United States President Donald Trump announced plans for a 100% tariff on the semiconductors that are widely used in everyday electronic devices in a bid to expand the U.S. manufacturing industry and shift reliance away from Chinese imports.
The U.S. semiconductor industry has gradually expanded, thanks to favorable policies introduced during the Biden administration, following years of declining output. Trump’s actions are expected to encourage greater investment in the sector, but will the United States be able to fill the supply gap or pay the heavy duties in the mid-term?
Semiconductors and Tariff Overview
Semiconductors are the foundation for microchips, which are used in a wide variety of electronics, from smartphones and laptops to video game consoles, pacemakers, and solar panels. They contain complex electronic circuits and are built using materials such as silicone. Semiconductors alternate between conducting electricity and acting as an insulator, which permits them to be used as electronic switches.
Some of the world’s main semiconductor producers include the United Kingdom, the U.S., Europe, and China. Over half of the world’s semiconductor supply is produced by the Taiwan Semiconductor Manufacturing Company (TSMC).
In August, President Trump proposed a 100% tariff on the import of semiconductors to spur more domestic production, which has fallen in recent decades. He said that companies would be able to avoid the tariff by purchasing U.S.-produced semiconductors.
If introduced, the tariff is expected to cause delays for companies acquiring supplies of semiconductors as they establish partnerships with U.S. companies. It could also drive up the price of electronics, as companies spend more on imported microchips.
Upon his tariff proposal announcement, Trump said that the tech giant Apple would avoid tariffs by continuing to buy semiconductors from TSMC, which has gradually been developing its U.S. manufacturing capabilities, and that other companies could do the same. Meanwhile, Trump reportedly plans not to impose tariffs on the South Korean firms Samsung and SK Hynix, which have recently invested in U.S. semiconductor manufacturing operations.
Trump has also doubled down on his actions to limit China’s dominance in the semiconductor sector. In August, it was reported that U.S. authorities secretly put location tracking devices in certain shipments of advanced chips to avoid them being illegally diverted to China. The aim is to detect any AI chips that are being diverted to destinations under U.S. export restrictions. The trackers are thought to have been used on shipments from manufacturers, such as Dell and Super Micro, which include chips from Nvidia.
Biden Chips Act
Trump’s proposed tariffs are not the first initiative aimed at bolstering the U.S. semiconductor industry. In August 2022, the Biden administration launched the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, aimed at encouraging investment in domestic manufacturing activities, with a specific focus on semiconductors.
The U.S. contributed around 40% of the global semiconductor supply in 1990. However, this figure has fallen to around 12%, as other world powers have increased their chips production. In addition, the U.S. does not currently produce many advanced chips, with Taiwan producing over 90% of the world’s supply.
The CHIPS Act earmarked $53 billion in federal financial initiatives for domestic semiconductor manufacturing and research and development. Both U.S. and foreign semiconductor producers became eligible for a 25% tax credit under the law. By April 2024, companies had announced over $200 billion in private sector investment in the sector.
Hundreds of companies have submitted statements of interest and have requested more than $70 billion in subsidies—nearly double the amount available, which led many to call for a CHIPS II Act.
Chips Industry Development and Supply Challenges
In March, McKinsey & Company published an analysis entitled “Creating a thriving chemical semiconductor supply chain in America”. Despite the introduction of a wide range of financial incentives aimed at accelerating sectoral development, the authors believe that “The United States is expected to face a meaningful supply gap for many materials by 2030, with approximately 60 percent of materials supply chains relying on imports.”
The analysis suggests that “It will likely require an investment of approximately $9 billion in one-time capital expenditures to close the materials gap and match the pace of semiconductor manufacturing capacity buildup in the United States.” If this is achieved, it could support the establishment of greater regional independence.
This is concerning in the face of the potential new tariffs, as it is not clear whether the U.S. would be able to ramp up its semiconductor production at the pace needed to meet the domestic demand, which would leave many to depend on expensive microchip imports, as they likely shift the cost to the consumer.
As Trump builds upon previous policies aimed at expanding U.S. semiconductor manufacturing, there are concerns that shortages could lead companies to invest in expensive imports to bridge the gap while they wait for new domestic production to come online. This could force electronics manufacturers to increase the price of their products in the mid-term.
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