Media headlines tell us that semiconductor chip industry had a robust 2024, with expected double-digit growth and an even better year ahead. That being said, this performance was, and is driven, almost entirely by generative AI. While recent smartphone and PC sales suggest some recovery in non-AI demand in 2025, we cannot allow the dazzling sun of AI to detract from the darker clouds of more sober analyses predicated on four, fundamental, geo-political changes that are unambiguously impacting the market; (i) de-globalization, (ii) the rise of economic nationalism, (iii) the chronic need to rebuild America’s industrial base, and (iv) the rapid retreat of the post-cold war, liberal Western consensus.
Figure 1. US National Debt 1955-2024
The flip-sides of de-globalization are trade restrictions, tariffs and markedly growing uncertainty. In fact, lots of uncertainty. The Trump Administration market interventions on these fronts are not fundamentally new, but to some degree they are a tectonic advance on previous positions. They are making stark headlines as a result. Somewhat ironically, it was TSMC’s founder Morris Chang who stated that, “Globalization is dead. Free trade is dead”, then warning, “This is only the beginning of the end.” Few believed him in 2022. To quote one commentator, “I felt he was exaggerating. Now it turns out he was right on the money”. That being said, living in an age of ever more frenzied use of hyperbole and social media tendency to polarize, then exaggerate, opinions, there is a temptation to dismiss what we may attribute as “hype” and think the eventual significance of these factors will turn out to be underwhelming. That or we go to the other extreme and see chaos. The evidence is strongly against either conclusion. We only have to answer one question to make our point: “Is there a logical reason that is driving the Administration to act more forcefully now?”
Straw and Camel’s back come to mind. In other words, an ongoing range of trends has reached a critical point of accumulation causing an unpredictably large and sudden set of reactions. Let’s take the issue of the Federal budget deficit. It took the entire history of the United States to reach $7 trillion of indebtedness in 2009, it doubled again over the next ten years, and doubled again in the next five years. In the 12 months ending 2024 the total stood at $35 trillion. In short, the budget deficit is fully one-quarter higher than in January 2020. Interest on that debt is now $1.2 trillion per annum, twice as much as was paid in 2022, and fully one-third more than is spent on defense, and it is only going to go up. At current trajectories, the Federal debt will stand at $50 trillion by the end of 2030. Clearly these numbers are unsustainable. The logic behind DOGE will, at this point, make much more sense to our readers, as will the underlying sense of political urgency.
Figure 2. Balance in Trade and Services 1955-2024
A second area of concern relates to the balance of payments deficit; the difference between what the US sells abroad, and what it buys. This also reached a record at the end of 2024; totaling $1.2 trillion for the year. To put this in context, the last time the US ran a trading surplus was in 1975. The US has got away with international indebtedness for decades on account of the fact of the dollar’s reserve status; it costs the US Treasury the price of paper and ink to make $100, the rest of the world, on the other hand, has to sell $100 worth of goods or services to the US to get that money. Foreigners then use this $100 to buy US stock or treasury bonds that give them corporate ownership or pay interest, or both. If overseas countries are happy with this arrangement, then what’s the problem?
The problem is the one factor in the growing trade deficit is excessive government spending. Spending which eventually finds its way into the American consumer’s pocket and thus a PC made in China, or an automobile built in Germany. The bigger the Federal deficit the bigger the trade deficit. The reader will note some degree of correspondence between Figures 1 and 2. So what is to be done?
Other than DOGE, the reader will be aware of a potential range of extensive tariffs against those countries with whom US trade is most imbalanced; China, Mexico, Canada and the EU. While tariffs may reduce imports in certain sectors, the real goal will be to use them as a device to tackle underlying political decisions exacerbating the deficit, such as the manipulation by Chinese authorities to keep its currency artificially undervalued or the EU’s use of regulations designed to push up the cost of imports, or as in the case of agriculture, keep them out altogether.
Tariffs are also intended to serve another purpose whose urgency is often missed by the mainstream media; spur domestic investment, promote and sustain re-shoring of a significant scale and range of manufacturing industries, especially in semi-conductors, and as regards the latter, with particular reference to the development of quantum, AI. Neither large scale manufacturing capabilities nor these advanced technologies are peripheral. In fact, collectively they are the foundational pillars of future military defense, economic growth and American reassertion. For this reason, we will be covering these pillars in depth in our next blog, and maybe a third.
Suffice it for now to say that tariffs and regulations are a means of promoting economic nationalism. Globalization resulted in market forces creating geographies where economic specialization and dominance coincided. This is an attempt to reverse that process, and is nowhere more apparent than in the production of semiconductor chips. Currently Taiwan dominates this sector, especially at the high-end where it produces 90 per cent of the most advanced chips. It also has a near monopoly on the systems that make these chips. In a politically harmonious world this was optimal. In this new epoch of growing rivalry, however, it is increasingly a security risk and potentially a supply-chain nightmare, which brings us to our concluding point.
Like the retreat of globalization, the end of post-cold war Globalist political dominance has been on the horizon for at least a decade. Since 2012, whether by design or coincidence, Presidents Xi and Putin—among others—have increasingly and consistently laid out their political philosophies for all to see. These have been principally nationalist in tone; confident, coherent, activist, but above all embracing a powerful sense of destiny. Not only in speeches, but also some quite detailed essays. Historians will recognize their ideas as the essence of the nineteenth and early twentieth diplomacy. Both leaders are well informed and intelligent, and from that stance have laid out in great detail their respective long-term policy goals, and done so both with unambiguous clarity especially in terms of creating local hegemonies. Both unapologetically place local interest and restored national greatness at the center of their ambitions. These and other changes over the past decade should surprise no informed mind, to quote one analyst, “… they told us plainly, but no one was listening”. That the phrase “Great Powers” has suddenly re-entered our vocabulary really underscores Chang’s comments that this really is “the beginning of the end”.
In our next blog we will move from this generalist outline to consider more specifically the impact of these trends on the semiconductor industry as a whole, and SMEs in particular, reviewing both headwinds and tailwinds. Yes, some of these disruptive changes may yet offer a once-in-a-generation opportunity others will require a new kind of resilience and business planning.
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Dr. Anthony O'Sullivan
Strategic Market Research Specialist
Palomar Technologies, Inc.