By Tae Kim

The U.S. is poised to win the artificial intelligence race against China. All the necessary elements are in place.

American chip companies and AI models are innovating rapidly, with big advances in features and hardware expected this year. The Trump administration is wisely looking to relax energy and permitting regulations to alleviate energy bottlenecks, which have become the main hurdle in building the large AI data centers needed in the U.S. Global investors, meanwhile, seem willing to fund a massive AI infrastructure buildout with projects like Stargate.

But one significant threat looms on the horizon: tariffs. President Donald Trump may snatch defeat from the jaws of victory with a fixation on chip tariffs.

Trump foreshadowed such tariffs last month. During a speech to House Republicans, he said the U.S. would impose tariffs of 25%, 50%, or even 100% on chip imports to increase domestic semiconductor manufacturing. Later that week, after meeting with Nvidia CEO Jensen Huang at the White House, the president characterized the session with Huang as a "good meeting" while adding that "eventually we're going to put tariffs on chips." On Monday, Vice President JD Vance vowed the Trump administration would implement policies to ensure AI systems and AI chips are made domestically.

Later in the week, Trump announced his plan to study reciprocal tariffs, but made no mention of chips. Investors sighed a breath on the lack of specifics or near-term duties. But the threat, specifically around chip tariffs, remains and investors should be aware of the risks.

On the surface, it might seem logical that a large tariff would incentivize domestic production of advanced chips. But the reality is that there's no way to divert production domestically over the next few years given a lack of capacity. Advanced chip factories can't be created out of thin air.

It takes roughly four years to build a new fab at the cost of $10 billion to $20 billion. Money and time aren't the only factors, though. Technical expertise is also needed. Only Taiwan Semiconductor Manufacturing, TSMC, has proven it can make chips that meet the requirements of top chip designers like Nvidia and Apple.

About 90% of the world's most advanced chips, including the main processors inside mobile phones, AI graphics processing units, and personal computers, are made in Taiwan by TSMC. Thanks to funding from the Chips Act, TSMC agreed to build a few plants in Arizona that will come online through 2030. But these fabs represent a fraction of global capacity and are possible only because TSMC has sent Taiwanese engineers to the U.S. to help build them.

Intel has had limited success thus far with its own U.S.-based foundry operations. In its latest quarter, Intel Foundry generated $4.5 billion in revenue, down 13% versus the prior year, while losing $2.3 billion.

The net result of a large tariff would be a significant tax on chips that would be passed on to customers. It would reduce, or even eliminate, the funding of large AI infrastructure projects.

Shortly after his inauguration, Trump, along with executives from OpenAI, Oracle, and SoftBank, announced the creation of The Stargate Project, which intends to spend $500 billion over the next four years building AI infrastructure in the U.S.

UBS estimates that 40% of the data center spend will go toward AI server racks. A 50% tariff, therefore, would make the project $100 billion more expensive, crimping either overall spending or potentially blowing up the funding for the project altogether.

Large technology companies spending aggressively on AI will also be forced to pull back or spend more. In their latest earnings reports, Microsoft, Google, Meta, and Amazon.com announced plans to dramatically increase their 2025 capex spending, bringing the Wall Street consensus to a total of $335 billion -- 16% higher than analysts had expected just weeks ago. Once again, tariffs would mean the money doesn't go as far, or companies would need to add to their already huge spending bills.

Here's my guess on what will happen: If Trump institutes high tariffs on chip imports, the stock market will crash, given that the AI trade has become foundational to America's growth story. The administration would likely backpedal, and the markets would rebound. We've seen this story before. Investors would surely prefer not to go through the experience again.

A version of this article originally ran in the free weekly Barron's Tech email newsletter. Sign up here to get it delivered directly to your inbox.

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Write to Tae Kim at tae.kim@barrons.com or follow him on X at @firstadopter.

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