AI Geopolitics and Tariff Wars

The reimposition of tariffs on AI-critical hardware components by the United States following the 2024 presidential election has triggered a restructuring of global technology supply chains. As the U.S. and China deepen their technological rivalry, countries like India are emerging as strategic alternatives in the global AI ecosystem.

Tariffs and Global Supply Chain Fragmentation

• Tariff Escalation in the AI Sector
• The U.S. introduced tariffs as high as 27% on key AI components such as specialised accelerators and logic chips in 2025.
• Electronics imports to the U.S. touched $486 billion in 2024, of which $200 billion were related to data processing machines, many from tariff-affected countries like China, Taiwan, Vietnam, and Mexico.
• Impacts on Global AI Infrastructure
• Tariffs are raising infrastructure costs, making the U.S. one of the least cost-efficient locations for building AI capabilities.
• Ironically, some data centre investments are shifting back to China, undermining the intended policy objective of decoupling.
• Case of Supply Chain Disintegration
• The segmentation of supply chains due to tariffs increases inefficiencies and obstructs cross-border technical collaboration, vital for AI innovation.

Economic Implications of Protectionist Trade Policy:

• Distortion of Innovation Ecosystem:
• Empirical studies suggest that a standard deviation increase in tariffs can lead to a 0.4% decline in output growth over five years.
• Deadweight loss arises from reduced trade volumes and diminished consumer and producer welfare.
• Impact on Global Technological Progress:
• AI innovation thrives on access to high-performance computing, cutting-edge hardware, and open research networks.
• Tariffs create a stratification effect, limiting participation to nations with established infrastructure and capital.
• Capital Substitution and Algorithmic Efficiency:
• Companies are increasingly optimising AI systems using algorithmic efficiency and hardware specialisation (e.g., ASICs), reducing dependence on raw computing power.

India's Position in the Restructured Global Order

• Strategic Opportunity as a 'Third Option'
• India is seen as a geopolitical neutral ground amidst U.S.-China tech tensions.
• With IT export growth between 3% to 5.1% and robust AI and digital engineering growth, India is becoming a key stakeholder in the AI economy.
• Strengths and Limitations
• Strengths:
• Large talent pool with 1.5 million engineering graduates annually.
• Government incentives for semiconductor design and fabrication, including multi-billion-dollar fab proposals.
• Limitations:
• Heavy reliance on imported hardware.
• Vulnerability to global supply chain disruptions and tariff shocks.
• India’s Policy Push:
• Programmes like the India Semiconductor Mission and Digital India are pivotal in building domestic resilience.
• Advanced Micro Devices (AMD) $400 million R&D campus in Bengaluru is an example of rising global confidence in India’s AI ecosystem.

Practice Question:

Q. "In light of recent U.S. tariff policies, critically examine how global trade protectionism is influencing the geopolitics of artificial intelligence and India’s strategic position in this context." (250 words)