tariffs on Apple products, for example, iPhones and iPads, will help ensure the company continues to meet the demands of the consumers and suppliers.
References
Eckebrecht, F. R. (2019). Fueling investments-The effect of the Agreement on Basic Telecommunications. Telecommunications Policy, 43(4), 361-379. Web.
Lange, L. B. J. (2019). Trump’s tariff push squeezes businesses and consumers. Reuters. Web.
Li, Y. (2021). Apple Inc. Analysis and forecast evaluation. Proceedings of Business and Economic Studies, 4(4), 71-78. Web.
Salinas, S. (2018). Apple says Trump’s China tariffs are going to hurt the company. CNBC. Web.
Tibken, S., & Carson, E. (2019). Apple tells US that tariffs would hurt its ability to compete globally. CNET. Web.
Loading...
