With the capacity to fulfil just 12% of domestic demand for semiconductors, the US needs to rapidly increase its onshore chip manufacturing capability. An unfortunate confluence of the Covid-19 pandemic and rapid cross-industry digital transformation demonstrated the volatility of the semiconductor global supply chain. A massive chip supply squeeze soon turned into a subsequent production glut with many businesses beginning to prioritise chip supply within this new reality.
Semiconductor supply is now viewed as a critical factor in national security and economic development policy. Every developed economy relies on semiconductor supply in order for its military, industrial and technology sectors to remain globally competitive. Currently, 95% of the world’s advanced chips are produced by one company, Taiwan’s TSMC, with South Korea’s Samsung closing in.
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It becomes, therefore, vital for the US to onshore semiconductor manufacturing capacity to hedge against the geopolitics of the South China Sea: A Chinese invasion of Taiwan would have catastrophic consequences for essential chip supplies, not just in the US, but around the world.
Such a shortage of chips would put any hope of US technological hegemony at peril. Advanced chips, in particular, are essential for global competitiveness in emerging technologies, particularly AI, and legacy chips are also required in vast supply for the automotive and household electronics industries, for example.
Will Trump kill the CHIPS ACT?
The Biden administration’s CHIPS ACT, signed in August 2022, offered investment incentives of up to $53bn for semiconductor manufacturing, research and development, and workforce training. The initiative saw TSMC investing $65bn in three Arizona fabs, Samsung investing $17bn in a Texas fab, alongside domestic chip giant, Intel, said to be investing over $90bn by the end of the decade in four new fabs across Oregon, Arizona, Ohio, and New Mexico.
According to US Semiconductor Industry Association estimates in May 2024, the country is on course to triple its semiconductor manufacturing capacity by 2032 – the largest projected growth globally – and secure a larger share of new private investment in semiconductor manufacturing, thanks in part, to the CHIPS ACT. In fact, companies in the semiconductor ecosystem have announced more than 90 new manufacturing projects in the US since the CHIPS ACT was first introduced in Congress, totalling nearly $450bn in announced investments across 28 states.
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By GlobalDataThe 2024 Republican National Congress manifesto promises to, “bring our critical supply chains back home” to “become the manufacturing superpower by protecting American workers from unfair foreign competition”. But it remains to be seen whether Trump will reverse the Biden era federal chip subsidies.
In Trump’s infamous Joe Rogan interview on the campaign trail in October, he referred to the CHIPS ACT as ‘’so bad’’ because it subsidises “rich companies”. Indeed, chip companies have seen a dramatic surge in profits driven by the AI boom’s increased need for chips.
TSMC’s 2024 market cap of $993.44bn is up 84.185% on the previous year, and Samsung’s market cap of $211.8bn makes it the 35th most valuable company in the world. Trump is not wrong in saying that by investing nearly $53bn to bring semiconductor supply chains back to the US, the federal government is essentially subsidising two of the most valuable foreign companies in the world.
Added to which, TSMC and Samsung, are already very heavily subsidised in their home countries, where they are integral to the national Taiwanese and South Korean chaebol economic model.
While some, including US House Speaker Mike Johnson, have suggested a repealing of the CHIPS ACT is on the cards, political economic research firm TS Lombard managing director, Christopher Granville, says Trump is not likely to roll back Biden-era investment initiatives, such as the Inflation Reduction Act and the CHIPS ACT but will, instead, limit resources allocated to their implementation and oversight. According to GlobalData senior analyst Mike Orme, both TSMC and Samsung are due to receive billions under the CHIPS Act but two years on have “yet to see a cent”.
Could Trump tariffs break the chip supply chain?
Whether Trump honours funding pledged under the CHIPS ACT and extends foreign investment incentives further, he will surely stay true to his obsession with trade tariffs, that, at the very least, will increase chip prices for businesses across the world.
“Chip prices across the global supply chain will rise in the event of a comprehensive tariff policy and its tangled multinational, multi-layered nature will become even more complex and fluid,” said Orme.
The US has to import most of the components involved in chip manufacturing. “If Trump is in earnest and can implement his tariff policy, tariffs at 10% (plus or minus) will be slapped on everything from key materials – although China is already restricting supplies of germanium and gallium to the US,” said Orme.
The burden of tariffs on top of the already high-priced and restricted supplies that the US can access – including EUV chip making equipment from the Netherlands and chip packaging supplied from Taiwan, Costa Rica and Malaysia – could have disastrous economic effects downstream.
If Trump stays true to his word, this would mean tariffs on virtually all the leading edge processor and memory chips the US uses, as these are all imported from Taiwan and South Korea respectively. And Intel, TSMC and Samsung’s onshore advanced fabs currently under construction are not due to come meaningfully on stream until 2026/27.
“An interesting side effect of all this maybe that Dutch chip making equipment supplier, ASML, which has been bridling against US sanctions hitting its crucial China business, may have a way of getting round the sanctions to some extent,” said Orme.
On the announcement that Trump had won, President Macron of France and German Chancellor Scholtz, seeing the trade war with the US ahead, put out a statement that France and Germany would work closely to boost EU sovereignty. “This could mean that ASML will take its case for not going along with US sanctions to a newly charged up EU rather than rehash the issue with its own government in the Netherlands, which has strongly sided with the US hitherto,” he said.
Indeed, GlobalData’s US Election 2024 Executive Summary notes that Trump’s push to impose a 10-20% global tariff on all imported goods will see some US-allied countries circumvent these tariffs through new free trade agreements. All of which may even be good news for China – an unintended consequence of Trump’s efforts to Make America Great Again.
