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China's right: smartphones are a big reason Trump can't win a trade war

China's right: smartphones are a big reason Trump can't win a trade war


And the sobriety of his advisers might be why he never tries

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iphone china
Vlad Savov

Smartphones are like trousers. They're unnatural, a human artifice that our species survived many millennia without, but which has now proliferated to the point of being essential to everyday life across most of the globe. China's meteoric economic rise this century sees the Asian country occupying the dual role of the world's biggest producer and biggest consumer of smartphones. This makes it the most essential nation to humanity's most essential modern tool, and as such, it insulates China from new American president-elect Donald Trump's threats of punishing trade tariffs.

One of the tentpole features of the Trump campaign's foreign policy, from the outset, has been the desire to rectify perceived unfairness in trade with China. Mr. Trump has repeatedly accused China of being a currency manipulator — a claim dismissed as invalid by economists observing the Asia region — and has indicated that he'd adopt an "America first" strategy in his dealings with US trade partners. In response, China has come out and not too subtly hinted that it would undermine iPhone sales if it were ever subjected to Trump's proposed brand of American protectionism.

To quote an editorial posted to the website of China’s state mouthpiece Global Times, "A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted."

Apple can’t build an iPhone without China, but China can build many awesome phones without Apple

There's an asymmetry here that Mr. Trump seems unaware of. Apple can't build an iPhone without China, but China can build hundreds of millions of devices approaching the iPhone's quality without Apple's help. Earlier this year, I wrote about just how narrow the delta between Apple's smartphone and its once-copycats from China has become. The president-elect has promised to bring manufacturing back to the States, but the only Apple product currently being made in the USA is the aged Mac Pro, which costs thousands of dollars, and Motorola’s failed experiment with the 2013 Moto X shows that smartphone assembly in the US is too costly to be viable.

And how important is that globally renowned iPhone? It accounts for more than half of Apple's revenue and was the primary driver for the most profitable quarter any company has ever recorded: $18.4 billion of net profit for this period last year. Apple has been the United States', and the world's, most valuable company — a title now contested by Google parent Alphabet — primarily on the strength of the iPhone. A big boost that drove Apple to its record earnings was its release of a bigger iPhone in China, sating the country’s hunger for a large-screen status symbol smartphone.

China's "tit-for-tat" retaliation to the threatened increase in US tariffs would also include cars, and China does indeed play an instrumental role in producing those, too, but there's a difference with smartphones. If China were merely a producer, it could be substituted away from over a period of time. Google's Pixel, for example, is manufactured by HTC in Taiwan.

It may be possible to substitute Chinese production, but not Chinese consumption

But China also devours phones at a rate that overshadows every other region. "China’s smartphone market was almost two times bigger than the US and Western Europe combined in Q3 2016," says Neil Mawston, director at market research firm Strategy Analytics. "China today is, by a huge margin, the largest smartphone market on Earth."

That extraordinary consumption expressed itself most recently in Alibaba's record $18 billion of sales during the Singles Day celebration of November 11th (11/11). By comparison, last year’s combined Thanksgiving and Black Friday sales in the US accumulated a total of roughly $12.1 billion. Importantly, Alibaba reported that 82 percent of its 2016 Singles Day sales came from mobile devices, underlining once again the outsized economic impact and influence of smartphones. And this is just one, albeit the biggest, online retailer we’re talking about; China’s consumptive energies are still growing at a remarkable rate of 32 percent.

china chart from bbc
The rise of China's Singles Day

The symbiotic relationship between the US and China goes deeper than the obvious and widespread American consumption of Chinese goods. Americans would suffer in that transaction, anyway, as The Wall Street Journal’s Andrew Browne today points out that higher import tariffs would most heavily impact the poorest American workers, who’d have to deal with higher costs being passed on in the form of higher prices for China-made goods. But the thing that would make a trade war most catastrophic is not just that things like iPhones might be more expensive to buy and take longer to make; it’s that China might decide that it doesn’t want to buy any. Probably the biggest change in the global economy since the 2008 financial crisis, as illustrated by the chart above, has been China’s increased consumption and rebalancing to become something more than just a high-volume producer of mass-market goods.

Browne’s WSJ report also goes on to elaborate on the hundreds of billions of dollars of investment in both directions, reiterating the point that making Sino-American trade harder would be mutually assured economic misery for both sides.

A trade war between the US and China would benefit neither

The good news is that Donald Trump’s bluster appears unlikely to be followed up with real action. Some of his advisers have already started walking back his claims, watering them down to campaign rhetoric and an aggressive negotiating stance rather than a real appetite for outright trade war. Facing an almost universal consensus (see opinion pieces in Bloomberg and The Guardian) against his idea of slapping down punitive tariffs on Chinese goods, Trump might do well to heed that contingent among his advisers that sees China as an ally rather than a threat. The collaborative efforts of China and the US have produced the world’s most profitable gadget in the iPhone, and hold even more potential for the future. The more interesting questions for US trade policy might involve Google, Facebook, and Microsoft, and how their web services could be allowed to proliferate inside China’s famously locked down internet environment.