Both European and American flagships are battered. Escalating tariffs and trade restrictions are pummeling the sales and stock prices of Silicon Valley’s NVIDIA and the Dutch ASML

Although the measures target China’s access to advanced semiconductor technology, they risk boomeranging, pushing Europe to swallow the bitter pill of working with Beijing, while cutting US companies off from the world’s fastest-growing chip market. It’s a painful, risky reckoning that will require expensive, time-consuming choices — while encouraging Chinese companies such as Huawei to innovate.

The immediate impact concerns stock valuations. Since the beginning of the year, high-flying NVIDIA has slumped by about 20%. ASML has sold off by about 10%. New US rules require licenses for selling advanced artificial intelligence chips like NVIDIA’s H20, forced a $5.5 billion charge. ASML meanwhile warns that US tariffs could cost US chip equipment makers more than $1 billion annually.

NVIDIA’s reliance on China is combustible. About a fifth to a quarter of its sales for data centers go to Chinese data centers. It developed the H20 chips to comply with earlier US guidelines. In addition, China has retaliated against the new US tariffs by imposing export restrictions on rare earth minerals or other key chip components

ASML, which supplies critical lithography machines for chip manufacturing, is squeezed. It plans to shift “lion’s share” of tariff costs to US customers, but such a move risks slowing orders. Clients like Intel, TSMC, and Samsung have postponed equipment purchases due to overcapacity in non-AI chips.

China wields several powerful options to retaliate. It already has restricted exports of rare earth metals essential to chip production. It can, and probably will, accelerate investments in local firms like SMIC to reduce reliance on Western technology. It also could block US tech imports, though this could harm Chinese manufacturers reliant on American software and hardware.

The most likely outcome will boost Chinese domestic production. In addition to state-owned SMIC, the telecommunications giant Huawei could become a major competitor in AI chips. And China could use Huawei chips to build AI data centers across the world in its Belt and Road imitative.

US and European technology remain unmatched. Previous generation NVIDIA chips reportedly perform 40% better than Chinese competitors, while ASML lithography machines face no real competition in producing ultra-small chips. But the US-China tech decoupling threatens to fragment global supply chains, forcing both companies to adopt costly “dual-track” production systems, one for Western markets and the other for sanctioned China.

The inevitable response from semiconductor companies is to accelerate diversification of their supply chains and invest in domestic manufacturing. Specifically, companies most exposed to tariffs — such as NVIDIA — should prioritize shifting manufacturing and assembly to the US. NVIDIA plans to invest heavily in domestic infrastructure and partner with US-based suppliers.

Given the unpredictability of trade policy, semiconductor firms develop “dual track” or redundant supply chains. This means building parallel manufacturing and sourcing capabilities both inside and outside the US and China, allowing companies to quickly adapt to shifting tariff regimes or export controls. Such flexibility is costly but reduces the risk of sudden disruptions.

Investors should expect a rocky road ahead, full of inventory write-downs caused by sudden policy shifts. The transition away from China will be expensive and time-consuming. The US currently lacks the scale and expertise of Asian foundries like TSMC and Samsung, so reshoring will require hundreds of billions of capital investment over many years.

Europe, including the UK, should focus on its strengths: design, and innovation, especially in compound semiconductors, and not try to “outsubsidize” either the US or China. The EU and UK, whose supply chains and labor pools are intertwined, should work as one. And if spurned by the US, both should consider hedging their bets by working more closely with Beijing.

Christopher Cytera CEng MIET is a Non-resident senior fellow with the Tech Policy Program at the Center for European Policy Analysis and a technology business executive with over 30 years’ experience in semiconductors, electronics, communications, video, and imaging.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.

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