What happened

Much of what's happening in the headlines and on the stock market these days has inexorable ties to artificial intelligence (AI). However, developments in another corner of the semiconductor industry stole the spotlight today. A smartphone released in China contained an advanced processor that many believed shouldn't be possible in the face of U.S. chip sanctions.

With that as a backdrop, wireless chips provider Qualcomm (QCOM -1.16%) tumbled 6.7%, semiconductor equipment systems provider ASML Holding (ASML -1.14%) slumped 4.6%, chipmaker Taiwan Semiconductor Manufacturing (TSM 0.01%) fell 3.2%, and chipmaker Broadcom (AVGO -0.09%) dipped 2.4% by 1:21 p.m. ET.

U.S. and Chinese flags superimposed on a semiconductor.

Image source: Getty Images.

So what

Last week, Huawei Technologies -- China's leading smartphone provider -- released a device with a chip so advanced it caught industry experts off guard. A breakdown of the smartphone revealed the processor was created by Chinese chipmaker Semiconductor Manufacturing International Corporation (SMIC), which immediately reverberated through the tech industry. 

Huawei's Mate 60 Pro included a new 5G Kirin 9000s processor based on advanced 7-nanometer technology, according to semiconductor research firm TechInsights. This signals advances in China's chipmaking technology that many believed weren't possible -- or technology that skirted U.S. sanctions. 

The stunning revelation prompted two U.S. congressmen to request additional restrictions, further curtailing or eliminating semiconductor exports to SMIC.

Rep. Mike Gallagher, chair of the U.S. House of Representatives committee on China, suggested that SMIC had potentially violated U.S. sanctions, calling on the Commerce Department to suspend exports of technology to both SMIC and Huawei. He further posits that these chip advances wouldn't be possible without the use of technology developed in the U.S. 

House Foreign Affairs Committee Chair Michael McCaul went further, telling Reuters that China was trying to "get a monopoly" on manufacturing even less-advanced chip technology. "We talked a lot about advanced semiconductor chips, but we also need to look at legacy," he said, including dated technology not covered by current restrictions. 

Now what

The Biden administration has been working furiously to keep the most advanced chip designs from making their way to China. Policymakers fear these advanced processors could be used to enhance weapons used by U.S. rivals on the battlefield, calling these moves a matter of national security.

Late last year, the U.S. instituted restrictions on the export of some of the most powerful processors -- particularly those used for AI -- to China and other countries without first obtaining a license from regulators. These restrictions have impacted a number of U.S. chipmakers, including Nvidia and Advanced Micro Devices, though the effect -- thus far, at least -- has been minimal. 

The U.S. has persuaded allies to institute similar measures. Earlier this year, the Dutch government implemented restrictions on AMSL, requiring the company to request a license before exporting advanced chipmaking equipment to China. Japan is also limiting the export of advanced systems made by Nikon

Calls for additional sanctions by Congress could expand to other types of semiconductors. This, in turn, could weigh on this quartet of semiconductor specialists.

It's important to remember, however, that the recent calls for additional restrictions haven't yet resulted in any additional action by the U.S. government. Furthermore, it remains to be seen what the details of these new sanctions might be and if these requirements will have any serious implications for these semiconductor specialists. Stay tuned.