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The author is the author of “Chip War.”
The US government is “looking at the entire supply chain of semiconductors and electronics,” President Donald Trump recently declared. Given his repeated promise to impose tariffs on imported chips, we must assume that some action is coming. But what type and what will it end?
Trade data shows that the US imports about $300 billion in chips each year, mainly from Southeast Asia. Will customs duties lead businesses to replace these imported products with domestically made chips? That’s not necessarily the case. The United States has little labor-intensive assembly and packaging capabilities that have been offshore to Asia since the 1960s.
So, if the US imposes tariffs on semiconductors, companies could respond by producing more to offset the increased costs. Instead of importing chips and placing them in domestically made appliances or vehicles, suppliers could move the entire process overseas. These finished products still face tariffs, but at least they are low-cost in manufacturing.
Most chips are already in the US as part of other devices. To acquire this trade, Washington is looking at more dramatic measures, imposing so-called components tariffs on semiconductors. This means summing the value of foreign-made chips in the device and imposing customs duties based on that.
This approach fits the multinational nature of modern supply chains. While the iPhone may be assembled in China, most of the important components come from elsewhere. Here, there is a precedent for watches. Here, tariff rates are calculated based on components such as batteries and wrist straps.
The Biden administration previously considered imposing component tariffs on Chinese chips before retreating, but was concerned about the complexity. However, impose component tariffs on chips from China, which produce less than 3% of the chips in the US supply chain, is much easier than impose tariffs on all foreign chips.
Currently, there is no substitute for the amount and quality of chips produced in Taiwan and Korea. Building a new chip fab takes years. Therefore, the component tariff regime for all foreign chips serves as a major tax increase for electronic equipment.
This raises the question all: what problems is the semiconductor tariff trying to solve?
For example, there is widespread support to limit US Chinese semiconductor use. Imposing component tariffs on Chinese chips will achieve this goal at a limited cost. But the Trump administration’s ambitions are broader than restructuring trade with China alone.
How about reusing the manufacturing? Imposing components tariffs on Taywan’s mud chips will ensure that the leading chip maker TSMC will provide an incentive to continue its US manufacturing investments. However, building chip plants takes time. And unless tariffs are phased out over many years, additional costs may be added to items sold in the US.
Moreover, Trump’s combination of threats and deals has already led chip companies to double their own diversification efforts. TSMC now says it aims to produce 30% of the cutting-edge 2NM chips in Arizona when all the new fabs are completed.
Some administrative officials are aiming for a broader goal: self-sufficiency. However, reversing all the efficiency of globalization comes at dramatic costs and involves deep contradictions. Certain important parts of chip-making equipment are produced by a single Japanese or Dutch company. Adding tariffs to these – as the administration’s investigation is considering, it will be more expensive to manufacture chips domestically and undermine the US’s competitiveness. The major US chipmakers will be one of the victims of a wide range of chip tariffs.
This is why the administration should focus on China’s chip subsidies, which is unique, big and skewed. Other major chipmakers, such as Japan, South Korea, Taiwan and Europe, have similar policies to the US. One of the findings of the survey is the divisional contracts with these countries regarding chips and AI. For example, commit participants to eliminate non-trade barriers and continue to build diverse supply chains.
Wide tariffs do not achieve this. America’s most successful companies rely heavily on tips. Their AI aspirations will require even more computing power. Self-sufficiency can only be achieved at incredible costs. It would be better to build a global chip industry that can produce semiconductors not only reliably but also efficiently.
