Tariffs Will Impede the Development of the Internet of Things (IOT) in the United States

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The Internet of Things (IOT) is another ongoing transformational technology that is changing and will continue to change our lives.  Gartner calculates that there were roughly 8.4 billion IOT connected devices in 2017 and there will be about 20.4 billion in 2020.   This SIIA White Paper describes the benefits for consumers, energy, agriculture, manufacturing, and healthcare.   

The United States, among other countries (including China) is taking advantage of the opportunities presented by IOT.  The important thing in this context is to maintain and, if possible, expand the American IOT adoption rate.  Why is this important?  First, it matters because the United States has a comparative advantage over China in this space.  Second, manufacturing, a sector prioritized by the Trump Administration, will be one of the biggest beneficiaries of IOT.  Third, consumers benefit economically from IOT, but the technology is also a matter of convenience, which is why so many consumers are eager IOT adopters.

Taken together, the factors mentioned above explain why the proposed tariffs on imports from China do not benefit consumers, businesses, and the national economy overall.  Exhibit A is proposed tariffs on smart thermostats that would likely slow the adoption of this technology, which millions of American consumers already benefit from.  This SIIA submission to USTR argues against these specific tariffs.  It would be a mistake in general to make products and components needed for IOT development more expensive.  Another example of a proposed tariff that would harm the development of the IOT sector in the United States is the proposal to impose tariffs on certain components that are important to build data centers.  The United States is the world leader in cloud computing, which is critical to the development of data voracious IOT applications.  Anything that increases cloud computing costs would inhibit the development of the IOT sector in the United States.       

Accenture places the United States number 1 with respect to the IOT enabling environment.  China is in the fourteenth position.   By 2030, Accenture estimates that IOT could add $6,132 billion to U.S. GDP in the next 15 years vice the possibility in China of adding $497 billion in the next 15 years.   So China will do well in IOT, which is fine.  All things being equal though for the United States, it is better for us if we do better in this crucial technology.  And assuming we have a good enabling environment, including the ability to construct cost-effective supply chains, we will do better in a relative sense than China.  But for the United States to continue to enjoy this comparative advantage, it is crucial to continue to allow U.S. firms to construct the most cost-effective supply chains possible.  This is especially true, as is the case with respect to smart thermostats, when there are no Chinese technology companies of the type favored by the Chinese government competing in the U.S. market.

Bloomberg suggests that about half of the benefits of the tax bill for the U.S. manufacturing sector could be lost if the proposed tariffs are enacted.  Steve Ranger writes about the importance of IOT-related investments in the manufacturing sector.  Based on IDC numbers, in 2018 global IOT spending in manufacturing will be $189 billion, in transportation $85 billion and in utilities $73 billion.  With respect to smart thermostats, the value-added software development is performed in the United States.  Why endanger that value-added work by making it more expensive to source the non-intellectual property rights relevant lower-value final assembly of smart thermostats?

Furthermore, smart thermostats have already been a boon to U.S. consumers in terms of saving on energy costs.  One study shows that smart thermostats can help U.S. consumers save up to 12% on heating costs and 15% on cooling costs.  Cost increases slow down smart thermostat adoption.  There are likely other examples among the proposed tariffs that could impede the development of the Internet of Things in the United States.  Again though, why harm a sector that is likely going to be a major factor in U.S. growth in the coming years?   

The bottom line is that the proposed tariffs hurt U.S. competitiveness by making it more expensive to capitalize on U.S. strengths such as the Internet of Things.  So, let’s not choose the tariff route.  Instead, let’s work with our allies to open up markets in China for American companies.

Carl Carl Schonander is Director of International Public Policy at SIIA.