Sector rotation: Semiconductor and pharmaceutical tariffs

Summary

• Trade uncertainty leveled up again this week with knock-on effects that will be felt from India to Indiana. We explore the latest sector tariffs impacting semiconductors and pharmaceuticals as well as a penalty tax on India for buying Russian oil.

• Tariffs on semiconductors and pharmaceuticals could lift the average U.S. effective tariff rate over 10 percentage points to as high as 30%. But assumptions matter, and accounting for likely country- and product-level carve-outs, we think an estimated tariff rate closer to 25% is a reasonable assumption in the wake of these adjustments.

• Semiconductors: If all potential semiconductor products were tariffed at 100%, it could generate more revenue than all current product-level tariffs combined and account for a six-percentage-point rise in the U.S. effective tariff rate. But, carve-outs for Apple and others are likely, suggesting the impact will be far smaller initially.

• Pharmaceuticals: Tariffs on pharmaceuticals look larger. Without exclusions and carve-outs, a 100% tariff on pharmaceuticals would generate more revenue than we get from all tariffs on China. Again, assumptions matter, and commitments from companies suggest carve-outs may be in order. The ultimate tariff rate decided on here also has a large bearing on the overall impact. Regardless, some states are set to suffer more than others with Indiana and Kentucky at the top of the list.

One step ahead of the headlines

A constant refrain from business leaders and a theme in the selected comments in the ISM surveys is that the ever-changing framework for tariffs sows uncertainty and that it's hard to keep up. That may be the case, but more than four months after the Rose Garden event announcing Liberation Day tariffs, this administration is showing no loss of appetite for tariffs. These reports are here to help you keep up.

The industry sectors under fire this week are semiconductors and pharmaceuticals. In terms of countries, India finds itself in the hot-seat while negotiators from Switzerland walked away from talks empty-handed. President Trump said he would impose a 100% tariff on semiconductors on Wednesday with carve-outs for some companies including Apple. He also levied an additional 25% tariff on India for buying Russian oil, set to go into effect in about three-weeks time. On Tuesday, Trump said that tariffs on pharmaceuticals are looming, though the only details we really have at this point are that they would start “small” and gradually ramp up to 150-250% in about a year-and-a-half's time.

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