Anticipated Significant Economic Impact from Unspecified Tariff
President Donald Trump is considering imposing a tariff of “25% or higher” on all semiconductor chips imported by the United States, stating to reporters on Tuesday that rates could potentially increase substantially over the next year. Unlike items such as cars and pharmaceuticals, which Trump indicated would soon face tariffs of at least 25%, semiconductor chips are not typically purchased individually by the average American consumer. However, these tiny components are essential for powering nearly all electronic devices in our daily lives, including medical equipment, Wi-Fi routers, laptops, smartphones, vehicles, household appliances, and LED lightbulbs. For example, modern cars incorporate thousands of these chips.
A shortage of chips was swiftly experienced during the peak of the Covid-19 pandemic, as Americans sought to enhance their technology with their stimulus funds, particularly investing in laptops, monitors, and other electronics crucial for remote work and learning, leading to a surge in demand that companies struggled to meet. To expedite product launches, many turned to Taiwanese companies, which possess and continue to enhance their advanced chip manufacturing capabilities compared to the United States. Taiwan has benefitted from its proximity to the essential raw materials for chip production and has received government support for the industry since the 1970s, resulting in unparalleled technological advancements compared to other nations.
According to data from the Commerce Department, the US imported $139 billion worth of semiconductors and electronic components last year, with Taiwan accounting for 27% of these imports. This makes Taiwan a significant source of chips and electronic components shipped to the US, with the value of these shipments increasing over sixfold from $9.4 billion in 2019 to $36.9 billion in 2024.
Conversely, the US exported $70 billion worth of chips and electronic components globally last year. Given the US’ heavy reliance on Taiwanese chips, particularly advanced ones crucial for newer electronics, a 25% tariff on chips could substantially elevate the prices of many consumer goods in the US.
While domestic chip production is set to expand, it still lags significantly behind Taiwan. The CHIPS and Science Act, passed by Congress in 2022 with bipartisan backing, allocated $53 billion over the next five years to support the US in reclaiming a prominent position in semiconductor chip manufacturing. According to a 2024 report by the Semiconductor Industry Association and the Boston Consulting Group, the investments and incentives offered to domestic chip manufacturers could potentially triple US chip manufacturing capacity by 2032.
However, despite some companies, including major chipmakers like Taiwan Semiconductor Manufacturing Company, Intel, Micron, and Samsung, transferring more production to the US to benefit from the CHIPS Act, the majority of advanced semiconductor chips powering consumer electronics in the US still originate from Taiwan. As per a 2020 report by the Congressional Research Service, Taiwan’s production alone accounts for over 90% of the world’s advanced chip manufacturing capacity.
Even if tariffs spur increased domestic
Rakesh Kumar, a distinguished electrical and computer engineering professor at the University of Illinois Urbana-Champaign, points out a crucial factor in the manufacturing process of computer chips. He highlights the reality that despite the potential for increased domestic chip production in the United States, the chips would still need to be exported to countries such as Taiwan, South Korea, China, and Mexico to be integrated into the final electronic products purchased by Americans. This situation opens the possibility for these goods to be subject to tariffs, particularly as President Trump explores the implementation of “reciprocal tariffs” on other nations and has already imposed a 10% tariff on all imports from China.
Moreover, Kumar emphasizes that the construction of new chip factories cannot occur instantaneously, as it typically requires a minimum of two to three years for a new facility to be completed. Therefore, even if tariffs are used as leverage to encourage onshoring of chip production, the impact on the industry in the short term is expected to be minimal. Additionally, Kumar notes that manufacturing chips in the United States will undoubtedly incur higher costs compared to production in Asian countries.
In essence, the imposition of a 25% tariff on chips is likely to result in an overall increase in chip prices, ultimately leading to elevated costs for electronic products in the American market. Stay updated on the latest news and newsletters from CNN by registering an account at CNN.com.
