Most of us have never had to worry too much about tariffs. They have been disappearing since 1979, when UK Premier Thatcher and US President Reagan began to open up markets to free trade.
You can see the development in the Coastal Journal chart, showing the history of US tariffs over the past 100 years:
- It is based on data from the US International Trade Commission and Bloomberg Economics estimates
- Tariffs began to rise after WW1 and averaged 20% after the 1929 Great Crash as protectionism took over
- They then began to fall as prosperity returned after WW2 and the BabyBoomer SuperCycle began
But now, they seem set to be heading higher again.
The elections mean that the Republicans now control the Presidency, the Senate and the House. So President Trump will face little opposition to implementing one of his signature policies.
So by 2028, US tariffs could well be back at 1930s levels.
APPLE DOMINATES THE TOP-END OF THE MARKET
Share of Global Top 10 Best-selling Smartphones, Q3 2024 vs 2023
Let’s move from theory to practice for a moment. Apple has been the world’s most successful company in recent years, largely as a result of the iPhone.
As the Counterpoint chart shows, it dominates the list of best-selling smartphones. And as it notes, Apple has been steadily moving up-market in recent years:
“Half of the total iPhone sales were contributed by the Pro variants in Q3. This shift is helping Apple drive higher-value device sales.“
APPLE HAS BEEN CLEVER IN MOVING UP-MARKET AS SMARTPHONE SALES SLOW
GLOBAL SMARTPHONE SALES – ANNUALISED VOLUME
Q4 2013 – Q3 2024
This made sense, given the slowdown in the overall market.
Apple’s success has come from a combination of excellent technology and attention to consumer preferences.
And Steve Jobs’ introduction of the iPhone in 2007 stands in a class of its own in terms of the use of humour and surprise.
But today, the smartphone market is slowing. Sales peaked at 1.55bn on an annualised basis in Q3 2017. In Q3 this year, they were down 22% to 1.22bn as the chart shows.
Of course, as we noted in February, Apple has also done a good job in developing the used iPhone market. It uses this to develop its Services business and provide legacy income.
But the end of the Middle Market, as discussed last week, means that the iPhone’s best days are in the past.
CHEAPER SMARTPHONES ARE STARTING TO DOMINATE
Inevitably, competition is now intensifying in the smartphone market, with budget models costing <$150 showing major growth, as Counterpoint notes:
- Global budget smartphone sales grew 10% YoY in Q2 2024, surpassing 100 million units, driven mainly by emerging markets
- Budget smartphones accounted for 37% of global smartphone sales, with high-end features being integrated into them faster
This is taking a toll on iPhone sales, with Apple now being forced to cut orders as sales of the new iPhone 16 disappoint.
APPLE’S BUSINESS MODEL WILL BE BADLY IMPACTED BY TARIFFS
Wall Street is already starting to worry about the outlook, as Bloomberg’s chart of Apple’s earnings day share performance shows.
But the real challenge is that Apple simply can’t afford to reshore iPhone production to avoid Trump’s planned 60% tariffs. As Steve Jobs told former President Obama in 2011:
“Those jobs aren’t coming back. Simply put, assembling Apple products is labor-intensive, and there are not millions of Americans who would accept 3,000-yuan ($415) monthly wages for such work, nor forego their weekend to boost earnings.”
And so Apple faces a real risk that it will be a casualty of Trump’s planned tariff war. As Caixin notea:
“90% of Apple products are still assembled in China. When iPhones, iMacs, iPads and Apple Watches assembled in China enter the U.S., Apple must pay these costs. And if tariffs increase, it will likely significantly raise its products’ retail prices in the U.S.”
Apple clearly faces difficult choices:
- If it tries to raise prices to reflect the tariffs, it will lose major volume as iPhones are already very expensive
- If it absorbs the cost, then its profits will suffer badly – one estimate suggests its US margin would fall to zero
One sign of the times is that the world’s most successful investor, Warren Buffett, has been selling his shares. Apple was once half of his equity portfolio. But over the past year, he has sold two thirds of his holding. And Buffett doesn’t normally sell shares when he thinks the company will do well.