Tariffs Are a Waste of Time

At CES we met a company from Eastern China that sells copper and fiber optic cables for data centers. This is almost a commodity business. There are thousands of companies that can make copper cables, and a few dozen that can make fiber optic cables, and probably ten or so that can make both of sufficient quality to be used in leading data centers.

We chatted for a bit. They told us about their products and we exchanged the latest on industry trends. Finally, we asked about price. “Their response was which factory do you want product from?”

It turns out this company has two factories, one in China the other in Thailand. These plants use identical equipment and make the same products. The company’s entire catalog is available from either site.

“Why do you have two factories?”, we asked. Their response was that the plant in Thailand was built two years ago entirely for US customers. During the last Trump administration, the US government slapped a tariff of roughly 20% on these products when they come from the PRC. The tariff for products sourced from Thailand is 0%.  So after a few years, the company opened a plant in Thailand.

Finally, we asked about price. “Oh, the prices are the same. Except all the raw materials for the Thai plant come from China and we have to ship them in, which makes Thai prices a little higher.” Admittedly, Thai prices are not 20% higher than PRC prices, but close enough.

This is happening across the supply chain. CES was full of companies touting their factories in Malaysia, the Philippines, Vietnam and Malaysia. Except, all the owners are PRC companies. Some have local joint venture partners, but in all cases we have found the PRC company is the controlling shareholder providing all the management, R&D and sales.

We are happy to have an academic argument as to the benefits and costs of tariffs, but the practical reality on the ground is that all new tariffs may benefit Thai workers, but they will not bring jobs to the US. The PRC has spent the past four years preparing for more tariffs, and in this corner of the industry they are ready for them.