Trade War and Tech, Tariffs Could Hurt Trump’s AI Goals | Bloomberg Technology

Key Concepts

• Tariffs (U.S. on China, China & EU retaliatory tariffs)
• Trade deficit (U.S. with China)
• Supply chain disruption
• Onshoring/Reshoring of manufacturing
• Inflationary pressure
• Impact on tech sector (Mag 7, Apple specifically)
• AI ambitions vs. trade war realities
• Export controls
• Geopolitical tensions (U.S. vs. China)
• Early stage VC funding in uncertain markets
• AI's impact on coding and business efficiency
• Social media's impact on mental health and corporate accountability

Tariffs and Trade War: Immediate Impacts

• Tariff Anxieties: President Trump's global levies, including 104% tariffs on China, are in effect, prompting retaliatory tariffs from China and the EU.
• Amazon's Response: Amazon has started canceling orders of inventory on specific products made in China (consumer electronics, household goods), indicating a real-time impact of tariffs.
• Trade Deficit: The U.S. has a significant trade deficit with China ($260 billion in 2023), highlighting U.S. reliance on Chinese computers, consumer electronics, etc.
• Retaliation: China and the EU are retaliating against U.S. tariffs, aiming to bring back manufacturing to America, particularly focusing on Apple.
• White House Stance: The White House is sticking to its guns, with President Trump wanting China to come to him for a deal.
• Trade War Escalation: The trade war between the U.S. and China has the potential to choke off a vast majority of trade between the two countries.
• Supply Chain Gaps: Data from the U.S. Trade Commission shows that a significant percentage of imports for laptop computers, PC monitors, and gaming consoles come from China (70% or more), potentially leading to supply gaps.
• Administration's Aim: The administration aims to bring back American manufacturing, potentially including "millions of people screwing in tiny screws in phones."

Economic Perspectives and Market Reactions

• Market Uncertainty: The market is uncertain about the aim of the tariffs (revenue generation vs. bringing back manufacturing).
• Lack of High-Level Talks: There haven't been direct high-level talks between President Trump and President Xi since the escalation of the trade war.
• Negotiation Attempts: 70 countries have called to try to begin negotiations, but it's unclear if China is one of them.
• Justification for Tariffs: The administration argues that China has been engaging in unfair trade practices for years, justifying tariffs to lower trade deficits and raise revenue.
• Reduced Import Volumes: High tariffs (e.g., 104%) are likely to reduce import volumes, potentially lowering the revenue generated from tariffs.
• Bloomberg Economics Estimate: Bloomberg Economics estimates that tariffs could bring in $300 billion a year due to the reduction in imports, half of what the White House has argued.
• Impact on Margins: Higher wages in the U.S. compared to Asia could lead to significant increases in the impact on companies' margins and earnings growth potential.
• Inflationary Pressure: Shifting production back to the U.S. is very inflationary.
• Earnings and Guidance: The market needs either a walk-back from tariffs or a more realistic earnings outlook for companies across all sectors, including technology, to determine the floor.
• Strategic Positioning: In an uncertain environment, investors are going back to their strategic positioning, still liking big tech over a five- to ten-year horizon due to their big balance sheets and positive cash flow.
• Apple's Sell-Off: Apple experienced its worst sell-off since the year 2000, with some seeing it as an oversold opportunity.
• International Buyers: There are signs of international buyers dipping their feet in, anticipating a potential walk-back from tariffs.
• Increased iPhone Cost: A U.S.-built iPhone could cost 90% more than it currently does.

Supply Chain Realities and Company Strategies

• Game of Chicken: At 104% tariffs, the situation is described as a "game of chicken" between the U.S. and China.
• Loaded Assumptions: Both the U.S. and China believe the other is in a weaker economic position and will fold.
• Limited Negotiation Fodder: There isn't much fodder for real negotiation, even a reset to 54% tariffs wouldn't be much of a win after this scale of disruption.
• China's Negotiation Goals: China would love a real negotiation with the U.S. that spans into other domains, such as large-scale purchases of semiconductors, which would blow apart the export control regime.
• Conflict Spiral: The situation is described as a conflict spiral in the trade domain, with escalating tech controls and China getting more creative with its retaliatory toolkit.
• Anti-Foreign Sanctions Law: China is implementing provisions for the anti-foreign sanctions law, including suspended IP rights for U.S. companies in China, which is considered explosive.
• Anti-Monopoly Arm: China's anti-monopoly arm has veto power over strategic M&A deals around the world, leading to potential conflicts of law.
• Companies Preparing: Companies have been trying to prepare for the tariffs, but the sheer extent of them was unexpected.
• Increased Fares: There has been an increase in fares for goods coming out of China as companies try to move as much product as they can before being impacted by tariffs.
• "Hurry Up and Wait": The advice being given to companies is to "hurry up and wait," as making a strategic decision today could fall apart quickly.
• Short-Term vs. Long-Term Strategies: Companies need to be thoughtful in terms of their immediate next steps versus their longer-term strategies.
• Ecosystem Development: Building an iPhone in the United States is not just about moving a manufacturing plant; it requires developing an entire ecosystem of tier two and tier three suppliers.
• Lessons from COVID: Supply chains learned lessons from COVID about their fragility and the need to build resilience through diversification.
• Tariff-Friendly Countries: Companies are looking at moving production to more tariff-friendly countries, but the long-term strategy needs to be figured out.
• Building in the U.S.: Executives are having discussions about building or assembling in the United States, considering the capital costs and timelines involved.
• Complicated Supply Chains: Supply chains are complicated, with many elements subject to tariffs, even for products labeled as "American-made."

AI Ambitions vs. Trade War Realities

• Trump's AI Promises: President Trump's AI promises may be undermined by his tariff agenda.
• Competing on China's Terms: The new economic order could force the American AI industry to compete on China's terms, potentially doing more with less.
• DeepSeek Example: The arrival of DeepSeek made people think China knows how to do AI more cheaply.
• Advantage Erosion: If AI gets more expensive due to tariffs, the advantage of American companies in deploying AI on a bigger scale could be eroded.
• Investment Uncertainty: The ability of companies like Meta, Amazon, and Microsoft to invest in AI was built on their core businesses, which are now facing uncertainty.
• Data Center Costs: Building data centers is becoming more expensive, even though the core components aren't currently subject to tariffs.

Venture Capital and Early Stage Investing

• Consistent Discipline: Lerer Hippeau closed a $200 million fund due to their consistent and disciplined approach to early-stage investing.
• Insulation from Public Markets: Early-stage companies and their investors are generally more insulated from public markets, but the Silicon Valley Bank crisis highlighted the importance of operational cash flow.
• Wake-Up Call: The crisis was a wake-up call for certain funds, prompting them to ensure companies are being responsible and not chasing growth at all costs.
• AI as an Unlock: AI is seen as an unlock in every industry, with companies that are not leaning into AI missing a huge opportunity to create efficiency and move faster.
• Coding Efficiency: Companies are writing less code by hand, instead prompting and managing third-party AI software.
• Uncertainty in AI: There is uncertainty about where the value falls in the AI space and what is owned by large language models versus application layer companies.
• Consumer Companies and Tariffs: Consumer companies are planning for tariffs, but some will be directly impacted.
• New York as a Hub: Lerer Hippeau is a believer in New York as a hub for tech talent.

Other Notable Points

• Meta Whistleblower: A Meta whistleblower is set to testify before Congress, claiming that the company threatened U.S. national security as it cozied up with China.
• Social Media Film: A new film by Bloomberg Originals follows a team of lawyers battling tech giants on behalf of families whose children suffered great harm linked to social media.
• Social Media's Impact: The conversation around social media has shifted to a full-blown public health crisis for children.

Synthesis/Conclusion

The transcript highlights the complex and multifaceted impacts of the U.S.-China trade war, particularly focusing on the tech sector. The implementation of tariffs, especially the 104% tariff on Chinese goods, is causing significant disruptions to supply chains, forcing companies to rethink their global strategies. While the U.S. administration aims to bring back American manufacturing and address trade imbalances, the market remains uncertain about the ultimate goals and potential consequences. The situation is further complicated by retaliatory tariffs from China and the EU, geopolitical tensions, and the rapidly evolving landscape of AI. Companies are grappling with short-term challenges while trying to develop long-term strategies in an environment of uncertainty. The early-stage VC market remains active, but investors are emphasizing responsible growth and the potential of AI to drive efficiency. Finally, the transcript touches on the broader societal impact of technology, including concerns about social media's effect on mental health and the need for corporate accountability.