Exemption of Networking Equipment from Trump’s China Tariffs Offers Temporary Reprieve, but Industry Is Already Readjusting to the New Trading Reality

Early April saw the rapid escalation of tariffs on trade between the United States and China. President Trump’s April 2 “Liberation Day” suite of tariffs introduced a further 34% levy on all goods deemed to originate from China and Hong Kong, on top of the 20% tariff enforced by his March 3 executive order, bringing the total up to 54%. In retaliation, China implemented its own 34% tariff on all U.S. goods, which triggered Trump to impose an additional 50% on Chinese goods, raising the total tariff up to 104%. Not to be outdone, China also hiked its tariff 50% up to 84%, to which the U.S. response was to raise their rate to 125% on top of the 20% from March 3, for a total of 145%. China subsequently increased their total tariff up to 125%, at the same time signaling that they would refrain from any further moves because the existing high rates already meant that U.S. goods in China were essentially unmarketable. It was then revealed on April 12 that networking equipment, including Wi-Fi routers and network modems, would be exempt from the additional 125% tariff (see exempted products under tariff classification 8517.62.00), although they are still subject to the 20% blanket tariff from early March, and are expected to be slapped with another set of separate tariffs in the near future. While the style and speed with which tariffs were enacted and then withdrawn on Chinese networking equipment may be shocking to the outside observer, both Chinese networking Original Design Manufacturers (ODMs) and their U.S. customers were not caught completely off-guard, as they have invested significant resources over the past half decade in preparing for any potential breakdown in trading relations between the two countries. This ABI Insight reveals the ways in which Chinese networking ODMs have prepared for further U.S. restrictions on their products, explores how the U.S. networking equipment industry will be impacted by retaliatory measures from the Chinese government, and provides foresight on the potential ramifications of this recent trade spat on the global networking equipment market.

It should be recognized that this new suite of tariffs is only the latest chapter in a multi-year decoupling between the world’s two largest economies, and they follow on from successive rounds of targeted export controls from the U.S. Commerce Department’s Bureau of Industry and Security (in October 2022, October 2023, and December 2024) on the export of advanced chipsets for Artificial Intelligence (AI) applications and semiconductor manufacturing equipment to China. Whereas higher Liberation Day tariffs on all other nations were delayed for 90 days (aside from the 10% blanket rate), China’s tariffs were escalated up to 145% for most items, with the exempted items given only a temporary reprieve at 20%. This reflects a deep-rooted belief from many in the U.S. government that a severing of trade ties between the United States and China is a desirable outcome, and that while there is potential for a mutually beneficial deal to be made with other nations, there is no acceptable compromise to be made with China. Compounding tensions is the fact that neither side is willing to signal weakness and both believe they have the upper hand. Confident that he possesses the advantage, Trump calculates that a strategy of relentless and unyielding pressure will eventually result in China’s capitulation, whereas China’s Foreign Ministry believes that it has sufficient tools and resources to counter the U.S. threat, and vows that it will “fight to the end.” Ultimately, given that the U.S.-China trade conflict is systemic in nature and, unlike other nations, cannot be resolved simply by rebalancing trade, companies should consider sustained political friction and trade restrictions between the two sides as the base case scenario, and prepare accordingly. This extends to the networking equipment industry, whose exemption from the additional 125% tariff does not shield it from being targeted again in the future.

None of the events of the last several weeks would have come as much of a surprise for Chinese networking ODMs, for they have been facing an unpredictable economic climate and ever-increasing U.S. pressure for over half a decade at this point. While scrutiny on Chinese networking vendors was gradually ramping up in the late 2010s, the sudden shock of the COVID-19 pandemic was the real watershed moment, after which the market saw irrevocable change. In the wake of the supply disruptions caused by the strict COVID-19 lockdowns in Mainland China across 2020 to 2022, virtually all major U.S. Internet Service Providers (ISPs) and networking equipment brands sourcing from Chinese networking ODMs have worked to diversify their supply chain away from China. Moreover, heightened security concerns have resulted in Chinese suppliers facing ever-increasing scrutiny. TP-Link for example, the world’s largest vendor of Wi-Fi routers for the retail market, has been the subject of a long-running U.S. government investigation into whether its equipment poses a cybersecurity risk to U.S. consumers, with many calling for an outright ban of TP-Link sales in the United States. These factors, alongside the general deterioration of the U.S.-China relationship, have already compelled many Chinese vendors to abandon the U.S. market altogether. For the rest, they long-ago came to the realization that substantial adjustments to their business model were necessary if they were to continue operating in the U.S. market.

As previously reported on by ABI Research, in recent years Chinese networking ODMs have drastically increased their investments in foreign production sites in order to circumvent existing restrictions on Made-in-China products and prepare for future ones, as well as to benefit from lower local labor costs. Vietnam has proven to be the most popular choice for overseas manufacturing sites, with Malaysia also emerging as a key destination. With manufacturing sites and logistics infrastructure now firmly established in these nations, they are well-equipped for Chinese networking ODMs to take advantage of them to sidestep tariffs on their equipment from the United States or any other nation. Indicative of Southeast Asia’s newfound role within China’s overseas trading network, Chinese exports to the region surged to their second highest on record in March 2024, with a large portion of this trade presumably consisting of supplies sent in anticipation of further U.S. trade restrictions on China. It was with this in mind that Vietnam was assigned a 46% tariff by the United States on the April 2 Liberation Day, a figure even higher than China’s initial 34%. The implication was that Vietnam, and countries in a similar position, must choose between China or the United States (not coincidentally, Chinese leader Xi Jinping’s first foreign trip this year, which began on April 14, is to Vietnam and Malaysia, alongside Cambodia). The potential imposition of sizable tariffs on Southeast Asia poses a major challenge to Chinese networking ODMs relying on business from the U.S. market, because although they no doubt expected restrictions on goods from the Chinese Mainland, they likely did not foresee the scale of the tariffs that are being proposed for Southeast Asia. Thus, for many Chinese networking ODMs it will be the final tariff that is placed on the home of their overseas facilities, rather than on China itself, which will have the biggest impact on their operations.

Just as Chinese ODMs failed to anticipate the size of the proposed tariffs on Southeast Asian nations, U.S. networking equipment brands and ISPs procuring networking Customer Premises Equipment (CPE) also placed their bets on this fast-growing region, believing that de-risking away from China and reorientating to Southeast Asia would afford them supply chain resiliency (in many cases, the suppliers of these U.S. firms are still Chinese ODMs operating in Southeast Asia). Unfortunately, this has now left them equally as vulnerable to the disruption that tariffs on Southeast Asian nations would cause, and they will exist in a state of limbo until they gain more clarity on the exact nature of the tariffs. In the meantime, businesses will be incentivized to refrain from making large investments and delay decision-making until there is more certainty on the exact tariff rate imposed on their supplier’s country of origin.

U.S. firms are also burdened by the reality that, at least in the near term, reshoring the production of networking equipment to the United States would be unlikely to prove profitable for them. The hyper-competitive race to the bottom nature of the networking equipment market, where successful ODMs are forced to produce equipment at scale with very low margins, mean that the manufacture and assembly of the equipment itself offers negligible value-add. Large capital investments would also be necessary in order to build the requisite capacity or capabilities. At the same time, the little upside that U.S. vendors will gain from these developments, such as supplanting low-cost Chinese CPE in the U.S. residential market (U.S. vendors are already overwhelmingly dominant in the U.S. enterprise market), is unlikely to outweigh the drawbacks. There is also no escaping that fact that removal from the market of cost-effective Chinese networking equipment—either because it is no longer low-cost due to tariffs or because it becomes subject to an outright ban—will end up being highly inflationary in the near term. 

Another underappreciated threat to the U.S. networking industry is China’s retaliatory measures. Over the past several years, China’s retaliatory toolkit in the face of U.S. export restrictions has become progressively more targeted and creative, leveraging the country’s dominant position in the global production of critical minerals, particularly Rare Earth Elements (REEs), of which China controls around 70% of worldwide production. The first wave of Chinese export restrictions on critical minerals began in August 2023, when the country’s Ministry of Commerce (MOFCOM) implemented export controls on Gallium and Germanium. This was then followed by the expansion of export controls to Graphite in December 2023 and Antimony in September 2024, and then in direct response to the Biden administration’s third round of semiconductor export controls to China in December 2024, a complete ban on shipments of Gallium, Germanium, and Antimony to the United States was enforced. Now, alongside hiking tariffs on U.S. imports into China to 84%, China has mandated the approval of export licenses for the export of seven Heavy REEs—Dysprosium, Gadolinium, Lutetium, Samarium, Scandium, Terbium, and Yttrium.

Each of the critical minerals and REEs were strategically selected on account of their centrality to the production of advanced technologies, such as semiconductors and lithium-ion batteries. Several of them are integral to the manufacture of components used throughout the Wi-Fi industry. Gallium, for example, is a vital element used for Gallium Arsenide (GaAs) wafers, the dominant substrate currently used for Wi-Fi Front End Modules (FEMs) due to its high performance and efficiency levels compared to alternatives. The Heavy REE Scandium is also relied upon for the Radio Frequency (RF) FEMs found in Wi-Fi modules. While the immediate impacts of the export restrictions/bans on the global production of Wi-Fi FEMs will be slight due to the relatively minor role the United States plays in their manufacture, they will hamper U.S. efforts to ramp up the manufacture of these products domestically.

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