The iPhone Canary - WSJ Editorial
Investors have been searching for signs of how Trump’s trade standoff with China is affecting the U.S. economy. Judging by the market reaction to slumping iPhone sales in China, many fear Apple is the canary in the global economy. This may be an overreaction, but the Apple warning does underscore the interdependence of the U.S. and Chinese economies and their joint stake in a trade deal.
CEO Tim Cook told investors late Wednesday that Apple is cutting its quarterly revenue forecast for the first time in 15 or so years amid falling iPhone sales in China, its third-largest market after the U.S. and Europe. “Over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad,” Mr. Cook wrote. He added: “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” Nor did investors, as Apple’s stock fell nearly 10%, leading a broader stock selloff.
Mr. Cook is an engineer by training, though he diagnosed the problem like an economist when he said, “We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well.”. Trade uncertainty has a similar secondary economic impact beyond the immediate higher costs of tariffs. If CEOs aren’t sure of their supply chains, or whether tariffs will raise their costs and limit their markets, they also postpone or reduce capital spending. This explains a large part of the investment slowdown in the last half of 2018.
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American car makers have also reported falling sales in China. General Motors sales fell nearly 15% during the third quarter while Ford’s dropped 43% from the prior September. Lower foreign profits could reduce U.S. investment and returns for American shareholders and workers. Weakening growth in China has also put downward pressure on oil prices, which could prompt U.S. shale producers to reduce drilling.
The point is that Mr. Trump can’t shield U.S. businesses from the collateral damage of his trade brawl with China even if he tried. The two countries’ economies are entwined for better or worse, which is why there’s a political and economic incentive for both sides to cut a trade deal that protects intellectual property, lowers tariffs, and above all reduces uncertainty.
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https://www.wsj.com/articles/the-iphone-canary-11546560144 (paid subscription)
