Why Tariffs on Chinese ICT Imports Threaten U.S. Cloud-Computing Leadership

Cloud computing—a technology model that enables on-demand delivery of information technology (IT) services such as applications, processing, and storage—has become the modern economy’s foremost computing paradigm. U.S. businesses have pioneered both the development of cloud-computing services and the adoption of cloud computing to increase productivity, cut costs, and foster innovation—spending $70 billion on public cloud-computing services in 2017. Unfortunately, the Trump administration’s proposed tariffs of up to 25 percent on $200 billion of Chinese imports would target many key components that make cloud computing possible. In theory, these tariffs have been undertaken to counteract unfair Chinese trade practices and improve U.S. competitiveness. But their practical effect would be to advantage foreign technology competitors, thereby threatening U.S. leadership in both the adoption and provision of cloud computing, and stunting U.S. economic growth. While contesting Chinese innovation mercantilism remains a laudable and necessary mission, the Trump administration should seek alternative policy measures that do not raise the cost of key productivity- and innovation-enhancing capital goods and services such as information technology and cloud computing.

As this report elaborates, the contemplated tariffs that would hit the U.S. cloud-computing industry would have at least four main consequences, none of which would bode well for the economy.

First, prices would rise, both for businesses and consumers. To the extent these increased costs are passed through as increased prices, consumers and businesses would be forced to choose between forgoing the technology purchases they were planning on making and cutting back elsewhere, such as on new jobs or new expansion.

Second, cloud-services providers would have to cut costs. To not raise prices even further, companies that rely on Chinese cloud-related imports would have to find ways to absorb some of the cost increases. Lower profits would lead to less investment in new data centers or research and development needed to stay ahead of international competition.

Third, cloud providers may be forced to invest elsewhere to remain competitive. U.S. cloud providers are already facing pressure to build more data centers in places like Europe—in light of new privacy laws—and if doing so means avoiding steep American tariffs, they may be more likely to accede because the physical proximity of a data center is not important for many cloud users. This is particularly concerning given an analysis by the Chamber of Commerce found that establishing a typical new data center creates 1,688 local jobs during construction, and 157 local jobs through normal operations going forward.

Fourth, the tariffs threaten to disrupt finely crafted global supply chains for the manufacture of information-technology products—supply chains that cannot easily be reinvented in the short term without significant detriment to, and dislocation of, U.S industry. This is exemplified by the fact that Intel has estimated it would cost nearly a billion dollars to move one of their Chinese semiconductor chip packaging plants. Moreover, in many cases, it may not even be feasible for U.S. tech companies to readily find suppliers for key components outside of China.