Silicon Suicide Or, Tariffs and the Deep State

The populists like to say tariffs are just like taxes, only better because foreigners pay them.

That’s dangerously wrong. Tariffs are not taxes, they are regulatory instruments, meant not to maximize revenue but to control economic outcomes. Like all regulations they presume that a politician or a bureaucrat knows best, and that neither has been bribed. Like nearly all regulations, regardless of what the enabling legislation says, they are made in the dark.

In most cases, bribes are not necessary. Pathetic ignorance of the industry by the regulator will do plenty of damage.

Here’s a thought experiment. What is the single most stupid and destructive tariff the United States could impose today?

Alas, there are many choices, but our nominee is the administration’s broad daylight threat of tariffs on semiconductor products imported from Taiwan, the home of Taiwan Semiconductor Manufacturing (NYSE: TSM).

Perhaps you have heard of Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOGL), Meta (NASDAQ: META), Broadcom (NASDAQ: AVGO), and Tesla (NASDAQ: TSLA). These are eight of the 10 largest U.S. companies by market capitalization, and eight of the world’s top 12, worth some $14 trillion today. Though their businesses vary, they all have two things in common:

• Advances in semiconductor engineering and the needs of their customers have prompted each of these companies to progress from chip buyers to chipmakers (except Nvidia and Broadcom which were always chip companies). They all design and commission “custom silicon” for their highly specialized products.
• Every single one of these companies outsources the actual manufacturing of their chips to Taiwan Semiconductor (NYSE: TSM). We should point out that “outsource” does not mean “fill in the order form.” Chip manufacturing is the most complex and demanding industrial process in all human industry. Each of these companies are deep engineering partners with TSM. TSM builds the factories, buys the equipment, and develops the processes, so its 500 customers, mostly American, don’t have to. Intel never shed those burdens, insisting on manufacturing at its own fabs and now teeters at the edge of bankruptcy.

Why TSM? Not because of price (it keeps raising prices). Not because of cheap labor (front-end chip production uses very little). The Amazing Eight use TSM because it is currently the only company in the world that can reliably and efficiently produce the world’s most powerful and demanding semiconductor devices.

TSM does well for Taiwan, but it does even better for the United States. Last year, TSM brought in $90 billion in revenues from its more than 500 customers.

Just one of those customers, Nvidia, brought in $130 billion. Broadcom brought in $51 billion. Apple, TSM’s largest customer, brought in $391 billion in revenue.

TSM’s net earnings after taxes were about $17 billion. Nvidia earned $73 billion. Broadcom, in a weak year, earned $6 billion. Apple earned $103 billion.

The Amazing Eight all face strong foreign competitors. Their value depends on maintaining margins. Slap a 25% tariff (the President’s favorite number) on Taiwan, and Apple, Nvidia, and Broadcom could see their values cut by 25% even 50%, disastrously restricting their access to capital for R&D and expansion. The other five would all suffer significant damage, especially as the data centers that now contribute so much of their profits are massive Nvidia and Broadcom customers, as well as making their own specialized devices.

Tariffs on Taiwan are the equivalent of the administration using laser sights to target its own foot. It can’t miss. The idea bespeaks an ignorance of the industry it intends to regulate no less profound than that of any work-from-home bureaucrat.

The MAGA team imagines that tariffs on Taiwan will force TSMC to build more factories in the United States. That is happening, at the behest of the huge subsidies in the “CHIPS act.” But Taiwan remains a pullulating hive of microchip wafer-fab equipment and service suppliers. Unlike China, the United States does not possess an excess of engineers and materials’ scientists.

Established companies such as TSMC will compete for critical engineering resources against creative American startups. It will then compete with U.S. wafer fabs from Intel, Micron (NASDAQ: MU), Skywater (NASDAQ: SKYT), and other niche suppliers.

So far, the acclaimed “CHIPS” subsidies have forced China to innovate in chips and wafer fabs and to advance faster than the United States. Tariffs doubtless will contribute further to our silicon suicide.

Tariffs on Taiwan is a big visible issue, not a deep state thing. By contrast, most tariff struggles happen under cover of darkness. Though Populists fantasize about some ideal, uniform “revenue tariff” of say, 5%, tariffs always devolve into a sewer of special pleading, waivers, exemptions, backstabbing, elbows under the table, and political corruption.

Even worse is the popular idea of reciprocal tariffs.

Have a Mack truck you want to take for a spin? You can run it right through “reciprocal.”

Yearn for the days before college football playoffs yielded actual champions? You’ll love “reciprocal.”

In any of tens of thousands of cases, some bureaucrat, lobbied by some congressman, will get to decide what “reciprocal” means. Not only which rates are reciprocal, which might seem easy, but which products are equivalent. Perhaps no term in the language could be more bureaucrat empowering.

One of the great hazards of political pontification is the illusion that the law or rule you advocate will be what you get. No, it will be reforged into a tool for the interested to manipulate long after your attention span has been exhausted.

Taxes, especially on business, get manipulated as well (which is a good argument for abolishing the corporate income tax). But even if tariffs are no more likely than taxes to become a tool for special interests, why pump more sewage into the swamp?