Is Nvidia's Drop Signaling the Beginning of a New China-U.S. Trade War?

Stock markets finally came back to life on Thursday, as major market benchmarks recovered from substantial losses early in the session. The Nasdaq Composite (^IXIC -0.64%) still lost ground, but the Dow Jones Industrial Average (^DJI -0.98%) and S&P 500 (^GSPC -0.46%) moved higher to break a multi-day losing streak.

Data source: Yahoo! Finance. Numbers in parentheses are negative.

One stock that played a big role in holding the Nasdaq back from gains was Nvidia (NVDA 3.71%). The chip-making giant saw its shares fall nearly 8% on Thursday, as investors reacted to an unexpected renewal of geopolitical tensions that could spur further challenges, not just among semiconductor companies,  but also throughout the technology sector.

Dealing with trade restrictions

Nvidia's drop came after the company revealed late Wednesday that it had received word from the U.S. government of new licensing requirements on some of its integrated circuits. The restrictions covered potential exports to Russia, which is entirely consistent with the sanctions that governments across the globe have put on the country after it invaded Ukraine earlier this year.

However, the U.S. government licensing requirements also apply to future exports to China. According to Nvidia's initial filing to the U.S. Securities and Exchange Commission, any systems that incorporate the company's A100, H100, or A100X integrated circuits, such as the DGX processor, will be covered by the requirements. In addition, any newly developed integrated circuits in the future with performance levels at or greater than the current A100 chip will be subject to licensing requirements.

Nvidia warned that the financial report it had filed just last week included 400 million in potential sales to China that would possibly be subject to the new licensure requirement. Customers would presumably have the ability to substitute alternative products that aren't subject to government regulation or to seek an exemption from the requirements. But Nvidia couldn't assure investors that its clients would be able to get the U.S. government to grant exemptions, or that it would be successful in persuading its Chinese customers to switch to other integrated circuits.

Escalation toward a trade war?

The move is the latest volley between the U.S. and China regarding protection of intellectual property. High-end chips from Nvidia and rivals like Advanced Micro Devices (AMD 1.33%) are often used in key applications such as artificial intelligence. Chip shortages have raised the issue of ensuring adequate supplies of these chips to one of national security, prompting the licensing requirements.

For its part, China has responded diplomatically, calling for the immediate removal of the trade restrictions on tech products. Indeed, that might have resulted in the U.S. government backing off to some extent on Thursday. In a subsequent SEC filing, Nvidia said that the government had authorized various exports to support the development of the H100 product line, as well as allowing support of U.S. customers through exports through the beginning of March 2023. Nvidia will be able to fulfill A100 and H100 orders through its facility in Hong Kong for the next 12 months.

The U.S. government wants to avoid letting Chinese tech companies gain access to advanced chips from Nvidia, AMD, and others, in part because it fears that China will use them to build their own counterparts. Overt export restrictions won't necessarily resolve the threat of intellectual property theft.

In the long run, tech companies seeking maximum growth want open access to all of the world's biggest markets. If geopolitical tensions continue, then they could make that best-case scenario for Nvidia and its peers impossible to achieve -- with potentially substantial long-term implications for shareholders.