In recent years, the combination of rising geopolitical tensions and the embrace of industrial policies has increasingly disrupted long-established production networks. Now, US President Donald Trump’s tariff war is taking this process to the next level, posing an existential threat to global value chains. Nowhere is this more apparent than in the semiconductor sector.

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

Meanwhile, countries have placed semiconductors at the centre of their industrial strategies. The US 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. And it is not alone: the European Chips Act, Japan’s subsidies for advanced packaging, and South Korea’s K-Chips Act all seek to strengthen domestic capacity in key areas related to semiconductor production.

But onshoring semiconductor supply chains is easier said than done. Advanced semiconductor-fabrication facilities ( fabs ) take years to build, require billions of dollars in investment, and depend on highly skilled labour. As a result, countries are pursuing a kind of hybrid model, in which they onshore sensitive nodes ( such as defence-grade fabs ), and redistribute lower-value segments to trusted partners.

Countries like Malaysia, the Philippines, Singapore, and Vietnam – which offer political stability, cost competitiveness and trade access – are now playing an increasingly important role in chip packaging, testing, and final assembly. Malaysia’s Penang cluster is attracting considerable investment in advanced outsourced semiconductor assembly and testing, and Singapore has positioned itself as a hub for high-value research and development and packaging innovation. Last year, following the introduction of new restrictions on exports to China, US chipmaker Nvidia signed an agreement to establish an artificial intelligence ( AI ) research and development centre in Vietnam.

For large semiconductor firms, the new supply chain increasingly places logic chip design in the US, fabrication in Taiwan, packaging in Malaysia or Vietnam, and final integration in Mexico or India. Mid-size firms may pursue vertical integration to control key inputs. Everyone is increasing supply-chain visibility and redundancy.

Governments, for their part, want to boost supply-chain resilience, enhance economic competitiveness, and ensure technological sovereignty. To achieve these goals, they should implement policy frameworks that go beyond fostering domestic investment to facilitate cross-border integration among allies. This should include harmonizing investment incentives, standardizing export-control regimes, and coordinating research funding. Multilateral trade agreements like the Indo-Pacific Economic Framework for Prosperity and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as well as new bilateral frameworks, can play a role here.

Governments must be prepared to adapt these frameworks to changes arising not only from geopolitical developments, but also from technological advances. Already, the rise of AI accelerators, chiplets and advanced packaging techniques is redistributing value toward the intellectual-property-intensive segments of the value chain. Moreover, as automation reduces dependence on low-cost labour, more production can be shifted to high-cost jurisdictions. Meanwhile, new materials, such as silicon carbide and gallium nitride, are creating niche opportunities for countries with capabilities in specialty chemicals and materials science.

Beyond directly supporting value-chain transformation, governments must ensure that their regulatory regimes are well-defined, credible, and stable. After all, IP protections, environmental standards, and investment-screening policies all inform firms’ decisions about where to locate production. Jurisdictions characterized by weak enforcement, unclear rules, or geopolitical volatility will be seen as risky, even if they offer cost advantages, and will thus struggle to attract investment.

The semiconductor value chain is not collapsing, but it is being strategically reshaped. The form it is taking reflects a new, more politically-conscious model of globalization, which values not only economic efficiency, but also resilience, trust and technological sovereignty. Countries with governments that understand the shift that is underway, and act swiftly to mitigate the risks and seize the opportunities it creates, will come out on top.

Eduardo Araral is a professor of public policy at the National University of Singapore’s Lee Kuan Yew School of Public Policy.

Copyright: Project Syndicate