China says 125% tariff will hit US-origin chips

On April 11, the China Semiconductor Industry Association (CSIA) revealed China's 125% retaliatory tariffs will hit US-manufactured semiconductor chips.

Some context: There are two stages to chip manufacturing – fabrication and packaging.

• Fabrication refers to the process of creating chip devices – such as transistors and capacitors – on a silicon wafer.
• Packaging involves cutting the wafer into individual pieces, and preparing them to be inserted into electronic devices.

Per the CSIA, when applying tariffs, Beijing will consider semiconductor chips' country of origin based on the location of front-end fabrication, rather than where the chip is packaged.

• Chipmakers like Texas Instruments and Intel – who fabricate their chips in the US, then ship them to Southeast Asia for packaging – will be hit with a 125% tariff when selling their chips to China.

Get smart: Beijing is hitting multiple birds with one big stone.

• First, it's punishing US chipmakers for the trade war started by their government.
• Second, this will undermine US efforts to reshore chip manufacturing – a key goal of the Trump administration.
• Third, this will force Chinese buyers to source their chips elsewhere – supporting China's chip manufacturing base.

Get smarter: In the short term, however, this will be painful for China too.

• A 125% tariff is a non-starter for China-based customers, meaning US-origin chip imports will stop almost overnight.
• This will cause havoc with China's supply chains, hitting manufacturers who rely on semiconductor inputs.