When the Chips Are Down, Tariffs Beat Subsidies
President Donald Trump this week said he is planning to impose a 100 percent tariff on imported computer chips unless manufacturers are also investing in U.S. production, telling reporters that “if you are building in America, there is no charge.”
The announcement came as two economists, Ran Zhuo of the University of Michigan and Audrey Tiew of New York University, released a new working paper that may help vindicate the administration’s confidence in its tariff-first strategy. Using a detailed structural model of the global contract semiconductor market, the authors find that a modest 10 percent import tariff can shift production decisions in favor of the United States, transforming a hypothetical U.S.-based chip fabrication facility from a long-term money-loser into a more profitable investment than an identical plant in Taiwan.
By contrast, the kinds of capital subsidies and tax credits offered under President Biden’s CHIPS Act—while substantial—do not by themselves tip the balance. Even with those incentives, the U.S.-based plant ends up earning between $1.6 billion and $1.8 billion less over its projected lifetime than a comparable facility abroad, largely due to higher labor, construction, and operating costs.
The findings offer an empirical challenge to the subsidy-first approach favored by the Biden administration and suggest that market access—rather than just financial support—may be the more decisive factor in industrial location decisions. It upends the widespread assumption among economists that subsidies are superior to tariffs.
Why the U.S. Still Struggles to Complete in Chip Making
Zhuo and Tiew simulate a U.S.-based version of “Fab 14,” a real production facility operated by Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker. In their model, the U.S. site faces a $1.2 billion higher capital cost than the Taiwan facility, a disadvantage only partially offset by public subsidies.