Another Potential Headache For Us Data Centers — Trump Tariffs

The Trump administration is weighing a new round of sweeping tariffs on semiconductors, eight people familiar with discussions told POLITICO — despite warnings from tech companies that the move could doom U.S. hopes of dominating artificial intelligence.

One tariff approach under consideration would dramatically expand the number of tech products subject to the duties, hitting not just chips but potentially many of the goods made with them, such as laptops, gaming consoles or the servers that fill data centers, the people said. Commerce Secretary Howard Lutnick favors a structure that would tie foreign companies’ relief from the tariffs to investment in U.S. chip manufacturing to juice more domestic production, said four of the people.

The administration is also mulling a phase-in period for the new tariffs, the four people said. The people stressed that the framework could still be substantially revised in the coming weeks or months.

POLITICO granted anonymity to the people discussing the proposal so they could describe the private deliberations candidly.

The potential for new tariffs on chips is alarming the U.S. tech industry, which is already grappling with a shortage of high-end semiconductors amid skyrocketing demand driven by the construction of data centers used for artificial intelligence.

Advocates for the sector say they’re not opposed to Trump’s goal of building more of those components on U.S. soil, but note that advanced chip factories cost billions of dollars and take years, if not decades to build. Until that capacity exists, American companies will remain heavily dependent on imported chips from a handful of Asian suppliers including Malaysia, South Korea and Taiwan, which alone produces more than 90 percent of the world's most cutting-edge semiconductors.

The fight lays bare a contradiction at the heart of the administration's tech agenda: Its drive to rebuild American chipmaking is running headlong into Trump’s promise to win the AI race. Tariffs meant to force chip production back onshore would, the industry warns, tax the very imports the AI boom depends on — and could force U.S. companies to cancel some of their plans to build data centers.

“This data center buildout, in scale and dollars, has been compared to building the transcontinental railroad,” said Jonathan McHale, digital policy chief at the Computer and Communications Industry Association, which counts major tech companies such as Amazon, Google and Meta as members. “Anytime you add to the cost and decrease predictability you make it more difficult to invest, and you are putting that in jeopardy.”

In a statement, the White House defended its use of trade policy to bolster domestic industry.

“Reshoring semiconductor manufacturing is a top priority for President Trump, whose policies have already secured hundreds of billions of dollars of investments in this key sector,” said White House spokesperson Kush Desai. “The Trump administration remains focused on delivering more investments and economic relief for the American people while safeguarding our national security.”

The Commerce Department did not respond to multiple requests for comment.

Tech firms have launched a lobbying blitz in hopes of convincing the Trump administration to scale back the expected tariffs so they more closely mirror duties the president released earlier this year, which included broad exemptions for data centers and other domestic uses, limiting their impact.

In addition to Lutnick, tech industry representatives and lobbyists have met with senior officials — including Commerce Undersecretary Jeffrey Kessler, who heads the department’s Bureau of Industry and Security — with increasing frequency since the start of summer, the people said.

The lobbyists argue that the tariffs would slow the data center expansion by making it harder for U.S. companies to obtain the volume of semiconductors that the AI boom requires. The duties would hit just as American tech giants are on a record-setting AI spending blitz, dumping hundreds of billions of dollars into data center mega-campuses and snatching up the pricey, cutting-edge chips needed to operate them.

“This may be the single dumbest way imaginable to pursue American dominance in AI,” said one tech official from a major industry group that also served in the first Trump administration. “It's like kneecapping yourself at the starting line.”

Many of the lobbyists thought that Kessler expressed more sympathy to the industry’s concerns, but underlined that the final decision rests with Lutnick and that the undersecretary was unlikely to meaningfully challenge his direction.

“Every conversation is some version of: ‘Please, tread carefully. You don’t understand how much demand is coming, or how little capacity we have to meet it,’” said the tech official.

Recent talks, however, have trended in a negative direction for the industry, three of the people familiar with the matter said, after Trump administration officials signaled it may no longer support exemptions like those included with the January tariffs — not just for data centers, but research and development, startups, consumer applications, civil industrial applications, and public sector uses, as well as "other uses" that the Commerce secretary concludes will strengthen the U.S. supply chain.

Instead, Commerce Department officials are increasingly saying in private talks that they need to apply the tariffs more broadly on companies to push chipmakers to expand production in the United States. 

Under the system that Lutnick favors, the U.S. would let a set volume of chips enter the country duty-free, with the size of that allowance tied to how much companies pledge to produce on American soil — a structure that risks widening the gap between the supply of tariff-free chips and the volume U.S. companies need, the four people said.

People close to the discussions say Commerce Department officials have yet to settle on the precise rate of the tariffs or other key details. One idea under consideration would set separate tariff rates and quotas for individual countries, with country-specific guidance covering their major semiconductor manufacturers, four of the people said.

Semiconductors and their parts overwhelmingly come from trading partners in Asia. Besides seeking to promote advanced semiconductor production on U.S. soil, trade hawks in the administration also fear that American tech companies' dependence on Taiwanese chips poses grave national security threats should China invade the island.

"Getting supply chains de-risked is one of the central geopolitical questions of our lifetime," said Michael Sobolik, a senior fellow at the right-leaning Hudson Institute think tank and a former aide to Sen. Ted Cruz (R-Texas). But Sobolik added, "It's going to be really expensive to, at scale, build a lot of these chips in the United States, because there are a lot of other cheaper places in the world where you can do that."

Tech lobbyists and economists warn that beyond disrupting data center investment, the tariffs would raise the cost of imported chips that U.S. companies use to make servers, computers, televisions and other electronics. They would also hammer U.S. chip designers such as Nvidia and Advanced Micro Devices, which rely on overseas manufacturers to produce their chips.

And they could leave companies such as Apple struggling to compete overseas against foreign manufacturers that can buy the same chips without paying the U.S. tariff, while pushing allied chip suppliers to seek more business in China.

Sujai Shivakumar, an economist who directs the Renewing American Innovation program at the Center for Strategic and International Studies think tank in Washington, said the Trump administration has to go beyond tariffs, since building up domestic chip production takes far more than making imports expensive.

"Higher tariffs can change relative prices, but in themselves, they don't produce more skilled technicians," Shivakumar said. "They don't shorten the permitting timelines. They don't expand reliable power and water infrastructure. They don't create qualified suppliers."

As one of the people in the tech sector stressed, the industry supports the goal of building up domestic chip manufacturing.

"The data center industry would love to have a strong domestic semiconductor manufacturing industry, and we're here to support that on-shoring," the person said. "But the volume and scale of manufacturing of advanced node chips and memory chips is just not where it needs to be."

The proposal to tie tariff relief to domestic investment mirrors a trade deal Trump inked with Taiwan in January of this year that allows Taiwan Semiconductor Manufacturing Co., which builds the chips designed by U.S. firms like Apple and Nvidia, to import some chips into the U.S. duty-free.

But so far, that’s just a small share of the leading-edge chips that the market needs. TSMC has committed $265 billion to its Arizona plants, the largest foreign direct investment in U.S. history, yet even at full build-out the company projects only about 30 percent of its most advanced capacity will sit there, much of it years away.

One of the people from the trade and tech sectors who frequently meets with senior Trump administration officials pegged the buildout of domestic chip manufacturing at more than five years. That’s far longer than the phase-in windows Trump has allowed on past tariffs, meaning the duties would likely bite major companies in the meantime.

"The math literally just does not work," said the tech representative. "The volume they're talking about granting duty-free wouldn't cover the hyperscalers alone, let alone the rest of the industry. Those are chips we physically can't buy here, because the capacity doesn't exist yet."