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Gadget makers are bracing for Trump’s trade war

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Trump’s tariffs could spell doom for small hardware startups

U.S. President Trump Visits China Photo by Thomas Peter-Pool/Getty Images

As the White House barrels toward $250 billion in tariffs on Chinese imports, US gadget makers are bracing for impact. The White House detailed the first $35 billion in restricted goods on Friday, including new restrictions on batteries, capacitors, and touchscreens, with an additional $15 billion still to be approved. On Monday, President Trump began laying the groundwork for an additional $200 billion in tariffs, issued in response to Chinese counter-tariffs.

That looming trade war has particularly severe consequences for gadget startups. Often borne out of crowdfunding campaigns, these companies have typically played American demand against Chinese manufacturing know-how, focusing on emerging products like smartwatches, VR controllers and the Internet of Things. The incoming tariffs make that approach both riskier and less profitable, potentially requiring an entire industry to rethink where it makes its goods.

“Everyone’s thinking about it, and what’s a solution that’s sustainable and legal,” says Nima CEO Shireen Yates. Her company, which manufactures a portable gluten tester, is a prime example of the kind of small hardware venture that could suffer as trade barriers go up. “Our distributors are thinking about it, everyone in the supply chain is aware of it. It’s too early but the uncertainty of it is daunting.”

The list of affected components released Friday is detailed, and the affected goods vary drastically in price and supply constraints. For some goods, like aircraft engines or satellites, China is not a significant supplier and the tariffs mostly serve to prevent a broader manufacturing base from growing. For other components, like the proposed tariffs on semiconductors, the tariffs could be avoided by assembling finished goods in China or elsewhere in southeast Asia.

In other cases, the new tariffs could complicate supply for components that are already heavily in demand. Shawn Chang, a vice president at a manufacturing consulting firm called Dragon Innovation, says he’s particularly concerned about the impact on the capacitor market. “Everything from Tesla cars to the IoT devices we use every day, to our cell phone... all of it is eating up capacitors enormously,” Chang says. “It’s really hard to buy capacitors right now, and it doesn’t help to have 25 percent [tariffs] on top of that.”

With duties going up on capacitors and other basic tech components like resistors, displays, and raw metals, manufacturing products within US borders wouldn’t be feasible for smaller companies. Rahul Bhagat, part of the founding team at Pebble, says that the increase would have had two main consequences in the early days of the company. American manufacturing would have been less cost-effective, making Chinese manufacturing more enticing for businesses.

“Overall, I’m not sure how these tariffs do much other than hurt American technology manufacturing and make things harder for the smaller startups and hobbyist hackers,” Bhagat says.

The tariffs would also cause companies to stockpile components from vendors like Avnet and SparkFun, making the parts even more expensive once they’re out of stock. That dynamic “would definitely have had negative consequences in the early startup days (Pebble included),” Bhagat says.

For any products where China is the dominant supplier, there may be little choice but to pass costs along to the consumer, with potentially serious impacts for hardware startups. “With today’s global supply chains, consumers and smaller companies often end up being the pawns and footing the bill of trade disputes,” Cyril Ebersweiler, founder of HAX, a seed accelerator, says.

As the White House piles on more tariffs, that risk only grows. On Monday, the White House began work on another $200 billion in Chinese goods that would be subject to an additional 10 percent tariff, a move that experts say would be likely to include consumer electronics more directly.

“There’s only so many ways you can get to $250 billion,” says Brad Setser, a senior fellow at the Council on Foreign Relations, who also worked for the Treasury Department under President Obama. “If you don’t go after computers and cell phones, you’re going to have to be quite broad and sweeping for everyone else.”

There’s also concern that many of the fine distinctions made in the first round of designations may get lost in later orders. The list on Friday included a range of battery technologies, but only placed tariffs on primary battery cells rather than the rechargeable batteries (also known as secondary cells) used in most consumer electronics. But Sester worries that such distinctions may be difficult to maintain. “To get from $50 to $250 billion, you’re going from 10 percent of US trade to 50 percent,” he tells The Verge. “It would significantly expand the sectoral scope of the tariffs.”

Many tech companies are already working behind the scenes to forestall such an outcome — particularly Apple, which assembles the vast majority of its products in China. According to a New York Times report, the White House has assured CEO Tim Cook that iPhones will not be subject to the new tariffs, although the company remains concerned that it may face bureaucratic retaliations from China in response to the tariffs. Companies can also lobby the White House for specific exclusion from the tariffs, although it’s unclear how many such exclusions will be granted.

For companies without Apple’s significant political clout, the most likely result would be higher prices and a knottier supply chain. For any products surviving on razor-thin profit margins, that could mean the difference between life and death. “If their margins are good, than they can absorb that cost,” Chang says. “But if their margin is not great to begin with and their raw materials cost goes up by 25 percent, that could really kill business.”

Ashley Carman and Chris Welch also contributed reporting.