Will Trump's tariffs cause price hikes in electronics? Here's how his plans could lead to trouble in the semiconductor industry

MW Will Trump's tariffs cause price hikes in electronics? Here's how his plans could lead to trouble in the semiconductor industry

By Therese Poletti

The semiconductor industry could be facing some serious trouble next year, if President-elect Donald Trump follows through on some of his campaign promises.

The new import tariffs Trump talked about during his campaign - especially the extra 60% tariffs on goods from China - could lead to sharply higher prices for some products assembled there, if exceptions are not made.

In addition, he did not have many kind words for the U.S. Chips Act, even though it is focused on getting some semiconductor manufacturing back to the U.S. , which is one of Trump's priorities. The Chips Act provides grants, tax credits and loan guarantees.

And more export restrictions on chips, and the equipment to make them, are expected to block the sale of high-end semiconductor manufacturing equipment to China which could effect sales of some U.S. chip equipment makers.

"It's kind of hard to say right now, but my guess is that some early effects will be negative," said Robert Maire, president of Semiconductor Advisors, of the incoming Trump administration.

Among the biggest uncertainty is the issue of tariffs, what products they will hit and what technology sectors could be hurt. The bottom line, though, on tariffs is that they will lead to increased goods prices.

"Trump's plans will make us worse off economically," said Harry Broadman, a principal at WestExec Advisors, senior economist at the Rand Corp. and former U.S. assistant trade representative in the George H. W. Bush administration. "In the short run, the consumer or individual will pay higher prices for imports and that means the cost of what they are buying has risen significantly. That means you are going to have inflation, people will find their disposable income decreased."

During his first term in office, Trump's administration imposed tariffs on a wide range of products from China, but the tariffs he has discussed for his next term are even higher and could be more detrimental.

For example, in a worst-case scenario featuring a 60% tariff on all goods coming out of China, all iPhones would get a big price hike, said Dan Hutcheson, vice chair of TechInsights Inc. Apple Inc.'s $(AAPL)$ manufacturing partner is Foxconn of China, where most of the iPhones are made.

Edison Lee, an analyst with Jefferies & Co., noted that in Trump's first term in office, Apple got an exemption. "In Trump's last presidency, Apple was exempted from import tariffs," Lee said in a note to clients Friday. "Since then Apple has pro-actively diversified its production away from China, but so far only about 10% of [the] iPhone is made outside China." He added that it is a possibility Apple will receive an exemption again. .

But in a worse-case scenario, Hutcheson said that generally speaking, for an iPhone with a $1,000 retail price and a wholesale price of $600, plus $15 in shipping and insurance, the tariff would would be 60% of that value, or $369. "So to cover the tariff costs, Apple would have to raise the wholesale price by that amount." Passed onto the retail level, "it would work out to a price of $1,369," he added.

Many electronics products made by U.S. companies are still assembled in China, and based on Trump's comments to date, products assembled and shipped from China would be hit with the hefty tariff.

Stacy Rasgon, a Bernstein Research analyst said the direct impact of the additional China tariffs on semiconductors alone would be very small. "We hardly import any chips from China," he said, adding that the Biden Administration has already increased tariffs of semiconductors coming from China for 2025. Raw semiconductors made up about $3 billion in imports, out of $427 billion in total goods imported from China in 2023.

Investors appear to be taking a wait-and-see attitude, until Trump is actually in office next year, and clarifies his plans. But, the Wall Street Journal reported that Trump wants Robert Lighthizer as his his trade czar, a former U.S. trade representative who helped him impose tariffs in his last administration.

"The incoming administration loves tariffs, and thinks they are the answers to all trade imbalances," said Maire. "They used tariffs to enforce and cajole policy."

Tariffs could also hit the semiconductor-equipment industry, where the production of some equipment used to fabricate semiconductors is also made outside the U.S., in counties like Singapore and Malaysia, he said.

During his first term in office, Trump's administration imposed tariffs on a wide range of products from China, but the tariffs he has discussed for his next term are far higher and could be more detrimental.

"It would be one thing if Trump said, 'I am going to work with the G7 leaders'," Broadman said. "That is what needs to be done, but instead individual country leaders become susceptible to sweetheart deals with China." He said if the U.S. does not work with other countries, China will retaliate. "You do it arm-and-arm with allies. Because what China will do is play off importing nations off other importing nations."

Trump may further expand U.S. export controls, as part of his "America First" strategy "to limit China's access to advanced semiconductor technology," according to a recent note by Beacon Policy Advisors, a Washington public policy research firm.

In the past years, the Biden administration has tightened restrictions on exporting certain technologies to China, with the goal of blocking access to chips that can power artificial intelligence. For example, Nvidia Corp. $(NVDA)$ has been working on specific versions of its graphics units processors that would adhere to the export controls. But the U.S. is getting stricter and under Trump that will likely continue. Reuters reported that the U.S. Commerce Department ordered TSMC (Taiwan Semiconductor Manufacturing Co.) (TW:2330) to halt shipment of advanced semiconductors to China that are used in artificial intelligence.

This will also include semiconductor equipment companies, many of which have been exiting the U.S. for manufacturing in Asia. U.S. lawmakers have been asking the equipment makers for their sales data to China. According to Bernstein Research, Chinese companies are on track to spend $43 billion on wafer fab equipment this year, but it is not yet clear how any potential export restrictions will effect their spending.

In its earnings call this week, equipment maker Applied Materials Inc. $(AMAT)$ executives were asked for their thoughts about "any potential risk in terms of added restrictions or perhaps going the other direction" related to the incoming administration.

"It's early, we really can't speculate on what might change there," said Applied Materials Chief Financial Officer Brice Hill. "So we'll have to wait for more input on that one."

The Chips Act represents another conundrum for Trump. Designed to create more semiconductor manufacturing in the U.S., the program has not yet paid out funds to most of the companies due to receive them. Trump has disparaged the Chips Act, calling it "a really bad deal."

"There is certainly plenty that can be done to delay, prevent, modify, question and generally screw with even a done deal....especially if you are the new administrator, who writes the checks, of said deal," Maire wrote in a recent note to clients.

Maire said that he believes Intel Corp.'s $(INTC)$ funding for its Ohio fabrication facility will come through, as will Micron Technology Inc.'s $(MU)$ for its Idaho plant, but that funding for TSMC's latest Arizona fabs might be at risk. Likewise, Trump could hurt some blue states like New York, and Maire believes Micron's fab in Clay, N.Y. "is likely toast."

"It was a well-intentioned law to try to boost U.S. competitiveness at a very sensitive and important industry," Broadman said. "It is a bipartisan initiative." But he added that it would be "extraordinary" if Trump supported it.

This week's appointment of Tesla Inc. $(TSLA)$ Chief Executive Elon Musk and former Republican candidate Vivek Ramaswamy to lead a "Government Department of Efficiency" to create a smaller government could also have a devastating effect on the Department of Commerce, which administers the Chips Act, as well as many government agencies.

Investors initially cheered the news of Trump's victory, and companies may look forward to lower income taxes and less regulation under Trump. But even more heftier tariffs and potential feet dragging in releasing the Chips Act funding will ultimately hurt the overall U.S. economy.

-Therese Poletti

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November 16, 2024 09:32 ET (14:32 GMT)

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