How will the new tariff announcements impact Ireland’s technology sector

Simon MacAllister: Considering that many technology companies focus more on services than on goods, should we be surprised that technology stocks have experienced a decline?

Grit Young. It's a mixed bag. On one hand, the recent drop in share prices is primarily driven by companies heavily affected by global supply chain disruptions, such as online retailers and consumer technology device manufacturers. On the other hand, many other technology stocks have shown resilience. However, semiconductors stand out as a significant exception, currently under scrutiny by the US administration. Previously, investors and business leaders were optimistic that tariffs would not severely impact AI technology companies. However, the recent announcement of the extensive tariffs and the firm stance could indicate potential challenges ahead.

Simon: Technology as a sector has complex supply chains. How will the new tariffs affect the complex supply chains within the technology sector, and what strategies can be employed to reimagine the supply chains at this time?

Grit: It will be tricky to reimagine supply chains. Much of the world’s technology supply chain, especially around consumer devices, is not easily moved. It relies on significant knowhow and the right type of labour and skills. Analysis by The Economist noted that an iPhone manufactured entirely in the US could cost the consumer US$3,500, a significant increase from the current price of around US$1,000. 

It's therefore still likely to be cheaper to keep production of smartphone devices overseas despite the spiralling tariffs costs. 

Online retailers that rely heavily on goods from the Far East and operate on thin profit margins may face challenges to their business models. Larger retailers, however, are likely to absorb tech development costs and could regain some margin by passing these costs onto consumers.

The impact on the broader technology sector will vary. Perhaps more volatility is yet to come. Companies in the cloud computing space, for instance, may not feel immediate effects. The U.S. is a major exporter of services while importing goods, and if a full trade war develops—especially in light of recent sweeping measures and China’s response—service providers could be targeted by countries worldwide, particularly in the EU. 

While tariffs cannot be directly imposed on services as they are on goods, taxation is possible. The EU had been advancing the concept of a digital services tax before reaching bilateral agreements on Pillar II. Additionally, the EU could increase anti-competition fines, impose penalties for data breaches, and reduce protections for U.S. owned intellectual property. If enacted, these measures would significantly impact many technology companies due to their global presence.

Simon: Do you anticipate the technology industry will experience long-term pressures due to the new tariffs?

Grit: The technology industry generally depends on strong profit margins to fund investments in future technologies and innovations. The most probable outcome is a substantial decline in profit margins for many tech companies. Investors have already begun reallocating their funds from equities to safer assets, which will hinder technology companies' ability to invest in innovation, including AI.

As the most innovative companies of the past two decades begin to feel the strain and reduce their investments, the negative impact on innovation—especially as AI reaches maturity—could be felt for decades to come.

Simon: What potential opportunities do you see arising for the technology sector as a result of the new tariffs despite the challenges they may present?

Grit: I believe there are regional opportunities, particularly for the EU, to advance in the technology sector. The EU has resolved to strengthen its critical infrastructure and defence capabilities. While this may not lead to optimal efficiency in markets and economies, it could foster greater resilience within the system. Increased global competition might also lead to a broader range of innovations.