How Might Tariffs Impact Data Centers?

Posted by Instor on Dec 19, 2018 9:00:00 AM
An in-depth look at how China and the United State's impending trade war might impact data center owners across the globe. 

 

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The two largest global trading partners, US and China, have taken a half-time break during the heated trade war but other global factors could further fuel it. The Peterson Institute for International Economics’ Trump’s Trade War Timeline: An Up-to-Date Guide outlines all the milestones which have led up to the current trade war pause. However, the trade war may continue if certain conditions are not met according to a White House press release in response to a meeting between Donald Trump and Xi Jinping at the G20 Summit. There are mutual trade barriers which must be met within 90-day truce but if they are unable to reach an agreement, the 10% tariffs will be raised to 25 percent.

One of the major catalysts to this current trade war can be attributed to the trade deficit – for the past five months, China continues with the biggest surplus to the US and US companies are required to share technological intellectual property (IP) as a prerequisite to doing business in China aside from China’s historical yuan manipulation. The US Census Bureau data shows the deficit with China hit a record $43.1 billion in October 2018 which is a 7 percent increase from the previous month.

How has the September 2018 announcement by the Trump administration to add $200 billion in tariffs on Chinese products impacted the data center? These products listed included servers, switches, routers, and is expected to raise the cost of cloud services in the US where more than 90 percent of US businesses depend on cloud computing with $70 billion spent on public cloud computing in 2018 alone. Bloomberg Government reports that cloud services market to peak above historical heights to 32 percent in fiscal year 2018 for the Federal Government. On the contrary, many of the original equipment manufacturers (OEMs) have quickly increased prices but the ultimate cost of continuing tariffs will cost the US. Defining the impact to data centers is proving to be elusive and a moving target.

The tariffs on cloud technologies and components from China were predicted to make US manufacturing more expensive with similar affects to increasing taxes. The US is exercising a protectionist position while China maintains a mercantilist position. By serving domestic markets through local production, China can boost technological investments and innovation while excluding foreign competition in their respective market sectors – this is the result of 10-year policy - Made in China 2025. Most recently, Beijing has instructed media outlets to not make further use of "Made in China 2025" or there will be consequences.

The International Monetary Fund (IMF) study on Macroeconomic Consequences of Tariffs includes data from 151 countries over a 51-year period – the study found no improvements in the trade balance when tariffs rise. They did, however, discover that tariffs were directly related to rising exchange rates. Details of the trade gap with China are outlined in the US Trade Representative facts.

According to The Information Technology and Innovation Foundation (ITIF) A 10-Point User Guide to the Trump Tariff Wars and their model on the impact on U.S. productivity of placing a tariff on information and communications technology (ICT) products like computers, servers, smartphones, telecom equipment, semiconductors, software, cooling fans, and scientific instruments. Estimates for the 10 percent and 25 percent tariffs would result in $163 billion and $332 billion, respectively.

Another ITIF report, Why Tariffs on Chinese ICT Imports Threaten US Cloud-Computing Leadership, describes how tariffs could impact the US cloud computing industry and weaken global competitive advantages that are outlined with four main consequences:

  • Costs rise across the board and passed onto consumers. Businesses would have to choose between planned technology purchases or cutting back elsewhere including expansion and new jobs.
  • Cloud-service providers who rely on cloud technology imports from China must absorb costs or cut costs. This could lead to lower profits, less investment in new data centers, and reduced research and development budgets.
  • Cloud providers must find new avenues to invest and remain competitive. Pressure from other markets including the recent EU-Japanese trade deal, new privacy laws, and uncertain tariffs may require cloud users to locate physical proximity of a data centers.
  • Tariffs threaten to disrupt global supply chains including shipping regarding manufacturing and IT products. Supply chains are not agile enough to support the US industry. Intel serves as an example with estimates of almost a billion dollars to move semiconductor chip packaging plants out of China and US tech businesses are unable to located suppliers outside of China.

Although the future is uncertain, vigilance is necessary to determine holistic impacts from tariffs and countertariffs across all market sectors: Chinese companies continue to flock to the US to be listed on stock exchanges, China has reportedly shelved the Made in China policy, some companies are considering moving manufacturing operations outside of China, Huawei is on trial in the West, and many economist see the US-China trade war as the biggest threat to the US economy in 2019

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