Inc. dodged stinging duties on its smartwatches and wireless earbuds after the U.S. excluded those gadgets from tariffs on $200 billion in Chinese goods, though the tech giant still faces retaliatory measures being weighed by China that could strike iPhone production there.
The trade tensions are rattling companies in a range of industries, but Apple’s heavy dependence on the U.S. and China makes it especially vulnerable as the world’s two largest powers escalate their economic feud. Because Apple assembles almost all of its gadgets in China, its watches, AirPods and other devices are vulnerable to the Trump administration’s plans to widen the scope of tariffs on Chinese imports—a risk Apple warned about earlier this month.
That reliance also could make the iPhone and other devices vulnerable if Chinese officials follow through on retaliatory moves to restrict sales of materials, equipment and parts key to U.S. manufacturers—measures The Wall Street Journal on Sunday reported that Beijing is considering.
The timing of the countries’ new measures could be especially bad for Apple, which this week starts shipping two of its three new iPhones and a new smartwatch. Those new devices are expected to help fuel the company’s sales in the final three months of the year, when Christmas shopping helps deliver about one-third of Apple’s annual revenue.
China’s threatened retaliatory moves in particular “could be fairly devastating,” said Mark Vena, an analyst with Moor Insights & Strategy, a technology research firm. He said Apple should have enough inventory of key components for iPhones and smartwatches to maintain production through the holidays, but in the long term, Chinese retaliation “could be a serious problem.”
The Trump administration’s break for smartwatches and wireless headphones, which were slated to be hit by 10% tariffs starting Sept. 24, come at a critical moment for Apple. The company this week starts shipping a new smartwatch along with two of its three new iPhones. Those new devices are expected to help fuel Apple’s sales in the final three months of the year, when holiday shopping helps deliver about one-third of annual revenue.
Apple Chief Executive Tim Cook has urged Mr. Trump to avoid a trade battle, saying it would hurt U.S. companies. Mr. Cook had expressed optimism during a July call with analysts that the trade dispute would “get sorted out” because each country needs the other to prosper.
But Apple early this month said in a filing with the U.S. Trade Representative that the administration’s planned tariffs on $200 billion in Chinese goods would hit its smartwatches and wireless AirPods headphones.
In the U.S., the proposed tariffs of 10% would have added more than $11 to the import cost of about $115 for a Chinese-made Apple Watch Series 3, according to market researcher IHS Markit. Analysts say Apple would either eat those costs on the device, which retails for $269—and similar costs on other products such as AirPods—or pass the costs on to retailers and consumers.
“Apple’s profit margins are very healthy,” so the company could have withstood the tariffs better than most, said Wayne Lam, an analyst with IHS Markit. Still, he said absorbing the costs of the tariffs would have reduced Apple’s gross margins on its smartwatch, which are now more than 40%.
The Trump administration’s decision to spare smartwatches and wireless headphones comes despite the president’s suggestion the only way Apple products would be spared would be if the company started making its products in the U.S. He called on Apple in a tweet last week to “start building new plants now.”
Though the U.S. removed smartwatches and wireless headphones, it estimates the tariffs will still affect about $200 billion in goods when they are implemented. Other products that came off the list included chemical inputs, bike helmets and child-safety furniture such as high chairs and playpens.
Those planned tariffs, and others already imposed on about $50 billion of Chinese imports, don’t affect the iPhone, which accounts for about two-thirds of Apple’s total sales. That could change for the iPhone if the Trump administration follows through with earlier threats to expand its levies to a total of $500 billion in imports, or nearly all the goods the U.S. gets from China.
A big risk is possible Chinese retaliation, said Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. Sales in China accounts for about one-fifth of Apple’s total revenue, and trade experts, and analysts have long feared the country could increase the value-added tax of 16% it already levies on iPhones and other goods.
A move to block suppliers from delivering key components to Apple “is the embodiment of the worst-case scenario,” said Mr. Sacconaghi. Apple’s supply chain is so established in China that “there’s no short-term workaround,” he said.
China will have to be sensitive to how any such retaliation might affect Chinese workers. Apple employs about 10,000 people directly in China and indirectly accounts for three million jobs there through its supply chain.
In the U.S., Apple directly employs about 80,000 people and claims responsibility for two million jobs around the country, including those of suppliers, app developers and entrepreneurs who offer products across its devices.
Write to Tripp Mickle at Tripp.Mickle@wsj.com