AI industry faces headwinds from tariffs and economic uncertainty

Escalating trade tensions between the U.S. and China are threatening to derail the AI investment boom that has powered tech industry growth. Despite earlier resilience against concerns about slow returns on AI investments, major tech companies now face potential disruptions to their ambitious infrastructure plans as tariffs impact critical supply chains for AI hardware. This brewing conflict highlights the vulnerability of the AI sector to geopolitical forces and could have significant implications for the broader U.S. economy, which has been partially buoyed by massive data center investments.

The big picture: U.S.-China trade tensions threaten to disrupt the AI investment boom across industries from energy to software, potentially stalling ambitious infrastructure plans.

• Companies from tech giants to utilities powering data centers face disruption as tariffs between the U.S. and China escalate.
• The uncertainty has already caused businesses from retailers to automakers to slow spending, with analysts noting early signs of tech giants pulling back on data center leases.

By the numbers: Google and Microsoft have reaffirmed their combined $155 billion capital expense plans despite mounting pressure.

• This represents nearly half of the approximately $320 billion analysts estimate Big Tech will invest in AI this year.
• Nvidia, the AI chip giant whose stock briefly made it the world’s most valuable company, has seen its shares drop about 26% this year amid market concerns.

Why tariffs matter: The 145% U.S. tariffs on Chinese goods could sharply increase data center costs if the current electronics exemption is rolled back.

• China remains crucial to the production of AI hardware and was excluded from a 90-day tariff reprieve issued earlier this month.
• Supply chains for electrical infrastructure and data center equipment are already strained globally, with high demand and limited supply.

Expert perspective: “Tariffs will likely make this more challenging, especially if foreign suppliers divert this equipment to other markets,” warns Pat Lynch, executive managing director for data center solutions at commercial real estate services firm CBRE.

Economic implications: A pullback in AI spending could significantly impact U.S. economic growth in the coming years.

• J.P. Morgan analysts estimated in January that data center spending could contribute between 10 and 20 basis points to the country’s economic growth in 2025-2026.
• The “Magnificent Seven” high-flying tech stocks have already lost around $5 trillion in market value since hitting their peak late last year.

Behind the numbers: Alphabet’s stock has declined approximately 20% in value as investors adjust expectations amid growing trade tensions.