Its tariff announcement day, and it seems not every country was ready to kiss the ring or make the required genuflections, and negotiations continue.  Without comment, here’s the list with key CE countries highlighted.  The EU has a special category as it works on a product by product basis.  If the product tariff is less than 15%, it is brought up to 15%.  If the tariff is 15% or higher on particular goods, it stays at that level:

While the threat of additional tariffs on those countries that don’t come to the table with a plan to assuage the president is likely a real one for smaller countries that have export business with the US, the general discomfort and worry level seems to be dissipating a bit.  The tone publicly is that all countries are willing to discuss trade agreements, while privately the feeling is moving toward, ‘nothing is going to happen other than saber rattling”  As we watch container rates to get an idea of the level of concern, commentary from that sector seems to indicate participants are becoming inured to tariff threats as little has actually be implemented.
Rates spiked early in the year because of tariff woes and again in June as previous deadlines approached but have not held at those inflated prices.  There is still considerable premium in container rates relative to 2023 and even those seen in March and April of this year, but the panic that kept shippers up at night seems to have subsided to be replaced by less panic and a bit more dice rolling.  We expect if Trump weasels out of the 8/1 deadline again, most of that premium will disappear.  If he sticks it to a few allies, that panic could return, but for now it looks like container rates are easing back to 1Q norms, especially as many brands are not seeing enough demand to continue to pull-in next month’s shipments.  Waiting until August…

Synopsys (SNPS), Siemens (SIE.XE), and Cadence (CDNS) are breathing a sigh of relief as the US Commerce Department has notified same that they no longer are required to procure a government license in order to conduct business in China.(see https://scmr-llc.com/blog/turning-up-the-heat - 5/20/25 for more info.), a result of the deal that was struck between the US and China in recent days.  The problem is (not for those three), there is very little detail about any real agreement, other than the 90 day suspension of the ‘anger tariffs’ (our words) that both parties imposed.
The White House statement gives little information about the details of the agreement other than those relating to the tariff suspension, summing up the agreement as follows: “…Agreed to establish a mechanism to continue important discussions about trade and economics”.  Other than that and what shows below, little has been said about any real agreements, guidelines, guardrails, or trade metrics.  What remains, at least for 90 days, follows:
China

• Removes the retaliatory tariffs (34% on all US goods that it imposed on 4/4/25 for 90 days
• Suspends or removes non-tariff countermeasures (Adding 11 US companies to the Chinese “Unreliable entities’ list, adding 16 companies to the export control list, and imposing new rare earth controls)
• Retains 10% tariff that existed prior to 4/4/
• Nothing specific was said about the Chinese Section 232 and 301 retaliatory tariffs (15% to 25%) on US metals, Soy, LNG, Autos, Electronics, etc.)
• Nor the ‘fentanyl’ retaliatory  (10% - 15%) tariff on Coal, crude oil, and vehicles
• Or the ‘Most favored nation’ ~7% tariff on all US imports

US

• Removes tariffs from 4/8/25 and 4/9/25 (which increased tariffs from 34% to 84% and then again to 125% for 90 days
• Retains 10% tariff that existed prior to 4/8
• Remaining tariff sits on top of 20% fentanyl tariff, 10% ‘basic’ tariff and existing Section 301 and 232 tariffs.

So what it really comes down to is we went back to where we were before the beginning of April for 90 days and discussions continue.  There is no real trade deal, only a removal of the ‘My tariff is bigger than your tariff’ bluster.  Most CE companies that are affected seem to be doing the ‘shift’ dance, moving production or assembly from facilities in China to those in less potentially tariff burdened countries, but with no real deal and only a few days to go before the tariff suspension expires, those we have spoken to have little new information on which to base decisions and expect another 90 day clock reset on July 9.  It is hard to know where to shift production if you have no idea how country-by-country tariffs will play out.

​According to President Trump’s post on Truth Social (see below) a deal with China concerning rare earths is done, although general news media tends to disagree, calling whatever has been agreed on a ‘framework’ rather than an agreement.  That said, it was enough to get China to resume rare earth exports after roughly two months of restricted (essentially halted) rare earth shipments, in return for a resumption of educational visas for Chinese students and a reduction of tariffs on Chinese goods from 145% to 55%, inclusive of a 10% baseline tariff, a 25% tariff remaining from Trump’s first term, and a 20% additional tariff related to Fentanyl trafficking.
OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME. FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA. LIKEWISE, WE WILL PROVIDE TO CHINA WHAT WAS AGREED TO, INCLUDING CHINESE STUDENTS USING OUR COLLEGES AND UNIVERSITIES (WHICH HAS ALWAYS BEEN GOOD WITH ME!). WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%. RELATIONSHIP IS EXCELLENT! THANK YOU FOR YOUR ATTENTION TO THIS MATTER!
Jun 11, 2025, 8:04 AM
The WH was under pressure as Ford (F) was forced to halt production of Explorer SUVs at a Chicago assembly plant last month when a supplier was unable to obtain the rare earth magnets that are part of a number of key sub-systems and the US military began indicating concern over delays in certain programs that were highly reliant on rare earth materials. The Ford supplier has indicated that it has been granted a 6 month export license this month from the Chinese government and is resuming supply and we assume others will be doing the same, although the current agreement is not formal and will expire in August if terms are not agreed upon and those include general trade imbalances, intellectual property issues, and US business licensing issues on the mainland.
The US dependence on China for its rare earth supply presents an unusual challenge for the current (and future) administration, as the US imports 99% of its rare earth consumption and China controls ~70% of rare earth mining and ~90% of rare earth refining.  While the size of the US consumer market makes it extremely attractive to China and gives the US considerable trade leverage, the impact of even a short Chinese ban on rare earth exports shows China’s leverage over the US and how quickly we respond  We expect China will resume export licensing for rare earth suppliers this month and next, but will be careful not to let the US stockpile any significant amount of material in case the negotiations fail.

In response to US export restrictions on semiconductors and semiconductor production equipment, China has its own “Dual-Use” list of items that can be used in everyday items and in weaponry.  These items require a governmental review and the issuance of a license before they can be exported from the country, essentially allowing the Chinese government to use them to limit US advanced R&D and undermine the US military and semiconductor development efforts.   There are a substantial number of items in the Chinese list that are produced primarily in China, with only a small percentage of total consumption available from sources off the mainland, leaving little chance of the US stockpiling such materials or rapidly replacing newly restricted Chinese materials, and while the US government downplays the potential impact that these restrictions might have on various military projects and industries, even small shortages can slow or halt billion dollar programs and certainly contribute to rapidly rising costs.
Last week China abruptly restricted the export of Indium Phosphide substrates, likely in response to some  recent restrictive move by the Trump administration.  InP substrates are used in the production of laser diodes, photodetectors, and single-chip combination laser/amplifier/modulators, but most importantly InP is used to produce High Electron Mobility Transistors (HEMT) and a variety of RF and Microwave advanced communication components, along with high efficiency solar cells that are used for space communications.  The specific objective is not known but even with a number of suppliers of Indium itself, other than China, InP substrates will become harder to source.
Each addition to China’s list, especially in the rare earth category, puts more pressure on the administration to strike a deal with China, as alternate sources for a number of key materials are small but rarely does the WH indicate that China has any leverage in trade talks.  In fact, when it comes to rare earth elements, while the US Geological Survey does not break out individual rare earth  consumption and sourcing for the US, on an overall basis , the US imports ~80% of its rare earth consumption each year, with 56% of those elements coming from China.  Based on 2022 data, China is the leading supplier of 29 of the 50 most critical minerals and controls 85% of the processing for those minerals.

For example:

​Among the most critical is Yttrium, an element  that the US imports almost 100% of its needs from other countries, 93% of which comes from China.  The Department of Defense has identified Yttrium as essential for military applications and indicated that even a 90 day supply interruption could have a significant effect on defense contractors.  42% of yttrium consumption comes from its use in red display phosphors and LEDs, the radioactive Y90 isotope is used to treat cancer (64 day half-life), it is also used as a high-temperature metalogical additive for jet-engines, and as a source (Yttrium-Iron Garnet) in microwave radar systems, making it a very necessary material for both the military and commercial markets.
While Yttrium is an extreme case, there are many other strategic materials where production and refining are dominated by China and despite the 2025 Nation Defense Authorization Act allocation of $1.2 billion for stockpiling rare earths and $350 million for domestic development of rare earth materials, the US has a critical dependency on China for both rare earth minerals and a number of other important materials for both the military and commercial products.   Products like semiconductors, TVs, smartphones, and soybeans make the headlines when it comes to trade negotiations between China and the US, but underlying those popular products are many far more critical  materials that we believe are also a major part of the negotiations but receive far less publicity because of their sensitive nature.

Given the volatile nature of the US/China tariff situation it has been obvious that not only have component suppliers been pulling in orders to beat on-again-off-again tariffs, but consumers, already burdened by high inflation and recession fears, have been a bit more cautious than usual about making purchases.  According to Tech Insights, high DAO inventory levels are coming down a bit but demand for most semiconductor components remains weak, while Ai related component demand continues at a strong pace.  Tech Insights has come up with two scenarios for the 2025/2026 semiconductor space after lower their earlier (March) forecast in April.  The two scenarios, moderate impact and severe impact, show how much the growth for 5 semiconductor type categories could be affected by a resumption of the more severe tariffs that were put in place and then postponed recently,
Tech Insights current expectations are now between the April forecast and the moderate scenario as negotiations continue, but the more severe scenario could occur if negotiations fail before the July deadline.  The current forecast and two scenarios are as follows:

​The table below shows the current growth forecast for  a number of semiconductor  categories for 2025 and 2026 and by how much that growth will be decreased for each semiconductor type (and total) for both years, under both scenarios.  The 2025 total growth forecast is for 14% growth.  Under the ‘moderate’ scenario, that growth would be decreased by 5.3% to 8.7% growth and under the more severe scenario it would be decrease from 14% by 10.4% to 3.6% growth.  In 2026, the current forecast calls for 9% overall growth.  Under the ‘moderate’ scenario for 2026 growth  would de decreased by 17.2% to negative 8.1% growth and under the severe scenario that 9% growth would decline by 34% to negative 25% growth.  Table 2 shows the same scenarios for the semiconductor equipment segment and their impact, while Table 3 shows which products would be the most affected by semiconductor tariffs from both a BOM standpoint and from the share of semiconductor sales.

To take the impact of semiconductor tariffs a bit further, we look  at a McKinsey report that shows semiconductor share of product BOM, essentially quantifying the impact of semiconductor tariffs on various CE products.  We arranged the table according to the sales value.  While SSDs are only ~5% of semiconductor sales value total, the table shows that 90% of the BOM is semiconductors, making them the most affected product category for semiconductor tariffs, but from a total value standpoint data center server racks represent 25% of all semiconductor sales value while having an 81% semiconductor BOM.  Making DCS the most impacted by semiconductor tariffs of all CE product categories.

​Needless to say at least some resolution to the trade issues must occur this year and one that is sustainable for at least 2025 and 2026.  If another postponement or interim solution is proposed it will just serve to continue the lack of long-term planning that seems to be the case across the component business, other than in the AI space, which will lead to more difficult circumstances in the out years of this administration, when negotiators will be doing everything possible to run out the clock before committing to major capital spending or purchase agreements.  Without at least some significant agreements on lower tariffs between the US and China, we expect both countries will see slower than expected semiconductor growth over the next few years. 

As the US and China seem to be negotiating over trade and tariff issues, the US Department of Commerce’s Bureau of Industry & Security is said to have sent formal letters to at least three leading EDA firms directing them to halt support of their EDA tools to mainland China.  The three firms, Siemens (SIE.XE), Synopsys (SNPS), and Cadence (CDNS) who represent almost 75% of the EDA tool market, dominate China’s semiconductor design tool market, with local firms representing only ~11.5%.  Siemens, with the smallest share of the three (13%) has already blocked its EDA related sites in China, while both Synopsys and Cadence are awaiting official confirmation and details, although there are questions about the validity of the notifications themselves.
The notifications were said to state that the companies should not be selling EDA equipment to Chinese entities without a license, essentially setting up a review process for all EDA sales and support into China, but some in the administration suggest that while it seems like an outright ban on EDA sales to China, decisions will be made on a case-by-case basis.  EDA tool sales have already been banned for nodes below 3nm (since 2022), but it is thought that the new notification extends that ban to 7nm, which is the level at which China’s leading foundry SMIC (981.HK) has been able to reach commercially, albeit in limited quantities.  Foundries outside of China have been producing at 3nm, typically using EUV tools that are unable to be sold to Chinese customers, leaving them with DUV tools as an alternative, a more complex and costly process.  Further restricting design tools will limit China’s ability to move to 5nm and below, even if they are able to use existing DUV process equipment as the design process will be limited to existing tools designed for more mature nodes and those developed exclusively on the mainland.
While we expect this latest round of potential regulations and limitations might be the administration’s latest negotiating ploy, rarely are these kinds of limitations rolled back, as the government can use its license granting power to pick and choose what and when it will allow such equipment to be sold to China.  The threat is what matters here, and we expect the timing of the potential EDA rule tightening is a way to ‘convince’ China that the US means business and they better come to the table willing to make concessions.  The administration says the stepped up EDA ban is just part of its longer-term investigation of the effects of China’s progress in the semiconductor space, but it seems a bit more transparent than that to us.

Yesterday, the US Court of International Trade ruled that the International Emergency Economic Powers Act does not authorize any of the Worldwide, Retaliatory, or Trafficking Orders issued by the President, and that those orders exceed any authority granted to the President by IEEPA to regulate importation by means of tariffs.  That conclusion entitled thew Plaintiffs to a summary judgement, vacating the orders, a major setback for the Trump administration’s plan to extract massive tariff dollars from our trading partners or force them to negotiate settlements to maintain trading relationships with the US.
The original ‘intention’ of the orders, particular those relating to Mexico, Canada, and China, was to pressure those countries to specifically address the drug problems at the US border, however the Plaintiffs, in this case the states of Arizona, Colorado, Connecticut, Delaware, Illinois, Maine, Nevada, New Mexico, New York, and Vermont, argue that the President’s actions (tariffs) do not directly deal with the drug problems as stated in the EO.  The government acknowledges that the EO creates leverage to ‘deal with’ those objectives, but the court found that such an approach was different from Regan v, Wald, where the Supreme Court sustained on constitutional grounds that the President’s decision to surtail the flow of hard currency to Cuba currency that could be used in support of Cunan adventurism – by restricting travel. 
The court stated that the government’s ‘pressure’ concedes that the direct effect of the country-specific tariffs is simply to burden the countries they target. It is the prospect of mitigating this burden, the Government explains, that will induce the target countries to crack down on trafficking within their jurisdictions.  But the court also states that “…however sound this might be as a diplomatic strategy, it does not comfortably meet the statutory definition of “deal[ing] with” the cited emergency. It is hard to conceive of any IEEPA power that could not be justified on the same ground of “pressure.””
The Justice Department immediately filed an appeal, which will go the U.S. Court of Appeals for the Federal Circuit, which puts it on track for a longer-term legal battle, however as of now, the ‘drug related tariffs imposed on Mexico, China, and Canada will be gone within 10 days from the ruling, along with the retaliatory tariffs, which are also currently on hold.  By no means do we expect President Trump’s tariff hammer to disappear as he will use the resources of the government to find other obscure laws to base his tariffs on.  With ~6 weeks to go before the next deadline there is plenty of time to reinstate if necessary. Followed by more legal challenges.
Note: As of 4 hours ago, the US Appeals court allowed the tariffs to be reinstated until June 9 when the plaintiffs and defendants must respond with updated arguments.
​

The volatile trade situation between the US and China has actually existed for years, however more recent trade issues have been based on agreements set by both countries as early as 2016 and 2017.  But in 2020 the US and China signed the Economic & Trade Agreement, known as “Phase One”, which was to level the trade playing field between the two  countries.  As this agreement is the basis for many current trade issues, we took a look at the agreement itself and how the current situation developed.
Economic & Trade Agreement (“Phase One”) Agreement) between the US Government and the government of the People’s Republic of China.

• BASICS: To Improve access in the agriculture and financial services sectors, refrain from problematic policies and practices related to IP and technology transfer and increase its (China) purchases of certain U.S. goods and services.

Under its 2015 10-year plan the Chinese government targeted 10 sectors where it wanted to raise industrial productivity: Advanced information technology, automated machine tools and robotics, aviation and aerospace equipment, maritime engineering equipment and high-technology ships, advanced rail transit equipment, new energy vehicles (NEVs), power equipment, agricultural machinery, new materials, biopharmaceuticals, and advanced medical device products.

• The goals of the “Made in China 2025” program (a subset of the 10 year plan), are to develop ‘indigenous technologies, IP and know-how, substitute domestic technologies, products, and services for foreign ones, and to capture a larger share of worldwide markets.  The US government sees these goals as problematic in that they are supported by more than $500 billion in governmental financial funding and would create excess capacity and cause ‘long-lasting damage to US interests’, although it is hard to understand why such incentives are different from those offered by the US government.
• Along with the subsidy issue, back in 2017 the US government began a Section 301 investigation into China’s IP practices.  Specifically, the use of a variety of tools to require or pressure the transfer of technologies and IP to Chinese companies.   This is viewed as a way of depriving U.S. companies of the ability to set market-based terms in technology licensing negotiations with Chinese companies, a valid complaint.  The US took it further citing Chinese intervention in markets by directing or unfairly facilitating the acquisition of U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and IP; and conducting or supporting cyber-enabled theft and unauthorized intrusions into U.S. commercial computer networks for commercial gains.  Since then the US reviews all acquisitions of US companies to determine if the technology is sensitive or crucial to the US military or key industries.  They have nixed many such deals.
• ISSUES: Tariffs have been a method for protecting industries from aggressive incursions by those who have  a financial advantage and both the US and China use them.  China’s trade tariff for MFNs was 7.5% in 2023, with an average of 14% for agricultural products and 6.4% for non-agricultural products, but China bound 100% of its lines to the WTO, which means the rates they set are the maximum rates they can collect.  This while not perfect, gives a sense of stability to the tariff system, something the US (under th current administration) has decided not to do.
  • The US government has been complaining that  as of the end of 2024  China has not even met its import tariff rate quotas for most products, which are agreed upon levels that cannot be exceeded without triggering even higher tariffs.   That said, those levels have been exceeded for corn and wheat imports from the US.  The Phase One agreement also required that China make improvements in its administration of TRQs for wheat, corn, and rice, which the US government says that China has not done so. 
  • The US government has also been complaining about other trade barriers it believes China has set up to prevent US companies from developing share on the Chinese mainland, particularly regulations around standards for agriculture, cosmetics, and meats and poultry, along with the difficulties China presents to those external suppliers that wish to participate in the country’s Government procurement programs.
  • Since the 2020 agreement, either individually or as part of the WTO the US and China have had innumerable meetings and discussions concerning the abovementioned issues and other policy complaints, particularly covering IP, trade secrets, trademark ‘squatting’, online piracy (movies, books, audio, etc.), counterfeit goods, and what the US government calls ‘indigenous Innovation’, essentially China’a favored approach to IP developed in China. 

All of these issues, along with similar issues in the financial services sector, and the alleged Chinese government’s inability to follow through on mutually agreed on changes, are the basis for the current administration’s trade policies with China, at least on the surface, while China’s government subsidy programs are also a bone of contention. Labor practices, preferences for state-owned companies, and VAT taxes are also on the list of complaints.
However we note that a quick check of US government subsidies shows that this year the US is estimated to be spending $42.4 billion in direct government farm payments and is expected to spend $181.8 billion for programs like crop insurance, risk coverage, and price loss over the next 10 years.  Fossil fuel direct subsidies and tax breaks typically range from $10 billion to $52 billion each year, but if you count indirect subsidies that benefit the industry, the number climbs to ~$760 billion, and those are only two of many categories, making US complaints about Chinese subsidies a bit moot..
When it comes down to the current state of trade between the US and China, the true motivating factor is political.  Yes, China has the largest trade deficit of any nation with the US, but it is also the largest market in terms of purchasing power parity and the 2nd largest in terms of GDP and is a heavily manufacturing oriented country with a relatively low consumer consumption rate.  As the US consumer is less savings oriented than most other countries with high GDP’s, US consumers are going to want to buy more goods from manufacturing oriented countries like China than China buys from us[1].  Trying to balance trade with China by bringing production of googly eyes or sandbox toys into the US is a waste of time as most small business owners will confirm as it is quite difficult to compete in labor intensive markets.  When threatened, as they are now, China and other manufacturing countries will agree to terms, make token gestures and continue on a similar path as they have been.
Trying to convince US consumers to buy only US made products, even if they are more expensive than those made in other countries only works in time of prosperity, and in most cases US consumers don’t examine everything they buy as to its country of origin.  So expecting all goods that are manufactured in China to shift production to the US is a losing game.  That said, the ratio of US services exported to China against goods imported from China has increased from 3.4% 20 years ago to 10.9% last year.  In creasing that ratio will work toward reducing the US/Chinese deficit more realistically over the long-term, without forcing the US consumer to change habits, buy less from China, or pay more for goods manufactured in the US.  We should certainly try to retore some manufacturing to the US, but it needs to be manufacturing things that are based exclusively on US technology, not generic products that have labor as their biggest cost.
For example, Semiconductors make sense, but not high volume mature node products that are relatively easy to manufacture, just leading edge products and the tools needed to produce them.  When it comes to CE products, how can we compete with rows upon rows of factory workers who get paid (average factory worker) between $8,184[2] and $14,435/year to a US factory worker whose average salary is $53,416[3].  Even when adjusting for purchasing power parity, the US factory worker makes between 3.1x and 1.7x more than the Chinese worker, and that is only the labor cost.  Tariffs are a way of trying to force long-term change in a short period and when it comes to responding China has shown that it can provide lip service for as long as necessary to prevent ‘stick damage’.  They will likely do it again, so perhaps another method should be tried.
 
 


[1] We note that US consumption to gross GDP is 62%; China’s is 39%.

[2] National Bureau of Statistics of China, CEIC

[3] US Bureau of Labor Statistics
 

Rarely do we spend so much time on CE product shipping, but the current tariff situation forces us to pay extra attention, despite a number of CE exemptions.  To be perfectly honest, we have spoken with a number of folks in the shipping business and a lawyer that specializes in import/export and the conclusion we have come to on what the cost of bringing a TV set made in China into the US is…nobody knows.  We have seen calculations ranging from 5% to over 100%, and the variability is enormous.  This leads us to focus more on container prices as an indicator of the broader effects of the tariff situation. 
Container rates generally have been flat over the last few weeks, certainly lower than this time last year (China/East Asia to US West Coast rates are down 31.8% y/y) but still higher than pre-Red Sea crisis rates.  With considerable talk about Chinese shipping cancellations one might expect rates to drop further, but some retailers are making the bet that if they schedule a shipment from China now, by the time it is loaded and shipped, the US/China tariff situation will be settled, and that has kept rates from falling further.  As many CE companies pulled in shipments to fill warehouses in the US, the panic that bare shelves might incite has yet to begin, but those willing to bet on a quick settlement will also be the first to restock shelves even if no deal is reached, albeit at a much higher price.
That bet also has other implications.  If they are correct and the US and China settle their trade differences quickly, there will be a snapback in shipping, likely leading to a short-term rise in container prices as capacity is constrained.  Ports would likely see considerable congestion with shippers desperate to offload and get ships back to China to get as much low tariff product to the US before anything else changes.  But more likely, negotiations will be drawn out and an eventual interim solution will be reached,  which China will honor for a short while and the administration will use as a victory lap.
We note that in January 2020, President Trump signed the “Phase One” trade agreement with China.  The agreement was made on the promise that China would purchase an additional $200b in US goods and services over the 2020 – 2021 period.  According to US data, they purchased only 58% of the total committed amount, which gave President Biden the justification to continue to apply trade pressure.  While the Trump administration will likely use any agreement as an ‘all good’ sign and back off excessive tariffs, we expect that China will do its best to buy only what it needs over the remaining time the current administration is in power.
While this is certainly one scenario, China, as an authoritarian one party state, is less influenced by popular opinion, and at least from the outside, does not seem to be facing much opposition to the tariffs that it has put on US goods.  We expect US consumers will be less forgiving if a trade deal is not quickly reached, especially as 3Q winds down and the holidays approach, carrying much higher prices.  This makes us believe that an agreement will be reached quickly once negotiations start, and those willing to make the current shipping bet will come out ahead, sort of..