Here’s how Canada’s semiconductor sector may be caught between the U.S., China trade war

The IBM logo is seen at their company facility in Bromont, Que., on Friday, April 26, 2024. THE CANADIAN PRESS/Christinne Muschi

Canada’s semiconductor industry could soon be caught in the economic vice grip of the escalating trade war between the United States and China. U.S. President Donald Trump has begun the process of imposing new tariffs on the chips that are the building blocks of digital technology found in homes and offices, from televisions to ovens to cellphones to cars.

On Monday, notices posted to the U.S. Federal Register showed that the Trump administration has initiated a probe into imports of pharmaceuticals and semiconductors on national security grounds.

The filings indicate the administration intends to pursue levies under the authority granted by Section 232 of the Trade Expansion Act. The 232 probe needs to be completed within 270 days after being announced.

Trump signalled his intentions to launch the probe in a social media post.

“We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations,” he posted on Truth Social.

After supply chains were interrupted during the COVID-19 pandemic, both Democrats and Republicans have viewed U.S. dependency on the foreign production of semiconductors as a threat to national security.

The components are also essential to building modern military weapons.

Taiwan makes more than 50 per cent of the world’s chips, followed by South Korea and Japan. The United States and China round out the top five.

In early March, Taiwan’s top chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), announced a decision to invest US$100 billion into expanding its chip manufacturing and packaging facilities in the U.S. At the time, TSMC said it was responding to customer demand, not pressure from the Trump administration.

Like he has done with tariffs on automobiles, steel and aluminum, Trump wants to use the duties to spur domestic manufacturing of the chips.

Quebec semiconductor sector at risk

Canada has approximately 500 companies in the semiconductor industry. According to Statistics Canada, the sector generated $28.8 billion in total output in 2020, and employed more than 123,000 full-time workers.

Paul Slaby, managing director of Canada’s Semiconductor Council, says among the companies represented by the association are large multinationals with headquarters in the U.S. and Europe. Although the council has polled its members about potentially moving their Canadian facilities to the U.S, Slaby says the companies are “reluctant to engage in public discourse,” but are “very much concerned.”

Slaby says about 50 companies manufacture semiconductors in Canada, including IBM’s facility in Bromont, Que., which makes processors for popular gaming consoles such as the Microsoft Xbox and the Sony PlayStation. According to a company profile, the site is IBM’s largest semiconductor assembly and testing facility in the world and employs about 2,800 workers.

Although U.S. companies are Canada’s biggest customer, Slaby says he’s optimistic that the threat of levies can spur new opportunities.

“We’re hoping that the current tension with our southern neighbour will push us toward diversifying our supply chains,” Slaby said.

Canada has pitched the idea to Asian and European companies of moving manufacturing, research and development facilities here, while Canadian companies have also talked about buying more products from Europe and the Indo-Pacific nations.

As Trump rolls out these tariffs on semiconductors, international trade experts say Canada needs to find a secure source of chips, but may benefit in the short term from bargain prices as China dumps its surplus chips.

“The U.S. has put 145 per cent tariffs on Chinese goods, while China has retaliated with 125 per cent tariffs on American products. That means there are a lot of (Chinese) products that will need to find homes,” says Eric Miller, the president of Rideau Potomac Strategy Group, who says that this may be the time to stock up on chips for future use.

“Canada’s companies can get these chips at a much reduced cost because there’s going to be a surplus.”

Miller says Trump’s tariff war means that the United States “is going to be less connected with the rest of the global economy,” and that could give Canada an advantage.

“As long as Canada maintains openness to the rest of the world and an economy that is willing to grow on trade, that should serve Canada very well.”

Prime Minister Mark Carney had previously warned, after his phone call last month with Trump, that the president had indicated tariffs would be put on the semiconductors. It is one of five strategic areas the White House has identified that it would target, along with autos, aluminium and steel, lumber and pharmaceuticals.