Tariffs - a silver lining for AI?

How the tariffs implemented by the Trump administration on imported goods could boost the development of artificial intelligence (AI) by fostering local innovation and investment.

Short on time? Here are our key points:

• Trump's tariffs have provoked fears of increased manufacturing costs for essential equipment in data centres vital for AI
• as AI becomes more powerful, national security concerns will grow. On the other hand, AI relies on complex global supply chains, making consolidation within individual jurisdictions challenging
• while Trump's tariffs present challenges for the technology sector, they may also drive reshoring and nearshoring efforts, which could improve technological autonomy and alleviate national security concerns around AI
• US reshoring could, therefore, spark competitive opportunities for UK and European AI firms

The Trump administration’s tariffs have major implications for the technology sector globally. Many US tech companies have seen stocks plummet due to market fears that manufacturing of essential equipment will become pricier due to tariffs on key countries in the supply chain. Data centres, vital for AI, could be particularly vulnerable to cost hikes from tariffs on steel, aluminium, and electronic components.

There may, however, be a silver lining to the tariffs for the AI industry, particularly in the US. The more powerful AI becomes, the more national security concerns around it will grow. As Nicholas Thompson of the The Atlantic notes, it may become increasingly difficult to disentangle these national security concerns from the economic uses of AI.

Currently, AI relies on intricate global supply chains, from the rare earths (used in semiconductors) over which China holds a significant monopoly, to Taiwan’s advanced GPU chips, to more mundane materials like steel and aluminium for data centres. A need to consolidate the entire AI supply chain within one country in the future, for example in the case of an escalated rivalry between the US and China, or a geopolitical change affecting Taiwan’s status as a global chip supplier, would be challenging for western countries.

Some industry voices suggest that to the extent tariffs prompt a move towards local supply chains for AI, they could be a positive thing. In an extreme scenario like those above, countries might need the capability to produce not only AI software and technology, but all the supply chain components themselves. Even without contemplating such a scenario, having the full AI supply chain consolidated within one jurisdiction may have other benefits: compliance with domestic regulatory frameworks and security protocols would become more straightforward, at least at the creation stage, and countries could have more control over how their AI systems are used. Deployment on the internet, however, would remain complex. The EU AI Act, for example, has extra-territorial effect where EU citizens have access to AI systems.

There have already been moves towards reshoring elements of the AI supply chain. Nvidia has already announced that it will manufacture ‘AI supercomputers’ entirely in the US, with plans for a million square feet of manufacturing space in Houston, Texas. The company also plans to start manufacturing its latest cutting edge Blackwell chips, used for generative AI development, at TSMC’s plant in Phoenix, Arizona. Apple has announced billions of investment in new chip production facilities in Houston, while Intel, TSMC and Micron are all making major investments in US-based semiconductor manufacturing. On the other hand, Apple has highlighted workforce shortages as a possible barrier to US manufacturing.

This raises the possibility that reshoring AI supply chains may create more manufacturing jobs in the US, perhaps countering any jobs AI might reduce through other efficiency gains. Ironically given the Trump administration’s tough stance on immigration, any serious reshoring of high tech manufacturing to the US may require more immigration of skilled workers from overseas.

The competitive opportunities of re-shoring 

For UK and European AI firms, a US move towards reshoring its AI supply chain could offer competitive opportunities. National security concerns may be less of an issue within the European Union, the wider EEA and the UK, thanks to typically close cooperation and collaboration between these jurisdictions. Historic defence and intelligence-sharing partnerships like NATO and Five Eyes may reassure the US about extending manufacturing to the UK or Europe, especially if there were cost incentives to do so. UK and European firms may also wish to reduce their own dependencies on potentially volatile international supply chains, such as those involving China.

International companies within the technology supply chain are already looking to expand their presence in Europe. The Financial Times reports that Taiwanese semiconductor suppliers are seeking to make use of Europe’s advanced chip factories, encouraged by incentives under the European Chips Act, which aims to attract €43 billion in investments, reduce supply chain risks, and to establish Europe as a leader in the chips market. Even before Trump’s tariffs there were similar government-backed efforts in the US; the CHIPS and Science Act, for example, authorises $52 billion in subsidies for US-based semiconductor production and research.

How nearshoring can reduce supply chain disruption

Nearshoring, which involves relocating production facilities to nearby countries, could also reduce companies’ exposure to supply chain disruption. This may be more feasible in Europe, which is already closely integrated, including from a national security standpoint. Eastern European countries are already a popular choice. A 2023 study by Inverto, part of Boston Consulting Group, indicated that 32% of companies surveyed plan to relocate activity to Eastern Europe in the coming years. Although the war in Ukraine complicates matters, countries like Poland and Romania are reportedly seeing increased foreign direct investment for IT and semiconductor production. In North America, US vendors are exploring electronics production in Mexico, which has so far been spared the ‘reciprocal’ tariffs.

Critics counter that benefits may not arise from reshoring unless tariffs are deployed in a more rational manner, and with some permanency. Given the tumultuous developments of the past weeks, and the reality that shifting production could take years and require significant new investment, tech companies may prefer to bide their time rather than make kneejerk reactions to US tariffs.

Still, some level of reshoring or nearshoring may be a sensible long term strategy for the AI supply chain. Considering geopolitical volatility, concerns around extra-territorial regulatory regimes, and the potential for AI to become entangled with national security concerns, some level of self-reliance for production of AI technologies, even if motivated at first by a questionable tariff regime, could be a positive thing.

However Trump’s tariffs play out, they are likely to become part of the broader conversation around technological autonomy and national security when it comes to AI.