THE CURIOUS CASE OF U.S. TARIFFS AND WHAT IT MEANS FOR SEMICONDUCTORS (UPDATED AS OF MAY 2025)

Hello there!

I am Priya, and thank you so much for reading this blog. I'm so excited to welcome you here! 

For the new ones, this is my comfort space on the Internet, where I try to decode the new affairs in the business world, and (try) to demystify seemingly complex ideas. To build an easy-to-follow structure, I'm working on picking 1 sector, every quarter, and will bring something new about it each day!

DISCLAIMER: This is NOT intended to provide any purchase/sell/hold recommendation for any financial instrument/product/virtual asset, nor am I qualified enough to provide investment advise. All opinions expressed here are my own, and are highly subjective. 

This information should only be read to gain some additional perspective into these sectors, and NOT as financial advise. With that out of the way, I wish you a very happy learning! :)

SOURCE: THE EFFECTS OF TARIFFS ON THE SEMICONDUCTOR INDUSTRY BY MCKINSEY

THE FLASHBACK

I'm sure most are aware of the crazy summer day we had back in April 2025, where Trump pulled out his long Excel table, populated with different countries on the left and proposed tariffs that would be implemented on their goods, on the right.

There was a 90 day leeway period discussed before these would be implemented, and in this gap, a basic rate of 10% was charged against each of those countries.

Despite the chaotic turn of events at the stock market, no industry was discussed nearly so often as the SEMICONDUCTORS, and yet, these sophisticated square chips were practically exempt from tariffs when this list was announced (atleast temporarily)!

S0 WHY ARE SEMICONDUCTORS SUCH A CRAZE?

A semiconductor chip is made through a rigorous procedure and contains millions of transmittors and processing units compressed into 1 chip. This little chip is capable of controlling everything from satellite navigation systems to air conditioning in an airBnB!

Given its incredible potential, semiconductors do not even form a good proportion of goods that are actually imported into the US! In fact, the semiconductor supply chain is so long and so globalized that one would need time to fathom its glory all at once!

An interesting case in the McKinsey report discusses a hypothetical EU company, that contracts out semiconductor manufacturing to China, from where it may be sent to another east Asian country like Malaysia for a product specific packaging. It then goes back to China to be integrated into circuits, which is then assembled into any electrical device we use, be it a laptop, or even your smartphone!

I believe you would've uncovered the crux of the problem now. The problem is that US does not import nearly as many dry semiconductor chips as they import electronic goods ($485.88B in 2024) that are MADE OF semiconductors, and the tariffs on these goods is truly what is going to create a structural transformation of the economy.

WHAT KIND OF IMPACT WILL THESE TARIFFS HAVE?

Economic impacts in general tend to be 2 fold: The one which meets the eye (the first order impact) and the one you'd have to dig deep to understand.

A first order impact would be the 145% tariff that is being charged on the wet chemicals imported from China. This is a very sector specific impact that only the semiconductor sector would experience.

The second order impact is more indirect. It would be, if suppose, there were import duties charged against microscopes used for R&D in this sector. This isn't so specific, it could apply to practically any industry!

Even though currently semiconductor equipments and integrated circuits are all exempt from tariffs, such second order impacts will continue to affect those companies that have fabrication plants in the US, prompting these semiconductors to become pricier.

....THIS SOUNDS A BIT COUNTER-INTUITIVE, NO?

Well, yes, if the new world of tariffs is not interpreted and planned for, in time.

For context, there are some very obvious impacts of these tariffs that may actually end up affecting the US industries more than they affect the ROW:

1) Semiconductor research: As discussed above tariffs could increase the costs of the generic equipments that are used in the research space. If the procurement end is not properly planned to become more localized, then the profits of these divisions will take a big hit.

That's not all. As per the Semiconductor's Industry Association, almost all countries globally have very generous tax policies when it comes to R&D expenditures in the semiconductor space. For example, in China for every $100 spent on semiconductor research, $220 can be deducted from the taxable profit, which will reduce the taxes to be paid.

Currently US does not have a very good policy in this regard and hence, rather than identifying ways to localize R&D expenditures, companies might just move out of US, and unfortunatelty take very good talent away with them, too.

2) Semiconductor equipment: There are some specific equipments used only by the semiconductor sector, like lithiography equipments that enable circuits to be printed onto semiconductor chips.

Currently semiconductor equipments are exempt from tariffs, which means these can be imported easily. However equipment manufacturers in the US will find it much more challenging to navigate this system, since the raw materials used to manufacture these giant machines, like steel, aluminium, AC-DC power simulators etc are all GENERIC (ties into the second order impact idea!)

These now find it equally costly to manufacture their equipment until they can figure out a way to localize their supply chain. However in this gap, manufacturing capacity may be negatively impacted, which is definitely bad.

3) Reciprocal tariffs: Finally, and this will take a wee while to solve, are the export restrictions and reciprocal tariffs that countries like China are imposing on the US. China is restricting the export of germanium and gallium, some of the critical raw materials essential for semiconductor manufacturing.

This will definitely interrupt the production of semiconductors, especially if one were to steer clear of Chinese raw materials!

WHY SHOULD ITEMS ONLY BE IMPORTED FROM CHINA? CAN'T I SEND MY ELECTRONICS TO A DIFFERENT COUNTRY, AND IMPORT IT FROM THERE?

Did not mean to sound illegal, but this was genuinely a question that propped up in my mind today.

Why not temporarily send across an electronic device to a different, non tariffed country, so we don't have to pay any duties when importing from there?

Well the answer to this is dictated by the import and export laws of the world, which states that the country that a good is imported from will be decided based upon the last place where it was 'substantially transformed'.

This would imply that for instance, if a semiconductor went to China, and temporarily stayed in India before being imported to the US, it would still be treated as being imported from China as that was the last place of substantial transformation.

GREAT, WE KNOW THE PROBLEM. SO NOW WHAT?

What can semiconductor manufacturers and in fact, the entire value chain from chip manufacturing to electronics distribution, do in order to optimize their costs and enhance profitability in these dire circumstances?

1) FIND YOU INNER SUPERHERO! 

And a real superpower in business, is to understand your pricing power. Let's say we are working with an electronics dealer in the United States. It would be a good idea for him to understand who his target audience are.

For example if this company is selling smartphones directly to the public, then there is a risk that if they were to include the cost of tariffs into their product price, that people wouldn't buy it. 

Yes, this is the infamous concept we call 'elasticity of demand'.

On the other hand if this manufacturer is involved in making data storage drivers with the use of semiconductors, then this will now become something that is indispensable for businesses, given the complex GDPR mechanisms that the world is adopting. 

In this case this company has got the amulet in their hand: consider adopting a cost based pricing approach, and weigh in your circumstances. Hopefully, your boat shouldn't sink too deep!

There is just another superpower that is very specific to this industry - I'll give you 5 seconds to think about this!

-

-

-

-

-

PARTNERSHIP!

Semiconductors have such a long and globalized supply chian that they can coordinate very well with each level in order to understand which route will bring them the most optimized returns.

Going back to my US Electronics Dealer (whom I shall name UED), who could have learnt that the cost of importing an assembled Iphone into the US market is way too high due to the tariffs. He now has the option to speak to his distributors and request them to claw back some of their margins so that the rest of the value chain does not have to suffer from declining margins.

2) START WITH THE HENCHMEN, THEN THE MAIN ANTOGONIST!

Maybe tariffs are truly out of our control. This doesn't mean we shut down our dealership, but rather we find the easier costs to target.

Are there any other costs that as a business we can claw back or optimize so we can better absorb the impact of the tariffs? Maybe the cost to import a laptop is huge, but we could perhaps find a cheaper location to set up our business and reduce rental expenditures?

Maybe we could find different local suppliers and adopt a good mix of imported goods and domestically produced goods so we don't have to face the grand impact of everything combined?

A good approach is to find a cost cutting goal (commonly referred to as X), and design to X (DTX approach). This way for every sale we do we think about cost cutting from the whiteboard/initial planning phase itself, so we are not frazzled when we look at the numbers during consolidation.

3) LOBBY!

A business can provide a much, much more nuanced breakdown of factors affecting a sector, that legislators may not be able to provide. Businesses can capitalize in on this and lobby with legislators to come up with laws that are transformative to their operations. 

Hence, businesses must come togther, join associations and support their value chain to sustain this period, and hopefully, dealing with this, will be as easy as setting up a motherboard ;)