Shortly after the Electronic Entertainment Expo (E3) trade show in Los Angeles earlier this month, the big-three console manufacturers sent a joint letter to United States Trade Representative Joseph Barloon. The letter requests the exclusion of video game consoles from upcoming tariffs on China. In asking for that exception, Nintendo, Microsoft, and Sony provide a detailed argument that boils down to “tariffs are foolish.”
The U.S. imported more than 96% of all consoles from China last year. The Trump administration is planning to raise its import tax on virtually every Chinese product to 25%. That means when Nintendo, Microsoft, and Sony bring a console from China into the United States, they have to write a check to the U.S. government for 25% of the cost of every unit. To be clear, China and its businesses do not pay the tariffs. They only pay if they are also the company importing to the States. In the end, American consumers pay through price increases.
This is an especially sensitive issue for Microsoft and Sony, because they are planning on releasing new hardware soon.
“While we appreciate the Administration’s efforts to protect U.S. intellectual property and preserve U.S. high-tech leadership, the disproportionate harm caused by these tariffs to U.S. consumers and businesses will undermine—not advance—these goals,” reads the letter. “Accordingly, we respectfully request that the Administration remove from the final list of tariffs, and thus refrain from applying tariffs on these products.”
The big three go on to argue that these tariffs will harm consumers, developers, retailers, and the manufacturers themselves. To offset the costs of the tariffs, Nintendo, Microsoft, and Sony say they may have to stop hiring or even cut jobs. And an import tax may also stifle innovation as companies look to save money.
Nintendo, Microsoft, and Sony to Trump: Tariffs stink
Publicly, the official talking point out of the Trump administration is that we need tariffs on China to force the country to crack down on counterfeiting, piracy, and state-sponsored corporate espionage. China is absolutely a bad actor when it comes to such issues. To release a product in China as a foreign company, you have to share the detailed plans for how products work. Many companies believe that China then hands those plans to domestic companies to help them steal intellectual property.
For gaming companies, China is also a nightmare. It is nearly impossible to get approval for sale in the country without working with a giant publishing partner like Tencent. And Tencent has so much power that it can take as much as 80% of a game’s revenue, which leaves only a fraction for the original developer.
But the United States was working toward a solution for all those issues. It was called the Trans Pacific Partnership (TPP). You may remember it because it’s one of the first things Trump backed out of after his inauguration. The TPP would have partnered the U.S. with a number of key economies in Asia, and that would have given the TPP bloc a significant amount of power to pressure China.
In comparison, tariffs are a blunt instrument. Actually, I would take a blunt instrument over import taxes. Tariffs are much more like a hammer built out of balsa wood and explosives. You can strike someone with it, but it’s just going to blow off your own hand.
Trump likes tariffs because they hurt — and he doesn’t care who
Trump doesn’t care about pressuring China into taking any action on intellectual property or whatever. He just wants to hurt China. That’s why he loves tariffs. It’s something he can do that puts pain on people in that country.
But as noted above, tariffs hurt Americans as well. And that’s before you consider the fact that China has no choice but to respond with tariffs on U.S. goods. It cannot let trade provocations go unanswered. The only way to get rid of tariffs is with bargaining leverage. That’s why tariffs invariably lead to a tit-for-tat trade war.
And you can tell that Trump doesn’t care about the repercussions because the tariffs can’t actually accomplish what he claims. The idea is that import taxes make it painful to do business in China, so maybe companies like Nintendo, Microsoft, and Sony will move their production back to the United States or possibly somewhere else. But that’s not going to happen.
“The video game console supply chain has developed in China over many years of investment by our companies and our partners,” reads the joint letter. “It would cause significant supply chain disruption to shift sourcing entirely to the United States or a third country, and it would increase costs — even beyond the cost of the proposed tariffs — on products that are already manufactured under tight margin conditions.”
So manufacturing isn’t leaving China. They can continue to charge the same price to make consoles. The big three have no real alternative. The only real outcome from a tariff on game systems is that Nintendo, Microsoft, and Sony raise their prices or the next gen isn’t as powerful as it could be to reduce costs.
Either way, China won’t care.