The United States Trade Representative's (USTR) Section 301 investigation into China's semiconductor industry could lead to significantly higher tariffs chips and further cloud the outlook on China's semiconductor market, Jefferies said in a Thursday research note.

With the tariff set to increase to 50% in January 2025, the investigation could lead to further punitive measures on Chinese imports of legacy semiconductors and materials, the equity research firm said.

Under Section 301 of the Trade Act of 1974, the USTR can impose additional tariffs due to foreign policies deemed harmful to US interests.

China condemns the US investigation, saying that it violates international trade rules.

The scope of further tariff increases and the range of affected products under the USTR investigation are "unclear" and "difficult to forecast," according to Jefferies.

However, Jefferies believes the move could be significantly harmful not only to Chinese semiconductor makers but also to the US economy, which is "something that neither the Biden administration nor the Trump administration wants to happen."

The research firm primarily forecasts wafer fab equipment (WFE) growth of low single digits in 2025.