AAPL Apple Inc

By Tripp Mickle 

Renewed trade tensions between the U.S. and China threaten to throw Apple Inc. back into the global trade battle, putting its iPhone business at risk just as the tech giant appeared to be shoring up declining sales of its most important product.

The round of tariff increases that hit Friday don't directly affect iPhones, iPads, Macs or Apple Watches. But President Trump this week threatened a tariff of 25% on $325 billion in Chinese imports that haven't previously been targeted by duties. Those would cover virtually all Chinese exports to the U.S., including Apple's most important devices.

"Build your products in the United States and there are NO TARIFFS!" Mr. Trump said Friday on Twitter.

Apple has faced minimal impact from previous tariffs on about $200 billion in Chinese goods, which covered electronic circuit boards, computer chips, chemicals and other parts. However, the iPhone maker is among the companies most exposed to future tariffs because it assembles almost all of its products in China. Tariffs could add to gadget prices or cut into profits by forcing Apple to absorb the additional costs.

Apple also counts on Greater China, which includes Hong Kong and Taiwan, for about a fifth of its sales, making it vulnerable if China retaliates with higher duties or punitive actions against American companies. Apple would be a likely target because of the iPhone's 7.4% share of China's smartphone market, analysts say.

"If Trump actually goes the last round, they're in big trouble," Mary Lovely, an economist at Syracuse University, said of the iPhone maker. She said a host of other consumer-facing products would face the same fate, including apparel and electronics.

Shares of Apple fell 7% this week, as trade concerns mounted. They finished Friday at $197.18

The trade tensions intensified Friday when the Trump administration increased tariffs to 25% from 10% on $200 billion in Chinese goods, claiming China had backtracked on commitments made during months of trade negotiations. The setback jeopardized a potential trade agreement, as China threatened countermeasures to the U.S. tariffs.

Apple Chief Executive Tim Cook has been in touch with the Trump administration throughout the trade dispute. He also has tried to play down tensions publicly, telling analysts repeatedly over the past year that he was optimistic about trade negotiations.

"These trade relationships are big and complex, and they clearly do need a level of focus and a level of updating and modernization," Mr. Cook said in November.

An Apple spokesman declined to comment.

The Trump administration last year spared Apple's smartwatch and AirPods wireless earbuds from planned tariffs.

The escalating battle this week comes amid an abrupt downturn in Apple's iPhone business. Apple last month posted its first back-to-back drop in quarterly sales and profit in more than two years as iPhone sales sank 16% in the first half of its fiscal year. Many iPhone owners are holding on to existing devices, turned off by higher prices and less interested in new features.

In the U.S., a tariff of 25% on a Chinese-made iPhone XS could exacerbate that problem by adding about $160 in costs to the $999 device, according to Morgan Stanley. Apple could either pass that cost on to consumers -- potentially causing people to hold off on buying new iPhones -- or absorb it, reducing its per-share earnings by 23% in fiscal year 2020, the firm estimates.

Shipments of iPhones to North America, Apple's largest market, fell 19% to 14.6 million units in the quarter ended March 30, according to Canalys, a market research firm.

Apple faces similar risks in China, where iPhone declines have been more pronounced. The iPhone has been losing share to Chinese rivals that offer lower-priced devices with increasingly sophisticated features. The company's sales in Greater China fell 25% in the first half of fiscal 2019.

In April, Mr. Cook said iPhone sales improved in the most recent quarter after the Chinese government took steps to stimulate the economy by reducing its value-added tax on iPhones and other goods to 13% from 16%.

Should the Chinese government retaliate against U.S. tariff increases, analysts say it could reverse that value-added tax relief. It also could target other aspects of Apple's business, including its roughly 40 retail stores in China and its App Store. There is also the potential that Chinese consumers might put off buying Apple devices in a show of national support, analysts say.

"It would be a big symbolic thing to go after Apple, and there are all kinds of tricks they can play," said Claude Barfield, a resident at the American Enterprise Institute, a conservative think tank in Washington. He added that would carry risks for the Chinese because of how many people Apple employs in China -- an estimated three million people through its supply chain.

Apple has taken measures in recent months to diversify its supply chain. Its largest iPhone assembler, Foxconn Technology Group, has studied whether to begin producing the devices in India. The move would reduce Apple's dependence on China for manufacturing and help it avoid U.S. tariffs on Chinese goods.

It would take Apple time to ramp production quickly in India or any other market, analysts say, making it unlikely the company could avoid U.S. tariffs this year.

Dow Jones & Co., publisher of The Wall Street Journal, has a commercial agreement to supply news through Apple services.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

May 11, 2019 08:14 ET (12:14 GMT)

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