Goodmorning and Happy Wednesday folks!

In the midst of the Dow absolutely cranking over 700+ points yesterday, the bullish sentiment definitely has a pep in its step going into this morning’s trading session. 

The benchmark S&P 500 also made a showing as it climbed to another all-time high level, and the Russell 2000 index continued its “mic drop” statement piece leaving its large cap counterparts in the dust. 

Fun fact: The last time the S&P 500 dropped more than 2% was 512 days ago… 

(Source: Giphy) 

Plus, with the roaring market (still) piggybacking off the AI boom, craze, frenzy whatever you want to call it, combined with the growing conviction that Powell will do us a solid and cut rates…

It’s given our friends on Capitol Hill an extra big shot of confidence to punch China where it really hurts: Their chips. In fact, according to reports, US politicians are considering the most “severe” trade restrictions available. Talk about things escalating quickly. 

(Source: Bloomberg) 

Here’s the lowdown: 

The US is considering invoking the Foreign Direct Product Rule (FDPR). Meaning that if your tech has even a sprinkle of American ingenuity, the US can slap export controls on it. 

(Source: Giphy) 

This would majorly cramp the style of companies like Japan’s Tokyo Electron and the Netherlands’ ASML, who are big-time suppliers of chip-making machinery to China.

Upon the news of this heightened aggressiveness towards the red dragons chip industry, Tokyo Electron’s shares nosedived by 7.5%, dragging Japan’s Nikkei 225 Stock Average down with it. ASML wasn’t spared either; their shares took a 7.95% plunge as well. My condolences to their investors… 

(Source: Bloomberg) 

But why is the US playing hardball all of a sudden? We all know it, but I guess I’ll say it again: AI Boom (duh). It’s no secret the US Markets are flying higher than a kite, on the wave of artificial intelligence advancements, and the last thing Uncle Sam wants is for China to catch up by piggybacking off hungry American tech companies. 

(Source: Giphy) 

Plus, with the AI industry still running a bit like it’s the wild west right now - everyone’s playing Will Smith trying to stake claims and strike it rich. So in theory, by keeping the best chips stateside ensures that the US stays at the forefront of the new gold rush. 

Makes sense right? Well there are some caveats. In fact, in some ways it can be looked at like amputating a hand, to save the rest of the arm, simply because the US chip industry will feel a pinch from these so-called “severe” restrictions. 

(Source: Giphy) 

Companies like Lam Research and Applied Materials are grumbling louder than me when I had my phone taken away as a teenager. Their argument (which is extremely valid btw) is that the current policies are backfiring, costing them billions in revenue while China keeps finding workarounds. Case in point: Yangtze Memory Technologies Co. (YMTC), is still making strides despite being blacklisted by the US. 

(Source: South China Morning Post) 

So obviously, while things are getting a bit tense on the diplomatic front, the Biden administration is still trying to rope in allies like Japan and the Netherlands to tighten their own restrictions. Ya know, kind of like an honor system type deal. 

(Source: Reuters) 

But as expected (especially after dragging the Nikkei 225 stock average down), Tokyo has already hinted they won’t play ball with the FDPR, and the Dutch are equally unimpressed, basically saying, “It’s a complete buzzkill”. 

(Source: Giphy) 

On the other hand, there’s a split in the US as well. Lawmakers are pushing for more stringent measures, while the chip industry is advocating for a more nuanced approach. They suggest expanding the “unverified list,” which would require licenses for shipping restricted tech, rather than going nuclear with the FDPR.

So as we can all see, it seems like it’s just a normal family “get-together” in the world of foreign affairs. Think Succession, where no one ever sees things eye to eye, and you’ll always have those with the rebellious side to make things interesting.  

(Source: Giphy) 

But the important takeaway is that this isn’t just about chips; it’s about who gets to lead the tech race of the future. Do I dare say it again? I can’t help it: “History doesn’t repeat, but it often rhymes”. 

We saw the same kind of tensions in industries during the space race back in the 60’s, and we are seeing the same kind of tensions now. And with AI being the next big thing, controlling the flow of semiconductor technology is crucial.

(Source: Giphy) 

So it’s clear the US is playing a high-stakes game, simply because everyone and their Uncle Joe down the street wants a part of it. So the outcome will have massive implications not just for tech companies, but for the whole global economy.

In the end, this is just another episode of “WTH will the US and China do next”, as each side tries to out maneuver the other. As the story goes, the US is tightening the screws, China is looking for loopholes, and the rest of the world is caught in the middle. And this time, it’s no different. 

Stocks.News doesn't hold any positions in companies mentioned.