The flurry of on-again, off-again tariffs that U.S. President Donald Trump has unleashed have thus far exempted the semiconductor chips that power much of the modern economy. That may be about to change.
The Department of Commerce on Monday filed a so-called Section 232 investigation into semiconductors and their impact on national security, providing three weeks for the public to comment before the potential imposition of tariffs.
Trump heralded the investigation in a post on his Truth Social account earlier in the day, insisting that tariff exceptions for smartphones, laptops, chips, and other electronic devices from China that his administration released late Friday night did not in fact constitute exceptions. “There was no Tariff ‘exception’ announced on Friday,” Trump wrote, contradicting his own administration’s characterization.
“We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations,” he added, clarifying that electronics were still subject to a 20 percent tariff imposed on China shortly after his return to office for its role in the fentanyl trade. “What has been exposed is that we need to make products in the United States, and that we will not be held hostage by other Countries, especially hostile trading Nations like China, which will do everything within its power to disrespect the American People.”
But in giving the electronics industry a reprieve, even one that he and other officials insist is temporary, Trump has found himself having to reckon with a harsh reality of the global tech supply chain: Cutting China out is hard. Roughly 80 percent of iPhones sold in the United States are still made in China, as are 70 percent of all U.S. smartphones and 80 percent of computer monitors, according to estimates from the tech research firm Counterpoint.
“It’s obvious now that the U.S. is more reliant on China than it cares to admit, and for all this talk of decoupling, clearly the business community has a deep awareness of this,” said Barath Harithas, a senior fellow at the Center for Strategic and International Studies (CSIS) in Washington, D.C., who researches trade, technology, and national security.
Trump’s tariff threats would disproportionately impact Silicon Valley firms that have spent months kowtowing to him—from Tesla to Apple to Nvidia—which could help explain the carve-outs announced Friday night. “I’m guessing after that came out there was a lot of jostling and lobbying behind the scenes,” Harithas said.
Nvidia on Monday announced a $500 billion investment in U.S. manufacturing, committing to building its AI supercomputers entirely in the United States and mirroring a similar commitment by Apple earlier this year. That didn’t stop the Trump administration from imposing some export restrictions on Nvidia’s chip sales to China, the company revealed in a filing on Tuesday, costing it an estimated $5.5 billion. But Nvidia CEO Jensen Huang indicated during a company conference last month that the company’s re-shoring of manufacturing to the United States is here to stay. “We’re preparing and we have been preparing to manufacture onshore,” he said. “Tariffs will have a little impact for us short term. Long term, we’re going to have manufacturing onshore.”
That’s at least one of the purported goals of the Trump administration’s tariff strategy—to compel companies to move their factories to U.S. shores. But completely reorienting the global tech supply chain away from China will take far longer than the weeks to months timeline of tariff relief Trump has offered thus far. “A temporary reprieve is useful to the extent your supply chains can be unbundled,” Harithas said. “What can meaningfully be done in two to three months for such complex supply chains?”
Then-U.S. President Joe Biden greets workers at the groundbreaking of a new Intel semiconductor manufacturing facility near New Albany, Ohio, on Sept. 9, 2022.Saul Loeb/AFP via Getty Images
When it comes to chips, the Trump administration’s national security concerns echo those of the Biden administration, which made it a priority to spur domestic manufacturing in order to reduce reliance on Asia. But Trump’s tool of choice is unique. He would be the first president to place tariffs on semiconductors—a move with massive implications given how embedded chips are in the fabric of the modern economy.
The Biden team opted for a different set of tools. Through the 2022 CHIPS and Science Act, Congress set aside $39 billion in grants, up to $75 billion in loans and loan guarantees, and a 25 percent tax credit to lure chipmakers to build in the United States. It worked. As of last August, semiconductor companies had announced nearly $450 billion in new manufacturing investment in the United States since the CHIPS Act’s passage. (Joe Biden did also adopt more punitive measures on China’s semiconductor industry in the form of a cascading set of export controls over the last two years of his administration, restricting the types of advanced chips that could be sold to Chinese companies.)
In his address to Congress last month, Trump urged lawmakers to overturn the CHIPS Act, calling it a “horrible, horrible thing.” But the administration now seems inclined to keep the tax incentives in place, Bloomberg reported, while layering tariffs on top.
Research from the Peterson Institute for International Economics (PIIE) found that tariffs alone would have been far less effective than the CHIPS Act in boosting domestic chip production. Adding tariffs on top of the existing incentives may serve to speed up the U.S. manufacturing boom, experts said, but the duties would also come at a cost to U.S. companies and consumers.
An aerial photo shows a Taiwan Semiconductor Manufacturing Company (TSMC) factory in Nanjing, China, on Aug. 10, 2022. AFP via Getty Images
U.S. demand for chips far outstrips current domestic supply, so companies would have no option but to continue importing them and stomach the tariffs for some time. Taiwan produces roughly 90 percent of the world’s most advanced chips, for one. U.S. officials have also been increasingly concerned about China’s growing dominance in the production of legacy chips—also known as mature-node semiconductors—which aren’t as high-tech but are still a critical backbone of the global economy, used in products from cars to dishwashers. The Biden administration launched a trade investigation into these chips in its final months.
“Now a lot of the concern is around non-advanced chip production, where China’s production of chips has just rocketed up. They bought so much semiconductor manufacturing equipment and their production is high enough that there are concerns that there will eventually be some kind of overcapacity, which drives down significantly the prices of mature-node chips. If that goes far enough, then it could put a lot of [U.S. semiconductor] companies out of business,” said Martin Chorzempa, a senior fellow at PIIE.
The Trump administration’s own Section 232 investigation into chips just began, so it could take several weeks or months for the administration to make a final decision about whether to impose tariffs and how high to set the rate. But Trump officials are considering a baseline tariff of 25 percent on all semiconductors, which could be raised over time, Politico reported. That would add significant costs to supply chains already burdened by Trump’s growing pile of tariffs.
The costs would soar even higher if the Trump administration extends the tariffs to all electronic devices that include foreign chips, which Commerce Secretary Howard Lutnick suggested would be the case in a Sunday interview on ABC News. That would serve as an additional measure to force companies to use U.S. chips and drive more chip production to the United States, but experts said it could be very difficult to implement because companies would have to disclose the origin of chips embedded in a vast range of products.
TSMC CEO C. C. Wei (right), accompanied by U.S. President Donald Trump, speaks at the White House in Washington, D.C., on March 3. Andrew Harnik/Getty Images
A problem for the Trump administration is that the affected supply chains can’t move overnight. TSMC has started production in its first fabrication plant (or “fab”) in Arizona, but it could take at least two years to build the next fab. In the interim, U.S. companies would be saddled with higher costs. Those could hit AI companies particularly hard because they need a massive number of chips to run their data centers.
Trump may be hoping that he can pressure companies to build more chip capacity in the United States by threatening tariffs without actually enacting them. Companies have certainly been throwing out big numbers: TSMC has pledged an additional $100 billion in investment in advanced chip production in Arizona.
The administration has yet to define its ultimate goal for how much domestic chip production would satisfy U.S. national security needs. Biden Commerce Secretary Gina Raimondo set a target for the United States to produce 20 percent of the world’s advanced chips by 2030. Trump’s language suggests he may set his sights higher, but the costs could dampen his ambition.
A worker walks past waste being processed at a privately owned rare earths factory in northwest China on April 21, 2011. Frederic J. Brown/AFP via Getty Image
While Trump mulls his next steps, China is all too keen to remind the United States of its supply chain vulnerabilities.
In early April, China struck back against Trump’s expanding trade war by unveiling export restrictions largely targeting heavy rare earths—underscoring how Beijing wields enormous influence over one of America’s biggest strategic chokepoints. Since the new measures require companies to secure special export licenses, which China is still establishing a licensing system for, they will likely halt exports for an uncertain period of time.
For U.S. lawmakers and firms, all of that unpredictability only spells trouble. “There’s going to be enormous uncertainty in how these are actually implemented, which is of course part of the Chinese strategy—to have it be uncertain,” said Sarah Sewall, executive vice president for national innovation strategy at the CIA-backed strategic investment firm IQT.
From iPhones and wind turbines to Lockheed Martin F-35 fighter jets, many of the technologies critical to the U.S. economy and national security depend on rare earths, which are a set of 17 powerful metallic elements with obscure names such as neodymium and terbium. Despite their name, the materials are not actually that rare, but finding them in mineable concentrations is challenging.
A worker produces semiconductor chips in Suqian, China, on Feb. 28, 2023. AFP via Getty Images
The big problem for U.S. lawmakers is that China overwhelmingly commands global rare earth supply chains, particularly with processing and magnet production. Beijing has weaponized that dominance in past diplomatic spats. In the most notable case, China briefly halted rare earth exports to Japan in 2010 over a territorial dispute, alarming much of the world and pushing Tokyo to ramp up efforts to diversify its supply and stockpile rare earths.
“Over many years, the United States has gotten itself into a position of excessive dependence on one supplier, in particular for these key rare earth commodities that play such a central role in both our defense industry, but also in our energy transition,” said Geoffrey Pyatt, who served as Washington’s chief energy diplomat under the Biden administration.
It’s not just rare earths where Washington is vulnerable, either. As China and the United States have sparred over trade and technology in recent years, Beijing has unleashed export controls on key materials including gallium and germanium, which are two chipmaking inputs, as well as antimony. Beijing has also banned exports of the technologies used for rare earths separation, extraction, and magnet production.
Facing these pressures, U.S. lawmakers have for years sought to slash that dependence on China. The issue has now also emerged as a key focus of the second Trump administration, which is eager to ramp up domestic production and appears to have scrambled—often confusingly—to secure new supplies in Greenland and Ukraine.
“This is not a sustainable situation for America or for the world,” Alex Wong, Trump’s principal deputy national security advisor, declared at an energy and critical mineral security summit in Washington earlier this month. “The Trump administration is laser-focused on making sure that our economy and our security are never at the mercy of China or any other nation.”
But it’s not just a question of political will. No matter how eager the Trump administration is to diversify away from Beijing’s rare earths, industry experts stress that U.S. efforts to secure new supply chains will likely take years to come to fruition, if not longer, especially given long-standing challenges in confronting China’s economies of scale and hefty expertise gaps. While the United States does have stockpiles of rare earths, they are “limited” and “will not tide us over forever,” said Gracelin Baskaran, director of the critical minerals security program at CSIS.
“It’s not just a capital problem. It’s also a know-how problem,” Baskaran said. “There are parts of the rare earth supply chain on the processing side that we actually never learned how to do.”
Current U.S. capabilities are mostly “early-stage,” according to a recent report by CSIS, which said that no heavy rare earths separation is currently occurring in the United States. “The United States is a long way off from meeting the DOD’s [Department of Defense’s] goal for a mine-to-magnet REE [rare earth elements] supply chain independent of China, and it is even further from rivaling foreign adversaries in this strategic industry,” the report said.
Ultimately, the many trade developments of the past week have shown that China, despite its relative vulnerability in the latest trade war due to its dependence on U.S. markets for export, has considerable leverage over the United States. Meanwhile, Trump’s ability to inflict pain may be somewhat limited by the U.S. tech industry’s own China entanglements.
“I don’t think they have the winning economic hand per se, but I think they can do us a lot of damage without necessarily harming themselves,” Sewall said.