Now that Donald Trump has won the election and will become the next President of the US, we need to take a closer look at many of the things he promised during the campaign. One in particular is highly problematic in my opinion.
He says he wants to repeal the CHIPS and Science Act passed by the current administration and Congress. As a replacement, Trump suggests adding a tariff on all the chips we import, which will then get everyone to build factories in the US in order to avoid the tariffs. But is that really that simple?
I think he’s wrong when he suggests tariffs alone will work to bring back US chip production, even if it may work with some other manufacturing operations. Tariffs are a penalty, while the CHIPS act is an incentive. Incentives almost always work better than penalties in getting things done and getting people to do what you want them to (it also works for companies). It may take a bit longer but it’s more effective and sustainable.
You can put all the tariffs you want on chips, but it still takes 3-4 years to get a new fab up and running, and it’s extremely capital intensive. At $20B-$40B per state of the art fab, many companies can’t afford that kind of investment without some form of subsidy, be it through direct funding or long term tax incentives. And even assuming with implementing tariffs that companies will build new fabs here, it will still take 3-4 years to do so, and for that period of time, the cost of chips will go up by 10%, 20%, or more? What will that do to the cost of goods and inflation?
There are other relevant issues to deciding where chips are built. In general it costs 10%-20% more to build chips here than in the Far East (e.g., Taiwan, Korea), so it only makes sense to build here for high value chips and not the commodity chips that many products use.
Pretty much everything today has chips in them so with tariffs you’re basically adding that cost on to the consumer of almost everything they purchase. And since many consumer products are cost sensitive, and the chips inside are often not state of the art and are fairly inexpensive, it makes no sense to add even more tariffs, as there is no real cost justification to build new manufacturing in the US.
Incentives like the CHIPS Act are more than just a giveaway. It’s also a practical statement of shared risk. New fabs are a very high risk venture and also may have a very limited lifespan as current chip making processes and equipment can fairly quickly become outmoded and/or require major upgrades.
So with the CHIPS act providing subsidies, the government is basically saying it will take on part of that risk. In a very capital intensive marketplace, this additional incentive can enable manufacturers to finance projects they couldn’t otherwise. And it partially democratizes the process so that not just the biggest and most elite companies can play.
So bottom line, I think it’s a bad idea to add the tariffs, unless of course you plan to use those tariffs for subsidizing new expensive fabs, which in my understanding is not what the President elect intends to do. But if he does, that’s a different strategy, and basically it’s what the CHIPS Act already does anyway, so what’s the advantage in repealing it?
One final thought. I’m betting that lawmakers and especially Republican lawmakers from certain states that will benefit from the CHIPS Act (like OH, TX and AZ, and recently also NY) will offer a lot of push back on this idea of repealing the act, and lobbyists will be working overtime to try and prevent this from happening.
The President probably doesn’t need Congress to be a partner in tariffs and can initiate them on his own, but that doesn’t mean he won’t feel a lot of political pressure against such a move. So it’s certainly not a sure thing that it will happen, or at least not across the board for critically important components. And that would be a good thing, in my opinion.
Jack Gold is founder and principal analyst at J.Gold Associates, LLC. With more than 45 years of experience in the computer and electronics industries, and as an industry analyst for more than 25 years, he covers the many aspects of business and consumer computing and emerging technologies. Follow him on Twitter @jckgld or LinkedIn at https://www.linkedin.com/in/jckgld.