China Tweaks Origin Rules to Dodge 125% Tariffs on US Semiconductors
The Risk for Chip War Escalation is Rising
China is changing the rules on the definition of the country of origin for semiconductors to prevent the Boomerang Effect of the 125% reciprocal tariff it imposed on the United States.
On April 11, the China Semiconductor Industry Association (CSIA) issued a notice stating that, according to regulations from the General Administration of Customs, the country of origin for "integrated circuits" shall be determined based on the "substantial transformation" rule under the four-digit HS code principle, meaning the location where wafer fabrication (foundry) takes place is considered the country of origin.
The China Semiconductor Industry Association recommends that the location of the wafer fabrication plant be used to determine the country of origin for customs declarations of integrated circuits, whether packaged or unpackaged.
In other words, chips branded as a product of American semiconductor companies can be recognized as the product of foundries from Singapore, Taiwan, Japan, or South Korea.
The association emphasized that importers should prepare purchase orders as supporting documents for potential customs inspection when making customs declarations.
Supply chain experts told TechSoda that when tariffs exceed 10%, products with gross profits less than 10% will be diverted elsewhere because it would not make sense to try to sell the product in that market. (Note: 10% is the universal tariff rate the Trump Administration announced for all countries except China during the 90-day pause) Unless the importer is willing to absorb the tariffs and pass them on to consumers, otherwise supplies will be cut and consumers will go after existing goods by paying higher prices, thus driving up inflation.
For semiconductors, TSMC is the only manufacturer with a gross profit above 50%. If China imposes a 125% tariff on the Nvidia chip that TSMC produces from Taiwan, the same effect will hurt its own companies in need of the chips.
Chinese industry supply chain experts said the new measure will hit US IDMs (TI, OnSemi, Qorvo, ADI, Micron, Intel), whose analog chips and logic chips are made in America, and drive the demand for local alternatives.
Some argue that Micron could mitigate risks by leveraging its production facilities in Asia, particularly by using its Taiwanese fabs to export memory products to the Chinese market. However, YMTC, a strong local competitor specializing in NAND and SSD production, is still likely to gain market share because Chinese customers would choose a local brand over a US one amid hostility in a Trade War.
China's redefinition of semiconductor country-of-origin rules aims to circumvent the impact of its 125% reciprocal tariffs on U.S.-designed chips, but this strategy faces significant challenges and potential further escalation in the U.S.-China tech trade war. Here's our analysis: