Despite the rally, Apple still faces a trade-war nightmare

Apple reclaimed its crown as the world’s most valuable company on April 9th. Financial markets roared higher in response to President Donald Trump’s decision to put a 90-day hold on his “reciprocal” tariffs to most countries, but not China. Look past the euphoria, though, and there is a stark reality. More than most big American firms, Apple remains hugely exposed to the worsening trade conflagration with China. Moreover, a pause is just a pause. Mr Trump’s capriciousness still makes it a nightmare to decide how to reconfigure supply chains in a trade war.

Apple’s relationship with China, where it makes up to nine out of ten of its iPhones, turned Mr Trump’s “Liberation Day” into six days of hell for the Cupertino-based company. Not only did the president’s tariffs threaten to push up the costs of its products assembled in China; they also hit goods exported from other countries, including India, an incipient maker of iPhones, and Vietnam, where the firm makes Apple Watches and AirPods. Apple has extended manufacturing to these countries in order to reduce its exposure to China. Hefty levies on them compounded the shock of the China tariffs.

Mr Trump’s U-turn, which in effect cuts levies to countries excluding China to a baseline 10% and opens the door to country-by-country trade negotiations, gives Apple a reprieve. Its shares soared by 15% on April 9th, pushing its market value above that of Microsoft, the tech giant that had overtaken it the day before. It was Apple’s best one-day performance in more than 25 years, even though on the same day Mr Trump increased levies on China to an eye-watering 125% as part of a retaliatory and counter-retaliatory tariff blitz between the two countries. That Apple’s shares soared despite the exchange of fire suggests investors believe that eventually America and China will come to their senses and negotiate—or that Mr Trump will grant Apple products an exemption, as he did during his previous term.

Unless that happens, though, Apple remains at the mercy of Mr Trump’s trade policies. The higher the duties on China, the higher the cost burden on the 70m or so iPhones assembled in China and then sold in America. Even at roughly half the current levels, say 60%, they could add $330 to the $550 raw cost of an iPhone (tariffs apply to production costs, not retail values), says David Vogt of UBS, a bank.

Higher costs could be passed on to consumers. But that is tricky. Sales of iPhones, which last year made up more than half of Apple’s revenues, have stagnated, partly because the company has failed to create seductive artificial-intelligence features. With the retail price of the most advanced iPhones starting at $999, it is hard to imagine that Apple could make them even more expensive without further turning off customers. In America, shoppers rushed to Apple stores to buy gadgets before the tariffs kicked in.

Alternatively, Apple could squeeze investors. Its gross profit margins reached all-time highs above 46% in 2024. Fears that profits will suffer as a result of higher tariffs partly explain the volatility in Apple’s share price. Gerrit Schneemann of Counterpoint Research, a consultancy, argues that the firm’s margins are high enough that it can absorb the shock better than rivals such as Samsung. It could also encourage loyal suppliers to share some of the burden. But tariffs will be a significant blow nonetheless.

Then there is Chinese retaliation. It is possible that the country’s counter-tariffs will make some components more expensive to import into China; for instance, Apple’s “Gorilla Glass” is made by Corning, an American company, in Kentucky. In addition, Mr Schneemann speculates that China’s restrictions on exports of rare-earth minerals may affect other suppliers.

More serious may be the risk to Apple’s sales in China. Its revenues in the country fell by 8% last year, mostly because of weakness in demand for iPhones and iPads. Chinese consumers may accelerate that slide by treating Apple as a scapegoat for Mr Trump’s antics. The appeal of home-grown alternatives, such as Huawei, Oppo and Xiaomi, is growing.

Moreover, the Chinese government could take retaliatory action against Apple. In February Bloomberg reported that China’s antitrust watchdog was considering a probe into the fees Apple charges app developers. That risks another flashpoint in the trade war.

Apple’s perils in China are not new. Since China’s pandemic lockdowns, it has been seeking to move production to other parts of Asia to hedge its bets. On April 7th the Wall Street Journal reported that, in response to higher tariffs on China than on India, Apple planned to increase iPhone shipments from India to America as a stopgap measure. Yet it is so deeply embedded in China that it could take years to rebalance the relationship. A Harvard Business School case study last year by Jeremy Friedman and others on Apple’s “de-risk or double down” dilemma in China described moving to India as demanding “substantial investments, unwavering patience, and an extended timeline”—in stark contrast with China.

The American dream

If its Asian supply chains are so vulnerable, where could Apple turn instead? The answer, according to Team Trump, is America. The White House says that a pledge by Apple shortly after Mr Trump’s inauguration to invest $500bn over four years in America is a prelude to moving production to its home country. But that is harder than the maga crowd makes it sound.

Start with the promised investment. That was public-relations “fluff”, says UBS’s Mr Vogt, noting that $500bn over four years would require Apple to spend more than its free cashflow, which is about $100bn a year. Apple made a promise to invest $350bn over five years during Mr Trump’s first term, and another big pledge during the administration of Joe Biden. Neither produced much in the way of shovels in the ground.

There are also high technology hurdles to reshoring anything but Apple’s top-of-the-range Macs. It has taken several years and heavy subsidies for TSMC, which makes semiconductors for Apple, to start producing in Arizona. It would be a similarly lengthy process for Apple to encourage high-tech suppliers of the iPhone’s power systems, cases and other components to come to America. As yet the Trump administration has offered no incentives to woo them. Wamsi Mohan, an Apple analyst at Bank of America, said that moving the iPhone’s entire supply chain to America would probably take many years and may not even be possible.

Tim Cook, Apple’s boss, could have made a decision years ago to move more production to America, using robots instead of low-cost labour, as an alternative to China, says Kevin O’Marah of Zero100, a supply-chain research firm. Now, though, Apple is “against a time crunch”. Cost is a factor too. Dan Ives of Wedbush Securities, an Apple bull, says an American-made iPhone could cost as much as $3,500.

Because it straddles so many geopolitical faultlines, Apple’s position is more precarious than those of most American firms. But it is not alone. Others have China risk. They also export from countries now racing against a 90-day deadline to negotiate tariffs with the mercurial Mr Trump. Corporate America is not yet in the clear. ■

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