The semiconductor value chain is unusually complex and geographically fragmented. It begins with raw materials and specialty chemicals, then continues to capital equipment and chip design and moves on to wafer fabrication, before finishing with assembly, testing and packaging.

Each stage of production is characterized by different levels of capital intensity, technological sophistication and strategic vulnerability, with some segments of the value chain, notably chip design, involving considerable amounts of proprietary technology.

The strategic importance of semiconductors, which are essential both for existing digital technologies and for enabling innovation, make shifting trade rules and rising political risks particularly costly.

For example, the US and its allies have sought to constrain China’s semiconductor industry, using export controls to limit its access to advanced chips and equipment. With China effectively cut off from the top end of the global tech stack, Chinese companies are being forced to develop parallel supply chains that avoid restricted technologies or sources.

High and changing tariffs that are inconsistent across value chains further distort cost structures. Since finished electronics (or pharmaceutical goods) are often subject to high tariffs that do not affect upstream components, firms are shifting final assembly to low-tariff jurisdictions.

Meanwhile, countries have placed semiconductors at the center of their industrial strategies. Washington allocated more than US$50 billion in federal incentives to bolster domestic chip production, research and supply chain resilience as part of the 2022 CHIPS and Science Act.