Impact of U.S. Tariffs on AI Development and Global Technology Supply Chains

Following the 2024 U.S. presidential election, significant tariffs could lead to a restructuring of global technology supply chains critical for artificial intelligence (AI) development. Although these tariffs aim to boost domestic production, they also risk increasing costs and disrupting innovation.

Tariff Effects

• In 2024, U.S. electronics imports reached nearly $486 billion, with data processing machine imports at $200 billion, largely from tariff-affected countries like Mexico, Taiwan, China, and Vietnam.
• The tariff regime increased to 27% on critical AI hardware by 2025, impacting AI accelerators and advanced logic chips.

Global Supply Chain Disruptions

• Tariffs can disrupt global supply chains, increase costs, and create investment uncertainty, slowing technological progress.
• Empirical studies suggest that a one standard deviation increase in tariffs reduces output growth by 0.4% over five years.
• The need for AI chip demand could necessitate a power capacity increase from 11 GW in 2024 to 327 GW by 2030.

Opportunities and Challenges for India

• India positions itself as a strategic “third option” in the U.S.-China technological rivalry.
• India's IT exports have grown by 3.3% to 5.1% year-over-year, with AI and digital engineering being fast-growing segments.
• India benefits from low labor costs and specialized knowledge; however, it relies on imported hardware and collaborations.

Economic Implications and Technological Shifts

• The tariffs catalyze “capital substitution effects,” where companies optimize resources through algorithmic efficiency and hardware improvements.
• Consumer-level AI applications may not see immediate price hikes despite increased infrastructure costs.
• Tariff environments promote the development of application-specific integrated circuits (ASICs), with over 50% of workload accelerators expected to be custom ASICs by 2028.