On Wednesday, July 17, 2024, global chip stocks experienced a sharp decline, reflecting growing concerns over potential U.S. export restrictions and escalating geopolitical tensions. This downturn affected major players in the semiconductor industry, including ASML, Nvidia, and TSMC.

According to a report by Arjun Kharpal for CNBC, the Netherlands-based ASML, a crucial supplier of chipmaking equipment, saw its shares plummet by 6.5% in morning trading. This drop came despite the company reporting better-than-expected second-quarter earnings. Notably, 49% of ASML’s sales during this period were to China, highlighting the company’s vulnerability to any potential export restrictions.

Similarly, Tokyo Electron, a Japanese semiconductor equipment manufacturer, closed nearly 7.5% lower, underscoring the widespread impact of these concerns across different markets.

The catalyst for this market reaction appears to be a Bloomberg report suggesting that the Biden administration is considering implementing a broad rule to restrict companies from exporting critical chipmaking equipment to China. This potential expansion of the foreign direct product rule (FDPR) could allow the U.S. to control foreign-made products that use even minimal American technology, potentially affecting non-U.S. companies significantly.

Adding fuel to the fire were comments made by former U.S. President Donald Trump in a recent interview with Bloomberg Businessweek. Trump suggested that Taiwan should pay the United States for defense and claimed that Taiwan had taken “about 100%” of America’s semiconductor business. These remarks have raised questions about the future of U.S. commitment to Taiwan’s defense, particularly if Trump were to return to office.

The geopolitical implications of Trump’s statements were felt in Taiwan’s market, with Taiwan Semiconductor Manufacturing Co. (TSMC) shares closing down 2.4% on Wednesday.

The ripple effects of these developments were also evident in U.S. markets. The VanEck Semiconductor ETF saw a 3.5% decline in premarket trading, while tech giant Nvidia fell by 4%. Other U.S.-listed semiconductor companies, including Arm and Applied Materials, also experienced downturns in pre-market trading.

This market reaction underscores the delicate balance between technological advancement, international trade, and geopolitical relationships in the semiconductor industry. As tensions between the U.S. and China continue to simmer, and with Taiwan’s crucial role in global chip production, the semiconductor sector remains highly sensitive to political developments and regulatory changes.

Investors and industry observers are now closely watching for any official announcements from the U.S. government regarding export restrictions, as well as monitoring the ongoing geopolitical discourse surrounding Taiwan and its semiconductor industry.