The Risks of Cutting Off China

The Great Wall dividing the U.S. from China is about to get higher. A Wall Street Journal report that the Biden administration is considering further tightening exports of artificial intelligence chips to China triggered a sell-off in chip stocks on Wednesday. Shares of Nvidia, the dominant provider of chips for generative AI, fell 1.8%. To be sure, that’s not much of a reaction for a stock that has risen 181% just this year, according to Koyfin. But the muted investor response makes sense: For Nvidia, losing China as a market is a long-term problem, not an immediate issue. Right now, demand for AI chips is so great that Nvidia will likely find other buyers easily if it can’t sell to China. 

As a Morgan Stanley analyst noted in a report Wednesday, there are plenty of customers in the U.S. “excited to take any product that might get repurposed from China.” But no one should underestimate the eventual cost of cutting off the nation. Listen to Nvidia Chief Financial Officer Colette Kress, who told an investment conference Wednesday that “over the long term” prohibiting Nvidia from selling AI chips to China “will result in a permanent loss of opportunities for the U.S. industry to compete and lead in one of the world’s largest markets.” OK, then—that seems like a big deal! And let’s face it, the impact isn’t just that U.S. companies will lose access to the Chinese market. We’re also forcing China to become more self-reliant in tech, something that will not help the U.S. industry or investors in the long run.