Tariffs and AI’s global transformation
The US presidential election in 2024 has led to substantial tariffs, potentially restructuring global technology supply chains that power AI development.
• Countries like India, as the “third option” in the U.S.-China technological rivalry, are in a precarious position due to the increased costs of imported components critical to AI infrastructure.
• The tariffs have raised the costs of electronics imports to the U.S., with data processing machine imports costing around $200 billion, sourced largely from tariff-affected countries.
• The current tariff regime has expanded this to as high as 27% on critical AI hardware components in 2025, particularly affecting specialized AI accelerators and advanced logic chips.
• Economic theory suggests tariff policies should stimulate domestic production through import substitution, but this approach often comes at the cost of economic efficiency and innovation.
• The tariffs may shield domestic firms from competition, reducing their incentive to innovate, and limit access to advanced imported technologies necessary for AI advancement.
• Rapid expansion in AI chip demand will require massive increases in data centre power capacity, which could undermine the U.S.’s competitiveness in AI.
• India, which has positioned itself as a strategic “third option” in the U.S.-China technological competition, could create unexpected opportunities due to the tariffs and supply chain disruptions that raise costs of AI infrastructure.
• The economic reshaping catalysed by these tariff policies has accelerated what economists call “capital substitution effects”.
• Tariffs and supply chain disruptions that raise costs of AI infrastructure could slow down India’s global ambitions in AI.
• Tariff structures interact with differential regulatory environments uniquely to create novel competitive dynamics.
• Decentralised AI development has led to the development of specialized AI hardware that is designed specifically for particular applications rather than general-purpose computation.