How Tariffs Are Reshaping the Global Semiconductor Trade Dynamics: What You Need to Do

Introduction

• Tariffs are introduced to protect domestic goods and services growth and reduce the trade deficit by making foreign goods and services expensive, increasing the competitiveness of U.S. manufacturers. The U.S. tariff is calculated by estimating the tariff levels required to reduce the trade deficit (last observed at -6.1%) with each country to zero. The calculation uses trade data and the sensitivity of imports to price changes. The implementation of reciprocal tariffs with a baseline rate of 10% tariff paves a critical risk pathway not only for the U.S. but also for IT service countries.
• Currently, semiconductors are excluded from the new tariffs, but new tariffs for on the semiconductor-related products and services could be announced soon. The imposition of 25% tariff on semiconductors by the U.S. is anticipated to have significant repercussions on the global semiconductor industry. Tariffs could encourage domestic production as they align with U.S. national security objectives.  Further, it also presents substantial risks, including global disruptions in the supply chain, strained international relations, and increased cost for consumers to impact the global market negatively.

• Currently, it is believed that approx. 30% of businesses are observing the situation regarding the unclear tariffs on semiconductors. Prior to the Trump tariff, 61% of the businesses were realigning their procurement strategies by identifying new suppliers. The reason for this is due to changes in the global market dynamics, geopolitical tensions, and trade barriers, making the trade complex and demanding to have more transparency in order to navigate.
• U.S. semiconductors, which accounts for 11% of the global market, mainly depend on countries such as Taiwan, South Korea, and Vietnam. The market reaction to the Trump tariff is quite volatile. The prices for certain components are already hiking, and distributors are reporting lengthened lead times on semiconductor components and high-performance parts. Further, the semiconductor application industry, such as smartphones and laptops, which are foundational blocks of the tech industry, is likely to be impacted by the price hike.

How Tariffs are Impacting the Economy

Tariffs in the short term could boost the semiconductor industry as businesses could initiate stocking of semiconductor chipsets, which may result in price hike of the semiconductor components. However, businesses in the long term could feel the negative shock as it could jeopardize the existing supply chain and make them re-evaluate their procurement strategies. Globally, the semiconductor economy is at risk of issues such as panic semiconductor stocking, disturbed supply chain, and heavy import taxes, which will shrink the economy abruptly in the long run. World GDP is expected to decline by -0.17 Percent Point (PP). At the same time, China, which currently faces a 105% tariff, will observe -0.22 PP Change. Canada, which has a major trade share in the U.S. economy, is estimated to decline by -2.07 PP. Countries might face the brunt of tariffs, but a free trade agreement might benefit the countries, enabling to grow their GDP by 0.07 PP.

Impact on Global Businesses

• Rising Costs & Supply Chain Shifts

Tariffs could impact the final prices of industrial electronics, smartphones, laptops, and electric vehicles. The U.S., which accounts for 11% of global chip production, will require investments and longer lead times, which will keep semiconductor prices elevated for some time. In response, companies may diversify their supply chain strategies by sourcing from domestic markets and increasing domestic investment to mitigate risks. Additionally, tariffs could disrupt the existing supply chains, especially for OEMs that depend on U.S. chip makers. The disruption will lead to realignments, which may consequently lead to re-negotiations and delays in sourcing, especially in sectors such as telecom, automotive, and electronics. Other nations such as Europe and India could form a trade alliance by strengthening their relationship on semiconductor manufacturing, ensuring a steady supply of semiconductors to counterbalance U.S. tariffs.

• Sector-Specific Impacts

The new tariffs could be announced under national security interest, which will act as a double-edged sword for the major semiconductor manufacturers such as TSMC, SK Hynix, and ASML. Major technology giants are relying heavily on these manufacturers for advance semiconductor manufacturing technologies such as EUVL. Thus, prices in the semiconductor space could observe an increase of 5.1% on imported products and 4.5% on overall prices. Tariffs could force businesses such as NVIDIA to procure at higher prices or switch to domestic suppliers, causing to realign the supply chain, leading to major business cost. Also, those who have operations in the U.S. could bear the load of additional taxes and reciprocal tariffs in other countries, which could impact the profit margins of major manufacturers such as Intel and NVIDIA that still import some of their memory chipsets from Taiwan. Further, Intel has production facilities in China, Vietnam, Ireland, Costa Rica, Israel, and Malaysia, which could be of great cost to the company.

Strategies for Businesses

Businesses in the semiconductor ecosystem are already planning to shift their investments and projects to the U.S. Although it is not yet specified that it would impact finished semiconductor products or semiconductor equipment. Thus, players will take-up wait-and-watch approach by re-aligning sourcing strategies in the short term to mitigate risk and shift production facilities and investments either in the U.S. or less tariff impacted country with a large consumer base market such as India.

• For example, NVIDIA, a global tech giant, will build its AI supercomputer in the U.S. as part of its goal to produce USD 500 billion in AI infrastructure in the U.S. in the next four years. The project will be accomplished with semiconductor giants such as TSMC, Foxconn, SPIL, Amkor, and Wistron.

Key Takeaways (Conclusion)

The market was threatened by tariffs long before their implementation, end uses of semiconductors could observe a hike in prices an overall of up to 5%, which would sustain in the short to mid-term. However, global multinational manufacturers are strategizing their supply chain as the tariffs and geopolitical tensions could cause businesses a great loss in terms of longer lead times, heavy import taxes, and shifting production and investment to lower-tariff and high-consumption markets. In the long term, businesses had to adapt the complex supply chain by re-negotiating contracts, developing a resilient supplier network, alternative resources, and high prices, which would be delivered to the end users at high costs. These factors will significantly impact the margins of the companies and negatively impact businesses.