The Hindu Editorial Analysis- 23rd May 2025 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Tariff wars and a reshaping of AI’s global landscape

Why in News?

Economic efficiency and innovation may suffer, but some countries could be vulnerable yet advantaged.

Introduction

Following the 2024 U.S. presidential election, the revival of major tariffs could trigger a deep restructuring of global tech supply chains critical to AI development. As dominant players adjust, countries like India may emerge in a precarious yet promising role — serving as a “third option” in the U.S.–China tech rivalry.

Impact of Tariffs on AI Infrastructure Costs

Increased Cost of Critical Imports

• Tariffs have significantly raised the prices of imported components essential for AI infrastructure.
• In 2024, the U.S. imported nearly $486 billion worth of electronics.
• Of this, around $200 billion was spent on data processing machines, primarily sourced from Mexico, Taiwan, China, and Vietnam—all affected by U.S. tariffs.
• These rising costs risk making the U.S. the most expensive country to build AI infrastructure.
• As a consequence, companies may relocate data centre projects to more cost-effective countries, including China—the very country many of the tariffs were meant to counter.

Tariff Evolution and Expansion

Trump-Era Tariffs (2018–2020):

• The initial wave led to increased prices for imported semiconductor components.

Current Tariff Landscape (2025):

• The current regime imposes tariffs of up to 27% on critical AI hardware components, including:
• Specialised AI accelerators
• Advanced logic chips
• These components are fundamental to AI computation, making the tariffs especially disruptive to the U.S. tech sector.

Economics behind the scenes

Economic Rationale vs. Practical Challenges of Tariffs

• Theoretical Justification: Tariffs are designed to stimulate domestic production through import substitution.
• Example: U.S. semiconductor manufacturing capacity is projected to triple from 2022 to 2032 — the largest global growth rate in this sector.
• The Ricardian Reality: Ricardian trade theory reminds us of comparative advantage, which continues to apply even under protectionism. AI hardware production relies on globally dispersed technical capabilities, making it inefficient when global supply chains are disrupted.

Economic Costs of Protectionist Tariffs

• Losses in Efficiency and Innovation: Tariffs cause:
• Supply chain disruptions
• Increased production costs
• Investor uncertainty
• These factors discourage innovation and long-term investment.
• Empirical Evidence:
• Indicator
• Effect
• 1 std. deviation ↑ in tariffs
• Reduced Output growth by 0.4% over five years
• Full reversal of recent U.S. tariffs
• Could result in 4% cumulative output gain
• AI innovation impact
• Slower progress due to limited access to frontier tech

Deadweight Loss: Tariffs may shield domestic firms from foreign competition, reducing innovation incentives. Restricted access to advanced imported technologies creates inefficiencies, harming both producers and consumers.

AI-Specific Impacts: Infrastructure, Innovation, and Inequality

AI Infrastructure Requirements:

• Innovation Stratification: Advanced, costly AI infrastructure becomes a barrier to entry and a key factor in innovation leadership. This creates a stratification effect, where only a few players control major breakthroughs.
• Tariff-Driven Global Inequality:
• Country Type
• Tariff Impact
• Developed Countries
• Reduced Technology transfer rates, Reduced innovation pace
• Developing Countries
• Increased Technology transfer (short term), but Increased inequality

India’s Strategic Opportunity Amid U.S.-China Tech Rivalry

• IT export growth:
• Indian IT exports have grown at 3.3% to 5.1% year-over-year recently.
• AI and digital engineering are among the fastest-growing segments within India’s tech sector.
• Government Support:
• The Indian government is actively supporting AI and semiconductor sectors through significant AI programmes and billion-dollar semiconductor fab proposals.
• Multinational R&D centres:
• The establishment of multinational R&D centres, such as AMD’s $400 million design campus in Bengaluru, further strengthens India’s position in the tech landscape.

India’s Comparative Advantages and Challenges

• Labour Costs: Relatively low, providing a cost advantage.
• Talent Pool: About 1.5 million engineering graduates annually, many skilled in AI development.
• Dependence on Imports: Heavily reliant on imported hardware and international collaborations for AI infrastructure.

Potential Risks:

• Tariffs and supply chain issues:
• May raise AI infrastructure costs, slowing India’s global AI ambitions.

Potential Benefits:

• India could gain:
• If companies seek alternatives to China for manufacturing and data centre operations.

Economic Effects of Tariffs on AI Development

Capital Substitution Effect:

• Tariff policies have accelerated the “capital substitution effect.”
• As hardware costs rise, firms shift focus to:
• Algorithmic efficiency
• Model compression techniques
• Hardware optimization rather than simply scaling raw computational power.
• This creates price signals encouraging innovation in efficiency rather than just hardware expansion.

Cost Decline in AI Model Usage:

• Observation: Cost decline in AI model usage falls by roughly 40 times per year.
• Implication: While tariffs may increase upfront infrastructure expenses, consumer-level AI applications may not experience immediate price rises.

Role of Regulatory and Economic Environments

Interaction of Tariffs with Regulatory Frameworks:

• Tariffs interact with different regulatory frameworks to shape competitive dynamics.
• Lenient data protection laws, widespread digital access, and abundant training data can offset hardware cost disadvantages.
• This interplay means that regulatory and economic factors may produce complex, non-linear effects on AI competitiveness, defying simplistic analysis.

Decentralised AI Development

Shift Towards Application-Specific Integrated Circuits (ASICs):

• Tariff changes have driven the development of specialised AI hardware designed for specific applications instead of general-purpose computing.
• This shift is characterized by the rise of application-specific integrated circuits (ASICs), marking a new architectural approach.

Optimising Data Centre Infrastructure for AI Inference:

• 2023: About 30% of workload accelerators were custom ASICs.
• 2028: This share is expected to exceed 50%.

Conclusion

Ironically, efforts aimed at boosting domestic technological strength might unintentionally speed up the decentralisation of AI development. Historical parallels indicate that when technologies encounter market limitations, they tend to shift toward more distributed models. A relevant example is the transition from mainframes to personal computers during the 1980s, which illustrates this trend well.

Misplaced urgency

Why in News?

The Madras High Court has effectively undermined a Supreme Court ruling.

Introduction

The Madras High Court has temporarily halted the implementation of Tamil Nadu's amended laws that granted the State the power to appoint Vice-Chancellors (V-Cs) in 18 State universities. This decision restores the authority to appoint V-Cs to the Governor-Chancellor, challenging the State's autonomy and sparking a constitutional debate. The core issue revolves around whether University Grants Commission (UGC) Regulations can take precedence over State legislation, particularly in light of conflicting Supreme Court precedents regarding V-C appointments.

Madras High Court Halts State’s Power to Appoint Vice-Chancellors

• The Madras High Court has put a hold on the Tamil Nadu government's amended laws that allowed it to appoint Vice-Chancellors (V-Cs) in 18 State universities.
• This interim order pauses the progress made after a recent Supreme Court judgment that had granted deemed assent to 10 Bills delayed by the Governor.

Governor’s Powers Temporarily Restored

• The court's ruling restores the authority of the Governor-Chancellor to appoint V-Cs, which the contested Bills aimed to remove.
• As a result, appointments to nearly a dozen universities are on hold, leading to an ongoing administrative stalemate.

Legal Basis for the Interim Relief

• The High Court's decision was based on a petition arguing that the amended Acts violate existing Supreme Court rulings on V-C appointments.
• Key precedents cited include:
• Dr. Sreejith P.S. vs Dr. Rajasree M.S. (APJ Abdul Kalam Technological University)
• Gambhirdan K. Gadhvi vs State of Gujarat (Sardar Patel University)
• Both judgments emphasized the need to comply with Regulation 7.3 of the UGC Regulations, 2018, which outlines norms for search committee composition and appointment processes.

State’s Argument Rejected by the Court

• The Tamil Nadu government argued that it had adopted the UGC Regulations in 2021, excluding Regulation 7.3.
• The High Court dismissed this claim, stating that removing the Chancellor's role in appointments is unconstitutional and legally untenable.

Concerns About Judicial Overreach

• The urgency of the Bench in invalidating the amended Acts has faced criticism.
• The court:
• Overlooked the State counsel's submission about a pending petition to transfer the case to the Supreme Court.
• Ignored the Supreme Court's request to be kept informed, which was not considered in the decision.
• Issued the interim order without allowing the State adequate time to respond with a counter affidavit.

The Larger Constitutional Question

• The situation highlights a broader legal dilemma:
• Can UGC Regulations, issued by a subordinate authority, override State legislation enacted under constitutional powers?
• Conflicting judgments in the past, such as Kalyani Mathivanan and Jagdish Prasad Sharma, make this an unresolved issue.
• If the Supreme Court takes up the case, it may need to provide a final interpretation to settle this constitutional question definitively.

Conclusion

• The interim order has intensified the stalemate in Tamil Nadu's higher education, leaving key universities without leaders.
•  More importantly, it highlights the unresolved issue of whether subordinate regulations like those of the UGC can supersede State laws. 
•  The matter now awaits clarification from the Supreme Court, which is crucial for settling the jurisdictional conflict and restoring functional order in university governance.