Ashok Chandak, President, IESA
The U.S. government’s imposition of a 25% or higher tariff on semiconductors is poised to have far-reaching effects on the global semiconductor industry. This move will influence costs, supply chains, innovation, and geopolitical dynamics, shaping the industry’s future.
Limited Impact on India
India is unlikely to face major short-term repercussions, as it is not a significant semiconductor exporter to the U.S. Furthermore, India’s semiconductor import duty is already zero, eliminating reciprocal tariff concerns.
- Most of India’s upcoming semiconductor manufacturing and Outsourced Semiconductor Assembly and Test (OSAT) facilities serve global brands.
- India’s rising domestic semiconductor demand will rely on local production, reducing import dependency.
- In the long term, Indian semiconductor firms will not face major disadvantages, as the U.S. tariff is expected to apply uniformly to all exporting nations.
Rising Costs for U.S. Consumers
A 25% tariff will substantially increase the cost of semiconductors imported into the U.S., particularly from Taiwan, South Korea, and China, which lead global chip production.
- Higher Prices for Electronics: The added costs will likely be passed on to consumers, making smartphones, laptops, electric vehicles, and industrial electronics more expensive.
- Pressure on U.S. Companies: Companies dependent on semiconductor imports, including Apple, NVIDIA, and Tesla, may face higher production costs, affecting profit margins and pricing strategies.
Supply Chain Disruptions
Reshuffling Global Supply Chains
- Companies may seek tariff-free chip sources or boost domestic investments to reduce risk.
- However, shifting supply chains is complex and time-consuming, as setting up new semiconductor partnerships can take years due to the high costs and technical challenges involved.
Challenges in Fab Construction
- Semiconductor fabs are among the most intricate and expensive industrial facilities to build, with costs ranging from $10 billion to $25 billion per site.
- Investment decisions depend on multiple factors, including talent availability, tax policies, regulatory conditions, and environmental and labor market factors.
Geopolitical Consequences
Strained U.S.-Asia Relations
- Taiwan (via TSMC) and South Korea (via Samsung) dominate global semiconductor production. The tariff could strain diplomatic and trade ties with these crucial U.S. allies.
Formation of Non-U.S. Trade Alliances
- Other nations may strengthen semiconductor trade relationships to counterbalance U.S. tariffs. This could lead to increased collaboration between Europe and Asia, ensuring stable supply chains independent of U.S. policies.
Increased Regionalization
- The semiconductor industry, traditionally dependent on globalization, may shift toward regionalized production hubs to mitigate future trade risks.
Impact on U.S. Technology and Innovation
Challenges for U.S. Tech Giants
- Companies like Apple, NVIDIA, and Tesla, which depend on imported semiconductors for advanced products, may experience delays and cost escalations.
U.S. Domestic Semiconductor Manufacturing: A Long-Term Strategy
- While tariffs may encourage domestic semiconductor production, scaling up U.S. manufacturing requires extensive investments and time.
- The U.S. has already launched initiatives like the CHIPS and Science Act, but even with incentives, establishing high-volume, cost-effective fabs will take years.
- Limited Immediate Benefits: Tariffs alone will not trigger rapid semiconductor manufacturing growth in the U.S. Existing multi-billion-dollar fabs cannot be relocated overnight, and new investments will be planned based on long-term market needs.
Overall Outlook
While the tariff aims to boost domestic production and align with U.S. national security interests, it also presents significant risks, including supply chain disruptions, higher consumer costs, and strained global trade relations.
Additionally, this move could potentially violate the Information Technology Agreement (ITA), an international treaty signed by the U.S. and several countries. Major U.S. semiconductor firms may oppose the tariff, as many rely on Asian foundries and OSAT facilities for production.
Ultimately, while tariffs are a major factor, companies prioritize zero tariffs on the extensive range of components and materials required for semiconductor production over the chips themselves. As a result, the broader supply chain implications may outweigh the intended benefits of the tariff.