By Clay Chandler and Eamon Barrett
May 25, 2019

Greetings from Hong Kong. Clay Chandler, filling in for Alan, with CEO Daily’s weekly Sino-Saturday edition.

When the Trump administration slapped punitive tariffs on Chinese imports last July, Apple was the only major American tech firm granted an exemption. Because US consumers are so addicted to their iPhones, and because so many Chinese workers are employed by Apple suppliers, investors mostly figured the trade war’s destroying angel would pass the US tech firm by.

Not even Tim Cook could deter the optimists. In January he slashed Apple’s revenue forecast and warned in a letter to shareholders that weakness in the Chinese economy, which Apple counts on for about a fifth of its revenue, could drag down the company’s financial results. Never mind. Apple’s share price sank 7% to $142—then, over the next four months, rallied to $211.

And yet this month’s sharp deterioration in US-China trade relations should give pause to even the most die-hard Apple bulls. Analysts are waking up to the fact that Apple can’t escape consequences of the next round of US tariffs. Morgan Stanley estimates those duties will increase the cost of an iPhone by $160.

The bigger worry is that Trump’s move this week to forbid US companies from selling technology to Chinese telecom gear giant Huawei Technology has painted cross-hairs on Apple’s back.

The Huawei ban takes trade hostilities to def-con 4; Fareed Zakaria calls it China’s Sputnik Moment. If fully implemented, the ban would cripple China’s leading tech manufacturer. Chinese officials have decried the measure as a “cynical” act of “bullyism,” and charged Trump with mobilizing the full force of the state to crush a Chinese firm. If Beijing sticks with its current policy of “tit-for-tat” retaliation, Apple would seem an obvious target for reprisal.

On Wednesday, analysts at Goldman Sachs, while stressing that “we are not assuming restrictions on iPhone production in mainland China at this point,” nevertheless estimated such a ban or “some other restriction on Apple products” could drag Apple’s earnings down 29%.

Even if Beijing doesn’t go after Apple directly, it can inflict pain in other ways. The Street.com suggests a Chinese ban on rare earths would be a huge headache for Apple. Beijing could also encourage a nationalist backlash against Apple products among Chinese consumers; there’s some evidence that’s already happening.

Yet even the most zealous Chinese nationalists find Apple’s charms hard to resist. The deputy chief of mission at the Chinese ministry in Islamabad gained momentary celebrity on social media this week with a photo showing how Huawei has “cut Apple to pieces.” He quickly became a figure of ridicule after it was revealed that he had taken the photo on an iPhone.

More China news below.

Clay Chandler
@claychandler
clay.chandler@fortune.com

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