What are the impact of tariffs on tech and will we see another semiconductor supply chain crisis?
The uncertainty around the impact of tariffs is stark right now, with those in the tech sector far from alone in wondering how they might be affected by sweeping taxes on imports.
First on the campaign trail and now in office, the Trump administration has repeatedly sung the praises of tariffs and, at time of publication, is in the process of levying 25% tariffs on imports from Canada and Mexico – the US’ largest trading partners. China is also facing a combined 20% rate, with President Trump having promised 25% tariffs on Europe in the immediate future.
While no one can predict the exact effects of these tariffs, the broad implications are a significant topic of discussion for the IT and broader tech industry. Steve Hall, chief AI officer at consultancy company ISG and president of its EMEA operations, has been producing the company’s index for a decade. Its Q4 2024 analysis projected that US tariffs would play a marked role in the sector’s overall growth rate.
“First of all, I think there’s a general belief that the tariffs are going to increase inflation. Fed’s [US Federal Reserve] going to fight inflation, so it’ likely means that they’re not going to be able to have the room that they need to do to lower the interest rates,” Hall tells ITPro, “So when that happens, as we’ve seen over the last couple years, large enterprises really pull back on discretionary spending.”
Hall says that the discretionary spending likely to be axed by companies, should the pain of tariffs be severe, could include budgets for digital transformation projects, with companies opting instead to focus on cost optimization opportunities. That doesn’t mean he expects all areas of the industry to contract, with the growth of the behemoth software as a service (SaaS) and hyperscale spending expected to continue, in large part due to the continued expansion of AI products and services. Companies that are focused on digital services are less likely to feel the full weight of tariffs as digital trade is, traditionally, not subject to the same types of customs measures.
Martin Balaam, the CEO and founder of SaaS product information and digital asset management firm Pimberly, says that though the vast majority of business expenses for companies like his are tied up in intellectual property and the human power to produce it, there are still aspects of the market place where IT companies can play a role in the mitigation of tariffs. He finds this particularly true when it comes to helping clients with supply chain oversight in all areas of the world, as Pimberly works to expand its market in the US.
“There are limited things that we can do, other than enable our customers to have more visibility in terms of where their products come from and which countries potentially are at a higher risk of some of these things actually happening to them.”
Balaam says that this keen eye on process has been ongoing since the first wave of the COVID-19 pandemic, with companies contemplating near shoring production to mitigate the supply chain crisis. But there is still concern across sectors that, despite the expressed hopes of the Trump administration, there just isn’t the ability to scale US production capabilities at the speed needed to entirely shield the domestic economy.
Balaam does see opportunities for innovation, particularly when it comes to a large disruption, like a tariff’s tendency to dislodge complacency amongst key company decision makers. One example given was the additional cost of computing power that could come from broad tariffs.
Still, Hall doesn’t see US manufacturing accelerating at the speed that tariff evangelists hope it will. This is of particular concern for those interested in tech innovation, with much of the materials required being way off shore. For example semiconductors, used in a vast number of modern devices, are largely imported from Taiwan and Taiwan Semiconductor Manufacturing Company (TSMC) produces 90% of the most advanced chips in the world, per The Economist.
In a speech to House Republicans on January 27, President Trump threatened to levy tariffs as high as 100% against Taiwan to spur further investment in US chip fabrication. Hall doubts whether the US can compete with Taiwan in the immediate future.
“It’s going to take years before the US has the chip manufacturing capability that comes out of Taiwan right now, and most of that is co[-produced].” Hall says, adding that US firms including Apple and Intel have a supply chain heavily integrated with Taiwan, which can make it hard to pinpoint the exact impact and severity of tariffs.
Nvidia, which has become one of the most valuable companies in the world off the back of record demand for its graphics processing units (GPUs) for generative AI training and inferencing, is highly reliant on manufacturing plants in Taiwan. On 3 March, its stock fell 9% against a backdrop of confirmed Mexico-Canada tariffs by the Trump administration.
Despite the general gloom over current prospects of American economic policy, Paul F. Magel, the president of the application solutions group at Computer Generated Solutions, suggests that the current administration is “saber-rattling” and that its motives and their eventual downstream consequences still aren’t entirely clear.
“From a Trump standpoint, he’s utilizing, certainly, the size of the US market and the threat of tariffs to drive other initiatives that he’s trying to accomplish,” Magel tells ITPro. Some early responses to tariffs may already be visible. Amid reports that the tariffs will be going ahead, TSMC announced a $100 billion investment in new US fabricating plants.
Magel counts himself amongst the portion of the sector who see technology as part of an effective tariff response as the US tries to bring more manufacturing home.
“Depending on the industry and the marketplace, we don’t necessarily have the labor force anymore to bring all of the manufacturing back that we had 100 years ago or 50 years ago,” he tells ITPro. “So, some of that has to be balanced out. That’s where things like… AI robotics automation will take place. There’s this labour component in manufacturing that you’ve got to make sure is not going to be a constraint if you start bringing it back to the United States of America.”
The current landscape is incredibly hard to transparently assess. What will be key, according to those in the broader IT and tech industry, is the ability of tech companies to use technology to further streamline their processes and for their providers’ ability to respond to current market needs. The world’s supply chains have become more and more integrated over many decades – some trace Canada’s integral connection to the US market as far back as the great depression, for example – and that detangling does not, and cannot, happen overnight.
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