Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How AI Chip Export Controls Are Rewiring Global Supply Chains
Transcript
- Lucas: So South Korea's Kospi just had one of its worst weeks in over a year. The EWY ETF, which tracks Korean stocks, fell more than 8 percent in the past five days. And the obvious culprit is the semiconductor sector. Luna: That's a massive move. And we're seeing similar pressure on Taiwan's TSM too, right? But interestingly, China's FXI actually went up 1.5 percent over the same period. Lucas: Right. That divergence tells you a lot about where the market thinks the pain is concentrated. South Korea and Taiwan are the two biggest foundry and memory chip hubs after the US. So when the US tightens export controls on advanced AI chips, those are the economies that get squeezed first. Luna: And this is fresh — the Biden administration's latest round of rules on AI chip exports came out in May. But the market is still digesting the implications, especially for companies like Samsung and SK Hynix. Lucas: Exactly. The big shift here is that the controls are no longer just about keeping advanced chips out of China. They're also restricting the equipment and software used to make those chips. So even a company like Samsung, which is based in an allied country, has to navigate a web of licensing requirements if it wants to upgrade its fabs. Luna: And that's hitting their bottom line. Samsung's semiconductor division saw profit drop over 30 percent year-over-year in the last quarter. The market is pricing in a sustained slowdown. Lucas: Yeah, and then you have the macro backdrop. The US trade deficit in goods and services widened sharply in May to nearly 78 billion dollars, down from about 54.5 billion just a month earlier. That's a 40 percent jump. And part of it is companies front-loading imports of chips and electronics before new restrictions kick in. Luna: So companies are stockpiling. That creates a short-term surge but then a potential cliff later. And the strong dollar makes it worse — the trade-weighted dollar index is at 120.5, near recent highs. That makes US exports more expensive and imports cheaper. Lucas: Right. So you've got a perfect storm for chip-heavy economies. South Korea's export data for June showed a 12 percent drop in semiconductor shipments year-over-year. That's a major red flag because chips account for around 20 percent of their total exports. Luna: And yet China's market is shrugging off the controls. Why do you think FXI is up? Is it because China is investing heavily in domestic chip production? Lucas: Partly. But also because the market knows these controls are leaky. There are always workarounds — shell companies, shipments through third countries, even smuggling. So Chinese firms are still getting some advanced chips, just at a higher cost. And the government is pouring money into domestic alternatives, which is lifting local suppliers. Luna: It's a cat and mouse game. But for multinationals like Qualcomm or NVIDIA, the uncertainty is brutal. They have to decide whether to comply fully or risk losing market share in China. Lucas: And that's the conversation happening in boardrooms right now. Look at the headline today: Steve Eisman of 'Big Short' fame is starting to doubt AI. He just sold a key tech stock. That's a signal that even the biggest bulls are getting nervous about how quickly the AI trade can turn. Luna: So are we seeing the beginning of a chip glut? All that AI capex the hyperscalers have been spending — are they going to overbuild? Lucas: There's definitely a risk. The S&P 500 fell 1.5 percent in the past five days, and the Nasdaq dropped almost 4 percent. That's largely tech-driven. Investors are starting to ask: when do these AI chips actually translate into revenue growth for the companies buying them? Luna: And the export controls add another layer. If you're a multinational with fabs in multiple countries, you're dealing with a patchwork of regulations. The EU is also working on its own chip controls and subsidies. So global trade in semiconductors is becoming more fragmented. Lucas: That's the key phrase: fragmentation. We're moving from a truly global supply chain to a set of regional blocs. The US allies get some access, China is cut off from the most advanced stuff, and everyone else has to pick a side. It's less efficient and more expensive, which ultimately shows up in trade deficits and inflation. Luna: So what does that mean for a company like ASML? They make the lithography machines that are essential for advanced chips. Their sales are now directly tied to geopolitics. Lucas: Exactly. ASML is a perfect case. They can't ship their extreme ultraviolet machines to China, but they're selling a lot to Taiwan and South Korea. But if global demand for chips slows, their order book could shrink. They're caught between policy and market cycles. Luna: Speaking of cycles, we're already seeing some easing in the memory chip market. DRAM prices dropped 5 percent in the second quarter, which is unusual after a year of increases. That bolsters the glut narrative. Lucas: It does. And that feeds back into the trade data. When chip prices fall, the dollar value of exports drops even if volume holds up. So South Korea's export numbers could stay weak even if they ship the same number of chips. Luna: One thing I found interesting in the headlines: Sam Altman is meeting with the Trump administration and senators this week. That suggests the AI policy debate is very much alive, and it could mean even tighter controls or new rules around AI safety that affect trade. Lucas: Right. And the current administration has been aggressive on export controls. But a change in leadership after the election could shift priorities. That adds another layer of uncertainty for companies planning long-term investments. Luna: If today's episode helped you make sense of this tangled landscape, I want to mention something. The reason we can dig into topics like this without ad breaks is because of listener support. If you found it useful, consider a small contribution — buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. Every bit helps us keep the show independent and focused on what matters. And now, back to the chips. Luna: So where do we go from here? Are there any bright spots for semiconductor trade? Lucas: Bright spots are hard to find, but one is the rise of AI inference chips — those are less restricted because they're not the cutting-edge training chips. Companies like Marvell and Broadcom are seeing demand pick up. And the automotive chip market is still growing, though it's less sensitive to geopolitics. Luna: So it's not all doom and gloom. But for countries like South Korea and Taiwan, the short-term pain is real. And for multinationals, the cost of compliance is going up. Lucas: Absolutely. And that cost ultimately gets passed through the supply chain. We're already seeing it in higher prices for electronics and longer delivery times. The era of cheap, frictionless global trade in chips is over. Luna: It's a reminder that trade policy isn't just about tariffs — it's about technology transfer, intellectual property, and national security. And those are the hardest things to negotiate. Lucas: Well said. And we'll keep tracking how this evolves, especially as we get more data on the impact of the latest export controls. Thanks for listening — we'll be back tomorrow.