[Chiptok] Why Voices Saying "No" Are Growing to Trump’s Call for "Tariffs Instead of Subsidies"

US Think Tank: "Tariffs Actually Weaken Semiconductor Competitiveness"
Semiconductor Industry with Complex Global Supply Chains
Concerns Over Burden on US Semiconductor Firms if Tariffs Imposed
Biden Administration Criticizes as "Terrible and Reckless Idea"

"Let's impose heavy tariffs on semiconductors entering the United States. There's no need to give money to build factories (in the U.S.). Not even a dime needs to be given. Just saying that semiconductor companies won't have to pay tariffs if they build factories in the U.S. is enough."

Donald Trump, the President-elect of the United States, made a statement during a podcast appearance last October while campaigning for the presidential election that shook the semiconductor industry. It was a kind of warning and preview that he would effectively abolish the CHIPS Act, which President Joe Biden had strongly pushed throughout his term. The minds of global companies that had decided on large-scale investments based on U.S. government subsidies became complicated.

Donald Trump President-elect of the United States Photo by Reuters-Yonhap News

With the inauguration of Trump's second term administration scheduled for January next year, there are concerned voices both inside and outside the U.S. about the approach of wielding tariffs as a stick instead of offering subsidies as a carrot. The U.S. realized the importance of semiconductor supply chains amid the COVID-19 pandemic and has spent years building supply chains centered on its own country. In this context, the tariff imposition strategy that Trump intends to introduce is pointed out to cause more harm than good to the U.S. and the global supply chain, considering the characteristics of the semiconductor industry.

"No Tariff Effect" in Semiconductor Industry with Global Supply Chains

The Information Technology and Innovation Foundation (ITIF), a U.S. economic and innovation policy think tank, recently published a commentary titled "Eroding Competitiveness Bit by Bit: Why Tariffs Cannot Save U.S. Semiconductor Manufacturing," authored by Steven Ezell, Vice President of Global Innovation Policy. ITIF is a top think tank in advanced technology fields with significant influence on U.S. digital policy. ITIF mentioned that "in industries where highly advanced technologies are applied in complex ways, especially those with high dependence on global value chains incorporating sophisticated elements across extensive supply chains, the effect of imposing tariffs is diminished," citing semiconductor manufacturing as an example.

During his first term, Trump also imposed high tariffs targeting China and others. He argued that applying import restrictions such as tariffs on countries exporting cheap products to the U.S. based on low labor costs would enhance the price competitiveness of domestic companies and secure jobs for Americans. However, ITIF evaluated that while tariff increases might help secure competitiveness in industries with relatively low technological levels and supply chains that can be substituted domestically, this approach is difficult to apply in the semiconductor industry.

The semiconductor industry is known for its complex supply chains. According to estimates by management consulting firm Accenture, a company must cross more than 70 borders to produce a typical IC semiconductor and deliver it to consumers. For example, the laser, one of the components of the extreme ultraviolet lithography (EUV) equipment essential for advanced semiconductor production, consists of nearly 460,000 parts. This laser is only one of over 100,000 components in EUV equipment. Building a single semiconductor factory requires various equipment manufactured worldwide in addition to EUV. Ultimately, constructing one factory requires the supply chain to operate organically.

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ITIF criticized, "To be competitive, companies must efficiently access components and inputs sourced from over 50 countries in terms of cost," adding, "Ultimately, raising tariffs increases the cost of producing semiconductors in the U.S., reducing competitiveness."

"U.S. Semiconductor Companies Bear Tariff Burdens"

Due to the complexity of semiconductor supply chains, there are cases where U.S. companies end up bearing the tariff burden. The Semiconductor Industry Association (SIA), representing the U.S. semiconductor industry, expressed concerns and criticism in a separate press release in July 2020, during the latter part of Trump's first term, stating that imposing tariffs would never help semiconductor manufacturing leadership.

In 2018, the Trump administration imposed a 25% tariff on Chinese semiconductors based on investigations into China's unfair trade practices. SIA analyzed that over two years since July 2018, U.S. semiconductor manufacturers had to bear $750 million (approximately 1.08 trillion KRW) in tariffs. Sixty percent of semiconductors imported from China to the U.S. originally began manufacturing in the U.S., passed through global supply chains, and eventually re-entered the U.S. via China, resulting in U.S. companies paying tariffs in the process. By imposing tariffs on semiconductor imports, U.S. companies ended up paying tariff costs on their own products, reducing available resources for research and development (R&D) and leading to decreased competitiveness, SIA pointed out.

The U.S. has been focusing on expanding manufacturing facilities within the semiconductor supply chain. According to a semiconductor industry report jointly released by SIA and Boston Consulting Group, last year, the headquarters of global semiconductor companies were located in the U.S. in one of two cases. However, in 2022, the U.S. accounted for only 38% of the entire semiconductor value chain, and its share in semiconductor manufacturing based on wafers dropped further to 10%. This means that while the U.S. has strengths in semiconductor design and hosts company headquarters domestically, it actively utilizes global supply chains to manufacture and import semiconductors.

SIA expressed concerns that "imposing tariffs on semiconductors could drive advanced technology sectors relying on semiconductor technology, such as artificial intelligence (AI), aerospace, autonomous vehicles, and robotics, outside the U.S."

Recently, seemingly aware of these points, SIA sent a congratulatory message on Trump's confirmed election last month while simultaneously welcoming the Biden administration's disbursement of subsidies based on the CHIPS Act. The association emphasized in its message that "the CHIPS Act strengthens U.S. manufacturing, creates jobs, grows the economy, and helps national security."

Biden Administration: "Tariff Imposition Is a Horrible Idea"

Besides the complex supply chain characteristic, criticism also arises from the fact that semiconductors are intermediate goods used as parts in products like automobiles rather than final goods sold directly to consumers. Since producing a car requires 1,000 to 3,000 semiconductors, if tariffs raise semiconductor prices, the final car prices inevitably increase.

Moreover, considering that the cost of building and operating semiconductor manufacturing facilities in the U.S. is 30% higher than in Asia, subsidies are needed to offset the cost difference to incentivize companies to operate factories domestically. ITIF stated, "Tariffs will not bring about the American semiconductor manufacturing renaissance that the Trump administration seeks," emphasizing that "President Trump should focus on policies that enhance U.S. semiconductor manufacturing competitiveness, such as securing technological talent."

President Joe Biden attending the groundbreaking ceremony of the TSMC factory in Phoenix, Arizona, USA, December 2022. Photo by Reuters and Yonhap News.

The Biden administration, which has attracted 40 semiconductor investment projects through the CHIPS Act, also appears concerned that its efforts might be wasted. According to SIA's tally, the Biden administration has attracted 40 projects involving 27 semiconductor companies investing $386 billion over the next 20 years across 21 states nationwide. To support this, the Biden administration announced $33.6813 billion in subsidies and $8.7 billion in loans based on the CHIPS Act. Commerce Secretary Gina Raimondo harshly criticized Trump's tariff policy as a "horrible and reckless idea," stating that tariffs alone are insufficient to expand semiconductor manufacturing facilities in the U.S.

Meanwhile, countries included in the complex semiconductor supply chain are deeply concerned. Tunku Karpal Aziz, Malaysia's Minister of Trade, whose country holds a 13% share in the semiconductor test and packaging supply chain in the back-end sector, stated in parliament on the 5th that Malaysia is closely monitoring the U.S. situation. This concern arose after Trump warned that if the BRICS alliance?comprising Brazil, Russia, India, China, and South Africa?threatens dollar hegemony, he would impose 100% tariffs. Malaysia, attempting to join BRICS, expressed apprehension. Minister Tunku Karpal said, "Any move to impose 100% tariffs will only harm those striving to prevent global supply chain disruptions," warning that it could cause chaos in the semiconductor supply chain.