RESEARCH TRIANGLE PARK – Yes, even “cloud computing” could be hurt by the increasing global trade acrimony that a growing number of media, governments and leaders in the private sector are labeling a “trade war.” And consumers could suffer since so much of the economy now relies on the cloud for services such as ecommerce, data analytics and much more.
“Many Americans will feel the impacts of the proposed tariffs on cloud computing through increased prices, lost jobs, and decreased economic opportunity,” said Caleb Foote, Information Technology & Innovation Foundation research assistant and co-author of a new report warning about the consequences of tariffs. “The administration should pursue alternative policy measures that don’t raise the cost of key productivity- and innovation-enhancing capital goods and services.”
The global market for cloud-computing services is worth $260 billion today, including at least $70 billion in the United States, and it is expected to nearly double by 2020, according to the Washington, D.C.-based think tank. Its research shows that 93 percent of U.S. businesses rely on cloud computing, and more than 3 million data centers, which play a central role in delivering cloud-computing solutions, have already been built in all 50 states across the country.
“[T]he 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,” the foundation warns in the report, which was published Tuesday.
The impact could be especially big in the tech-focused Triangle, where tech giants such as Red Hat, IBM, Lenovo, SAS, Cree, life science companies and others grow increasingly reliant on increasingly ubiquitous cloud-related services or sales of products such as semiconductors to help drive computers and other devices. Cree, for example, recently warned that tariffs could affect its business. Other businesses wouldn’t escape impact, either, such as Internet of Things-focused apps and services or existing firms, startups and emerging ventures which incorporate the cloud into their business strategy and execution.
While much of the tariff debate to this point has focused on cars, crops, steel and other products, the high-tech sector is becoming a bigger target. And the cloud computing business could get darker, so to speak.
U.S. businesses spent $70 billion on public cloud-computing services and the adoption of cloud computing to increase productivity, reduce costs, and foster and facilitate innovation in 2017, according to data from the International Data Corporation (IDC). The modern economy relies on the power of cloud computing, and U.S. companies have pioneered the growth of the industry and driven the mass adoption of the innovation.
“While the tariffs were proposed to counteract unfair Chinese trade practices and improve U.S. competitiveness, they in fact hurt U.S. cloud computing competitiveness,” said Stephen Ezell, ITIF vice president for global innovation policy and lead author of the report. “The administration’s proposed tariffs on key capital goods imports [such as information technology products like semiconductors] are the wrong way to go about it.”
Ezell believes that tariffs “threaten U.S. leadership in cloud computing and stunt U.S. economic growth.” And he sees four main consequences, each with potentially harmful effects to the economy as a whole and to the cloud computing industry.
- Prices to rise for businesses and consumers
The primary consequence is the increase in pricing for businesses that rely on cloud computing technology and on cloud services. “To the extent these increased costs are passed through as increased prices,” the report reads, “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.”
- Cloud-services providers forced to cut costs
In order not to raise prices too high, cloud-services providers are expected to trim budgets and cut costs. For example, companies that rely on Chinese imports to operate and run their cloud services businesses would be forced to identify additional ways to absorb cost increases due to tariffs. One potential byproduct of lower profits due to higher costs is less investment in new data centers, research and development, or other innovation investments that would enable U.S. companies to continue to pioneer new technologies and stay ahead of global competitors.
- Cloud-services companies may invest outside of the United States
In fact, the report cautions, those same cloud providers may remain elsewhere to remain competitive in the global marketplace, including for their customers in the United States. “U.S. cloud providers are already facing pressure to build more data centers in places like Europe,” claims the report, “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.”
A 2017 report from the U.S. Chamber Technology Engagement Center found that the average data center adds $32.5 million in economic activity to its local community each year, producing $243.5 million in output along the local economy’s supply chain and generate $9.9 million in revenue for state and local governments. This includes the average addition of 1,688 local workers during construction and another 157 local jobs supported by the data center, paying those workers an average of $85.5 million.
- Tariffs threaten to disrupt global supply chains
Supply chains matter—and tariffs threaten to dislodge or disrupt the existing supply chains for the manufacture of information-technology products. Reforming or recrafting supply chains is challenging and expensive to do in the short term—doing so would likely hamper a company’s ability to invest in new projects or research. It may be nearly impossible for some companies to find suppliers for their key components that are not based in China.