Impact Of U.S.-China Trade War

The trade war between the United States and China is escalating and it is here to stay.

Last year, the Trump administration started the trade war with China for basically two reasons. First, China has a massive trade surplus with the U.S. Second, U.S. companies have been the subject of IP theft in China, which has largely gone unchecked, according to the Trump administration.

Many disagree with these policies and say there is a better way to deal with the issues. Still, the U.S. last year slapped a 10% tariff on $200 billion worth of Chinese goods. China retaliated with a 10% tariff on $60 billion of U.S. imports.

Recently, the U.S. raised the ante and increased the duties on $200 billion worth of Chinese products from 10% to 25%. China retaliated. Then, the U.S. Department of Commerce has effectively banned China’s Huawei from buying components from U.S. companies by listing them on the “entity list.”

So what’s the impact? The impact has been felt across a number of sectors, including electronics, fab tools, materials and semiconductors. Each sector is complex and it would take tomes to unravel the ramifications. Plus, the situation is fluid and could change overnight.

So to get an idea where the industry is today, Semiconductor Engineering polled several market researchers as well as trade associations. In no particular order, here’s what experts said in four key areas—1) policy; 2) electronic production; 3) semiconductor/equipment; 4) and materials:

1) Government policy

John Neuffer, president and chief executive of the U.S. Semiconductor Industry Association (SIA):
“We are troubled by the recent setback in U.S.-China negotiations and the escalation of tensions on both sides, but remain hopeful a mutually beneficial agreement is still within reach. Too much is at stake for the world’s two largest economies to not find a productive path forward.”

Mike Russo, vice president of global industry advocacy at SEMI:
“We continue to monitor what appears to be a deteriorating situation between the U.S. and China related to their ongoing trade negotiations. The escalation in tariffs as well as the recent supply chain executive order and Department of Commerce action against Huawei are cause for increasing concern as those actions disrupt the supply chain and run counter to all-important market access.”

Sam Wang, an analyst at Gartner:
“Trade wars go beyond trade issues. It challenges the fundamental difference of government involvement on running a business between these two countries. Semiconductor vendors are now reminded that this difference should be the top consideration in doing business in China.”

2) Electronic production

Bill Jewell, president of Semiconductor Intelligence:
“Looking at U.S. imports of electronic equipment in the first quarter of 2019 versus a year ago gives an indication of the trends. Overall U.S. imports of electronic equipment were $58.8 billion in 1Q 2019, down $2 billion or 3.4% from 1Q 2018. Imports from China were down $3.7 billion, or 11%. Imports from Mexico held steady at $10.9 billion. Vietnam has emerged as the third largest source of U.S. electronics imports, with $4.4 billion in 1Q 2019, up $2.2 billion or 95% from a year ago. Taiwan was the fourth largest source, with $2.2 billion, up 45% from a year ago. The steady growth of U.S. electronics production while imports have declined indicates some possible shift of electronics production back to the U.S. The U.S.-China trade dispute has accelerated the growth of Vietnam electronics production. Taiwan has also benefited from the U.S. trade dispute with China.”

Bob Johnson, an analyst with Gartner:
“I would add that we are already seeing some companies moving their electronics manufacturing out of China to other Southeast Asian countries– Thailand, Vietnam, etc. Some of the reasons given were that Chinese labor costs were increasing. The trade frictions and movements will only hasten that trend.”

3) Semiconductors and equipment

Jim Feldhan, president of Semico Research:
“Using tariffs as the main weapon, the U.S.-China trade war will have a cooling effect on semiconductor sales as it trickles down and raises the cost of electronic products. The tariffs come at an inopportune time for the industry, as the memory market also rides the roller coaster down the ASP cycle.

Tariffs will have a negative impact on the overall supply chain as the cost of component parts, materials and equipment increase, forcing companies to absorb the higher costs or pass it on to customers. From a macroeconomic viewpoint, consumers have a finite amount of disposable income. If prices rise, consumer purchasing power falls. Smartphone sales are already slowing. If prices rise, phone sales could be reduced even further.

The electronics industry, including semiconductors, depends on worldwide trade. Tariffs are forcing companies to spend additional resources to create duplicate or alternative supply chains, which increase costs, reduces profitability and doesn’t add value. Most countries that are candidates to develop operations for the semiconductor supply chain run deficits with the U.S. According to the SIA, the U.S. maintained a semiconductor trade surplus of $2.1 billion with China.”

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Gaurav Gupta, research director for semiconductors and electronics at Gartner:
”In addition to the impact of tariffs, it is the uncertainty and confusion that would be detrimental to trade, make companies conservative, and throw off supply chains. As an example, the softening of decision regarding trade restrictions on Huawei within a week of the original decision that practically banned Huawei from buying parts and components from American companies. Supply chains will need to be more agile than ever before.”

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Dan Hutcheson, chief executive of VLSI Research:
“The impact of Trump’s trade wars on the semiconductor industry is difficult to parse from what’s been happening in our industry to pull things down. We’ve had the multiple hits of the memory glut, mobile maturity, and the crypto-crash. The latter two resulted in excess supply in the foundry market. The upturn peaked the week of Dec. 8, 2017, just before the first tariffs were imposed. However, the primary driver of the slowdown was the memory shortage cooling off.

When the steel and aluminum tariffs hit in March, there was a significant slowing in auto IC sales within a week. This can’t be blamed on a direct effect of the tariffs. The key factors were how decision making chains reacted to the uncertainty of what would come. So for example, auto IC sales slowed as auto companies decided to lean out inventories. We also saw this in the fourth quarter, as IC inventories ballooned in anticipation of January tariffs being imposed.

The surprise was an unusual dip in the second week of May, which was the IC market predicting the trade failure. All of this has occurred without any direct effect of tariffs. It’s all been reaction in anticipation of what might come—for which the actual impact could dim second half prospects.”

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Handel Jones, chief executive of IBS:
“U.S. semiconductor vendors sold $100 billion worth of products to China in 2018. Chinese semiconductor vendors sold $1 billion to the U.S. in 2018. Nonetheless, trade issues are causing major uncertainty among U.S. and Chinese companies. The response in China is to accelerate the development of new products and to become independent of the U.S. This will likely take 3 to 5 years, but the probability of this occurring is very high.”

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Bill McClean, president of IC Insights:
“The biggest effect of the U.S.-China trade war that we hear from semi makers is that it is making its customer base hesitant to order for future business. The orders are more ‘hand-to-mouth’ as semi users face the uncertainty of what is going to happen in the second half of this year. As we have always said, the market can take bad news better than it can take uncertainty. With bad news you make your plans, adjust, and move forward. With uncertainty, everybody just freezes, and is afraid to do anything, which is the worst scenario.”

4) Materials and minerals

Andrew Miller, head of price assessments of Benchmark Mineral Intelligence:
“From the lithium/graphite perspective, the trade war isn’t having too much of an immediate impact but has potential to have major implications on the future battery supply chain. In lithium, U.S. consumers are still source largely from South American brine producers; however, with the majority of supply expansions taking place in China, Chinese converters are taking a bigger position in global markets. Last year, China exported record volumes of lithium and accounted for over 50% of global chemical supply.

With the U.S. seeking to establish significant battery production capacity over the coming years (in addition to the Tesla Gigafactory) increased lithium imports from China will be inevitable. Although the U.S. has some domestic production and a number of development stage projects, expansions in the next 5 years will be limited so this will be a barrier to establishing supply chain security in the region, and further trade tensions with China could create a supply bottleneck.

In terms of graphite and anodes, the situation is more fragile given China’s dominance in the market. In 2018, China produced over 60% of the world’s flake graphite and over 80% of anode production. The U.S. imports significant quantities of graphite from China and while falling prices may be compensating for increased tariffs in the short-term, there is certainly concern about longer-term tensions. Also, in terms of the U.S. battery supply chain, China is critical for anode raw material supplies and therefore higher import costs could again be prohibitive to development of a domestic battery industry.”

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Caspar Rawles, senior analyst of Benchmark Mineral Intelligence:
“China remains a hub of cobalt processing globally, so typically material flows have been U.S. imports of Chinese refined cobalt products. With limited cobalt chemical processing in the U.S., and a fairly limited battery supply chain–particularly when it comes to Chinese cobalt products–the impact on the battery industry doesn’t look to be too significant for cobalt at this time. The U.S. has a large superalloy industry, which mostly relies on imported cobalt metal. Whilst China remains a significant swing supplier of cobalt metal, much of this material remains in Asia or heads to Europe with a smaller portion heading to the U.S.”

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Mark Thirsk, managing partner of Linx Consulting:
“While the imposition of tariffs is bad news for the end customers of electronic systems both in the U.S. and China, the main problem is uncertainty. Continual suspension of tariffs, delays, and surprise rate hikes will lead to confusion, which is perhaps more damaging than the tariffs themselves. There have been several presentations this year in semi organized events where the CFIUS position paper has been discussed. This points to a much deeper strategic confrontation between the U.S. and China that will reach beyond the current tariff impositions. The restrictions on Huawei are an example of this, where a significant impact will be felt not only by global suppliers to Huawei, but also companies that rely on Huawei for their business around the world.

The continued implementation of trade controls, tariffs, and trade barriers will be far-reaching within the whole semiconductor ecosystem as raw materials, finished products, chips, and systems will all be impacted by trade tensions. Lastly, the tariffs are just the most visible symbol of this ongoing strategic confrontation, and any trade agreement will likely be temporary or partial since the ideological confrontation between the U.S. and China is a much larger issue, and something we will have to live with for many years. It is critical for continued negotiations, either bilateral or global, to continue to allow the global semiconductor industry to take advantage of the growth opportunities China offers.”