Trump’s Proposed Tariffs on Taiwanese Semiconductors Would Backfire

On January 27, President Trump proposed up to 100 percent tariffs on semiconductors made in Taiwan, while criticizing the bipartisan CHIPS Act, which has already spurred over $450 billion in investments in America’s semiconductor and electronics sectors. But if Trump raised tariffs on imported Taiwanese chips to 100 percent, it wouldn’t drive Taiwanese semiconductor and electronics firms to America. Instead, the policy would unleash a global, cross-sector tariff war that would boost costs for Americans, hurt American tech firms, and damages relations with a key U.S. ally at a vital time.

What President Trump is essentially proposing is the United States raise tariffs on all semiconductors up to 100 percent. Trump’s assumption is if he raises tariffs on Taiwanese semiconductors to 100 percent, Taiwanese semiconductor manufacturers will move to the United States to avoid them. But if the United States imposes smaller tariffs on semiconductor imports from say India, Japan, or Malaysia, the Taiwanese companies will only move their factories there, not necessarily to the United States. Or U.S. companies will buy their semiconductors from other foreign companies.

Additionally, if the tariffs applied to Chinese chip exports were lower than for Taiwanese exports, Trump would be helping Chinese semiconductor manufacturers, whose exports to the U.S. market would then be less expensive. So, for this policy to have any real effect, Trump effectively must raise tariffs on all semiconductors, and that would likely lead to global tit-for-tat.

In the short-term, such tariffs would raise prices American consumers and producers pay for a host of consumer and manufactured goods, starting obviously with the (up to) 100 percent price hike of the cost of chips so crucial to cars, computers, and mobile phones. A 2023 study found that 44.2 percent of U.S. logic chip imports and 24.4 percent of memory chip imports come from Taiwan. It estimated that a major semiconductor manufacturing disruption in Taiwan—whether caused by an earthquake, military conflict, or (hypothetically in this case) Trump tariffs—could raise U.S. logic chip prices by up to 59 percent. Since chips are critical to countless products, the proposed tariffs would quickly elevate prices for everyday goods.

But they would also raise prices for American companies using Taiwan to produce their chips. In 2016, U.S.-headquartered ICT companies—including Apple, Broadcom, Qualcomm, Intel, NVIDIA, Xylinx, and many others—account for approximately 65 percent of global demand for fabless semiconductor manufacturing. Their costs would go up, unless they moved production outside the United States to avoid tariffs. Indeed, it would be economically rational for U.S. companies dependent on Taiwanese semiconductors to move production outside of the United States.

Beyond the economic harm, the idea that foreign companies or U.S. importers would bear the cost of the tariff hike instead of U.S. consumers is fanciful. For instance, in December 2021 Pablo Fajgelbaum and Amit Khandelwal reviewed estimated effects of the U.S.-China trade war through 2021, concluding that “US consumers of imported goods have borne the brunt of the tariffs through higher prices, and that the trade war has lowered aggregate real income in both the US and China.” Elsewhere, an October 2019 study found that tariffs on Chinese imports were largely passed on to U.S. importers.

Taiwanese semiconductor tariffs would do little to boost U.S. semiconductor manufacturing in the short term—and even in the best-case scenario, any impact would take years to materialize. Zero semiconductor manufacturers are going to simply close down a multi-billion dollar fab and move it to the United States, or build a replacement one here. So, the key question becomes where new semiconductor factories will be built in the future—a decision companies make years ahead based on demand forecasts, with construction taking years to complete.

President Trump seems to believe tariffs are the primary factor chip manufacturers consider when choosing where to locate new semiconductor fabs. But as ITIF has written, manufacturing semiconductors is perhaps the most complex, expensive engineering task humanity undertakes, with the most-sophisticated semiconductor fabs costing over $30 billion to construct. So, when making that investment, semiconductor manufacturers can’t afford to be wrong, and meticulously evaluate up to 500 factors—encompassing talent, tax, trade, and technology policies, as well as regulatory, environmental, and labor market conditions—before making their decision.

Make no mistake, tariffs are a factor, but companies prioritize zero tariffs on the vast array of components needed for chip production over the chip itself. Tariffs alone aren’t enough to justify relocating a $20 billion fab or choosing the U.S. over another location for a new facility.

President Trump assumes America will always be indispensable to the global tech ecosystem. However, the fact that America’s share of global semiconductor production cratered by 70 percent from 1990 to 2020, down to just 10 or 12 percent, suggests otherwise. If Trump manages to significantly raise the cost of this key component for all ICT products, it’s more likely to hurt all U.S. manufacturers—both in ICT and other sectors—that depend on it. In fact, it could push manufacturing further away from the United States, not bring it back. Per a 2019 study, U.S. manufacturing industries facing higher tariffs tend to lose jobs, as the benefits of import protection are outweighed by higher input costs and retaliatory tariffs. Trump’s Taiwan semiconductor tariffs would be entirely counterproductive—undermining the competitiveness of the U.S. tech sector and accelerating its shift offshore.

It is ironic that just like most neoclassical economists, president Trump appears to thinks that computer chips are just like potato chips; that if tariffs were jacked up so high on potato chips companies would only ever need make them in the United States and the domestic market would be sufficient to support competitive companies; the market could be fully internalized for potato chips and the manufacturers wouldn’t suffer. But that’s not the way it works for semiconductors: as noted, companies depend on globally supply chains to source a wide variety of specialized inputs from across the world; they also depend on large global markets to sell their products into to recoup the enormous costs of the fabs needed to produce and the research and development required to design them. Innovative high-tech industries like America’s semiconductor sector foundationally depend on global markets to succeed.

Perhaps the greatest irony of these proposed tariffs is that Trump simply doesn’t need them. In fact, America—starting under the first Trump administration—had already prevailed upon Taiwan’s leading semiconductor manufacturer, the Taiwan Semiconductor Manufacturing Corporation (TSMC), to invest significantly in the United States. TSMC is already planning to make a $65 billion investment to build three state-of-the-art facilities in Arizona. Supporting this, 14 Taiwanese manufacturers of semiconductor inputs (e.g., chemicals, gases, etc.) have set up operations in the United States. In other words, Trump doesn’t need to threaten tariffs to bring more semiconductor manufacturing to America—the United States is already one of the world’s most-attractive locations for semiconductor manufacturing.

Trump said these companies have money and so CHIPS funding was not needed. That misses the point. It costs some 30 percent more to build and operate a U.S. semiconductor fab (over 10 years) in the United States than it does for America’s Asian competitors. That’s why the bipartisan CHIPS Act tackled this issue with a 25 percent investment tax credit and $39 billion in grants and loans to offset the cost gap. Trump is right that companies respond to incentives, but instead of attacking the CHIPS Act, he should focus on the types of corporate and investment credit tax policies that were already so successful in his first term.

President Trump needs to remember the issue is China, China, China. That should be the focus of his tariffs and trade policy. Not an ally like Taiwan.

The Semiconductor Technology Advancement and Research (STAR) Act introduced today would bolster the U.S. economy, national security, and supply chain resilience by promoting investment in domestic #semiconductor manufacturing and design. At a time when global competitors are making historic investments in their own chip ecosystems, we urge Congress to pass the STAR Act to help America win the chip race and reinforce U.S. semiconductor leadership for years to come. #WinTheChipRace