Semiconductor tariffs will be costly. A better way to deal with China.

Mint

4 hours ago

The White House may be forced to recalibrate its tariff strategy in the face of judicial pushback. But it is also considering issuing semiconductor tariffs resting on national security concerns under Section 232, a legal authority that likely won't be restrained by the courts.
That would be expensive. The U.S. consumes several hundred billion dollars of chips each year, most of which are at least partly manufactured abroad. If the Trump administration imposes expansive tariffs on semiconductors, it would raise costs for America's biggest tech firms and slow investment in chip-dependent artificial intelligence data centers.
There is an alternative to broad chip tariffs that could achieve Trump's goal of fairer trade and more domestic investment. Striking a semiconductor-focused sectoral agreement with U.S. allies could reduce trade barriers, commit signatories to investing more in the U.S., and oblige them to join action against the largest source of distortions in the chip market: China.
Unlike other industries, chip exports don't face tariffs or significant nontrade barriers from U.S. trading partners. U.S. semiconductor firms aren't worried about the fairness of trade with Europe, Japan, South Korea, or Taiwan. The problem—for the U.S. and for its key trading partners—is China.
China's state subsidies are distorting the global chip market. Of course the U.S., the European Union, and Japan have also allocated government funds to bolster their semiconductor industries. But China's subsidies are far larger in scale. A study by the Organization for Economic Cooperation and Development found that while many countries support domestic firms with research and development credits or investment incentives, China's subsidy program is unique in that Chinese state funds take direct equity stakes in chip firms, enabling them to survive regardless of whether or not they make money.
After more than a decade of Beijing's subsidies, Chinese firms are now a large producer of the low and mid-range chips on which the world's industrial base depends. Leading companies in the U.S., Europe, and Taiwan fear that any new investments or factories they build will be unprofitable as China floods the market with its heavily subsidized alternatives. This has already happened in one corner of the chip market—the production of silicon carbide semiconductors. Wolfspeed, a leading U.S. producer of such chips, is facing significant losses and preparing to file for bankruptcy, The Wall Street Journal reported. Recognition that Chinese subsidies threaten the survival of Western firms has motivated the U.S. and other countries to launch their own incentive programs, such as the 2022 Chips Act. Narrowly tailored, China-specific semiconductor tariffs or other market access restrictions must also be part of the solution.
Washington has rightly taken steps to limit China's access to U.S. firms' advanced technology and to prevent the U.S. industrial base from increasing its reliance on Chinese chips, given the security risks such dependence would entail. But these rules restricting transfer of chipmaking equipment to China are tighter than the comparable regulations of other countries, such as Japan and the Netherlands. Firms from those countries have won market share, while also enabling China's technological advances.
If U.S. manufacturers can't use cheap Chinese chips for security reasons, but firms from Europe or Japan can, then U.S. companies face a cost-disadvantage. Aligning security and trade regulations governing the use of Chinese chips would level the playing field for U.S. firms—and improve allies' economic security. That is why U.S. chip companies have already endorsed a sectoral agreement to tackle the issues posed by China's subsidies.
And yet, limits on trade with China cannot solve the chip industry's staggering reliance on production across East Asia, especially in Taiwan and South Korea. Trump argues that his tariffs can force firms to build more manufacturing capacity in the U.S. High chip tariffs would certainly create this incentive—but at vast cost. If the White House imposes new tariffs on semiconductors, everything from cars to medical devices to data centers will become more expensive.
A sectoral agreement could use Trump's tariff threats to achieve binding investment commitments. If countries like Taiwan and South Korea commit to expanding manufacturing in the U.S., they could be guaranteed tariff relief. This would enhance supply chain resilience, without imposing tariffs that counteract the president's AI dominance goals and undermine the domestic manufacturing renaissance he hopes to catalyze.
About the author: Chris Miller is author of Chip War: The Fight for the World's Most Critical Technology.
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