The Complex Dynamics of US-China Semiconductor Trade Restrictions

October 9, 2023 / Ben Bajarin

This is a summary of the latest episode of The Circuit with Ben Bajarin and Jay Goldberg.

Congress has recently raised concerns about open-source architecture RISC-V and the potential need for restrictions due to its use by Chinese companies. However, experts agree it will be extremely difficult to actually restrict RISC-V given its open source nature.

The Biden administration’s October 2021 trade restrictions had noticeable gaps, such as not covering intellectual property (IP) or software. There are now discussions around potentially tightening restrictions, but it remains unclear how IP such as ARM could realistically be restricted given how embedded it is in the global semiconductor ecosystem.

The October 2021 restrictions have negatively impacted revenues for several US semiconductor companies, who are now actively lobbying to push back against further restrictions. However, the intent behind the restrictions was to limit China’s military modernization and access to advanced computing capabilities. With the US elections coming up in 2024, most expect the restrictions will get tougher as both political parties want to appear strong against China. This could lead to escalation if China chooses to retaliate against US companies in non-semiconductor industries.

For investors, the full revenue impacts are not yet priced into semiconductor stocks. In particular, semiconductor equipment companies selling to China could face increased scrutiny and limitations. Experts warn the situation could deteriorate much further if the US and China continue down the path of escalating tit-for-tat restrictions. While the direct revenue hits so far have been relatively minor, the worst case scenarios of a full-blown trade war are not accounted for in current valuations.

In summary, the complex dynamics around US-China semiconductor trade restrictions involve national security concerns, industry lobbying, political posturing, and uncertainty around how much escalation may occur. There are no easy solutions, so expect ongoing volatility around this issue.

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