WASHINGTON, DC - AUGUST 02: White House economic adviser Larry Kudlow speaks to the media about ... [+]
If Donald Trump's August 1 tweet — that the U.S. will impose 10% tariffs on $300 billion worth of goods imported from China —comes true on September 1, U.S. consumers and consumer products retailers will pay the price.
One specific company that will surely suffer is Apple.
Before getting into that, let's look at those pending tariffs. According to the Washington Post, the $300 billion worth of Chinese imports will result in prices increased on consumer goods from China such as t-shirts, toys and televisions. Indeed the Post reported that Goldman Sachs estimates that more than 60% of the items subject to those tariffs will be consumer goods.
The Trade Partnership estimates that retailers will pass on the tariffs to consumers in the form of higher prices — specifically, toy prices will rise 17%, shoes by 8%, clothing by 5% and furniture and TVs by 4%, noted the Post.
The tariffs will cause American shoppers to pay "$4.4 billion more for apparel, $2.5 billion more for shoes, $3.7 billion more for toys and $1.6 billion more for household appliances," according to the Post.
Indeed, given that retailers have already announced plans to close 7,500 stores in 2019, it is not surprising that they feel compelled to pass along the tariffs to consumers in the form of higher prices.
White House economic adviser Larry Kudlow (who interviewed me several times when he was on CNBC) said August 2 on Bloomberg TV that the effects of the tariffs on consumers would be "small."
But it is worth remembering that consumer spending accounts for 70% of U.S. GDP growth and that given the country's 3.2% nominal wage growth, those double digit price increases could cause some consumers to buy less or borrow more to keep up.
Indeed the Post cited MGA Entertainment's $250 price hike — 26% more than last year's holiday season — for the popular "The L.O.L. Surprise! House, a three-story doll house with a working elevator and heart-shaped swimming pool."
Apple investors and consumers could pay a substantial price. Wedbush Securities analyst Dan Ives estimates that Apple would sell 8 million fewer iPhones. In a note, Ives wrote, “The tariff news throws a mini wrench in iPhone demand, which will weigh on shares. These latest tariffs could significantly increase the cost of iPhones globally.”
The effect of these tariffs could hit Apple's earnings per share. According to Reuters, Bank of America said, “Our back of the envelope math suggests the impact (of the new tariffs) will be roughly $0.50-$0.75 (annualized per share) hit to earnings with roughly $0.30-$0.50 from iPhones.”
Bank Of America estimated that Apple would respond to the tariffs by raising iPhone prices by about 10% which would reduce demand by 20% or about 10 million units (two million more than Wedbush suggested).
Of course Apple's iPhone sales were tumbling before Trump's terrifying tweet. In the second quarter, iPhone sales fell 17% and in the third quarter, they were down another 12% to about $26 billion, according to Reuters.
One Apple analyst is not worried about the effect of the tariffs on Apple.
Ming-Chi Kuo of TF International Securities, wrote in a note, “The market is worrying that prices of Apple’s major hardware products for the U.S. market (including iPhone, iPad, MacBook, Apple Watch and AirPods) will rise and there will be negative impacts on shipment forecasts,” according to CNBC.
Instead Kuo forecast that, "in the mid-short term, Apple will absorb most of the additional costs due to tariffs, and the prices of hardware products and shipment forecasts for the U.S. market will remain unchanged.”
Kuo expects Apple's profits to decline should it choose not to raise prices.
However, he is optimistic in the longer run. “The negative impact on Apple are limited and temporary because the profit from service business is growing, and non-Chinese production locations will gradually increase. We believe that Apple’s non-Chinese production locations could meet most of the demand from the U.S. market after two years.”
In pre-market trade on August 5, Apple stock is down 10% from last week's high of $219 a share on July 31. This makes me think that investors are not buying what Kuo is selling.
