By Yoko Kubota and Julie Wernau 

BEIJING -- Escalating volleys of tariffs by the U.S. and China stand to pile pressure on already stressed supply chains, potentially pinching technology companies and consumers on both sides of the Pacific.

Proposed tariffs by the U.S., released Monday, would hit finished technology products such as smartphones and smartwatches, as well as video game consoles and other consumer products. Meanwhile, tariff increases ordered by China of as much as 25% affect some components that go into some of these products, including semiconductor packaging materials and certain types of displays.

Both governments are giving themselves room to maneuver in their latest escalation. China's new punitive levies don't take effect until June 1. A U.S. decision last week to raise tariffs to 25% on $200 billion in Chinese goods won't start to bite until around that time, given the lag for shipping. And Monday's proposal by the U.S. to slap levies of as much as 25% on the remainder of imports from China, around $300 billion in products, will take weeks to put in place.

Companies and trade experts said that, unlike previous rounds in the year-old trade dispute, the new penalties if unchecked are likely to drive up costs for more products that would partly be passed to consumers.

"Both sides are running out of options that will damage the other's economies without blowing back onto consumers at home," said Shaun Roache, chief economist for the Asia-Pacific region at S&P Global Ratings.

He said that until now, the U.S. focused its tariffs on components and other intermediate goods, rather than finished consumer goods. Doing so, he said, raised costs for companies, but at a level producers and importers could bear largely without raising prices for American consumers.

Some companies in recent weeks have begun acting on contingency plans in anticipation of escalating tariffs. Sweden-based telecom gear-maker Ericsson AB is preparing to shift some manufacturing out of China to facilities in the U.S., Estonia, Brazil and Mexico, a spokesman said. Made-in-China cellular-tower equipment, routers and switches are on the U.S.'s $200 billion list subject to 25% tariffs.

Taiwan-based AsusTek Computer Inc. said last week that it has been moving some production bases to Taiwan and Vietnam from China to limit impact on a U.S. tariff increase on motherboards and graphic cards.

"We already discussed contingency plans with our suppliers," AsusTek Co-CEO Samson Hu said in a quarterly earnings call. "The impact on us will be minimal, because we adjusted before."

A huge question is what happens to Apple Inc. The company makes most of its products, including iPhones, in China through contract manufacturers. While the proposed U.S. tariffs on $300 billion of Chinese goods includes smartphones, companies may petition that their products be excluded before the levies take effect in late June at the earliest.

Apple didn't immediately respond to a request for comment. As of Tuesday, Apple hasn't communicated major plans to shift production for key products to Foxconn Technology Group, its main assembler, people familiar with the matter said. Foxconn didn't immediately respond to a request for comment.

Apple suppliers have said that fully moving out of China is difficult: China's skilled workers and well-developed supply chain are difficult to replicate elsewhere in short order. How long the tariffs would be in place and whether the two sides can strike a trade deal also are holding suppliers back from making significant shifts, they say.

In recent months, Foxconn, which assembles a huge share of iPhones, has been considering producing the devices in India, an emerging smartphone market. It is also looking at Vietnam, though it hasn't said what it plans to make there.

Any fallout on Apple's China production base could be troublesome for Beijing too. Foxconn is the largest private employer in China, and the Chinese government wants to keep employment steady and prevent the trade fight from undermining a fragile recovery in the economy.

China's Foreign Ministry said Tuesday that tariffs won't solve the dispute and that while Beijing wants a negotiated solution, its resolve shouldn't be underestimated. "China does not want or wish for a trade war but it is by no means afraid of one," ministry spokesman Geng Shuang said at a weekday briefing.

In the wake of the latest tariffs, Chinese media have amped up criticisms that stringent U.S. demands in trade talks ultimately aim to prevent China from moving up the value chain and competing in the global economy.

One item on the U.S.'s proposed tariff list is made-in-China lithium-ion batteries. Those batteries are the most expensive component in electric vehicles, a sector China wants to dominate globally and has been subsidizing heavily.

A 25% tariff would make it tough for the Chinese imports to compete with batteries offered by Korea's LG Chem and Japan's Panasonic Inc., which both already have U.S. production facilities.

--Stu Woo, Chunying Zhang, Dominique Fong and Trefor Moss contributed to this article.

Write to Yoko Kubota at yoko.kubota@wsj.com and Julie Wernau at Julie.Wernau@wsj.com

 

(END) Dow Jones Newswires

May 14, 2019 10:03 ET (14:03 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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