Tech Policy Analysis | October 23, 2025
The Trump administration is reportedly considering sweeping export restrictions targeting products manufactured with American software destined for China—a move that could dramatically expand Washington’s technology containment strategy beyond semiconductors. The policy under consideration would restrict global shipments of items containing U.S. software or produced using U.S. software, potentially affecting everything from laptops to jet engines. The proposal represents the latest escalation in a trade conflict that has already strained global supply chains and threatens to fundamentally reshape technology commerce.
Policy Context: From Chips to Software
The proposed software controls emerge against the backdrop of years of tightening U.S. export restrictions on China’s access to advanced technology. Since October 2022, the Commerce Department’s Bureau of Industry and Security has progressively expanded controls on advanced computing semiconductors, chip manufacturing equipment, and electronic design automation (EDA) software to restrict China’s ability to develop cutting-edge chips critical for AI and military applications.
On October 10, President Trump announced via social media that he would impose additional 100% tariffs on Chinese imports and new export controls on “any and all critical software” starting November 1, though he provided no further details. Treasury Secretary Scott Bessent confirmed on October 23 that “everything is on the table” regarding software export restrictions, adding that any such controls would likely be coordinated with G7 allies.
The proposed measure would echo restrictions the Biden administration imposed on Russia after its 2022 invasion of Ukraine, which restricted exports to Russia of items made globally using U.S. technology or software. However, applying this framework to China—the world’s largest trading nation and a deeply integrated node in global manufacturing—would present exponentially greater complexity and economic disruption.
Geopolitical Catalyst: China’s Rare Earth Gambit
The immediate trigger for Washington’s consideration of software export controls was Beijing’s dramatic expansion of rare earth restrictions. On October 9, China announced that starting December 1, foreign entities would need licenses to export products containing more than 0.1% of Chinese rare earths or manufactured using Chinese rare earth technologies. This marked the first time China deployed its version of the “foreign direct product rule”—a mechanism long used by Washington to extend U.S. jurisdiction extraterritorially over foreign-made products.
China now controls export of 12 of the 17 rare earth elements, minerals essential to industries ranging from electric vehicles and wind turbines to semiconductors and defense systems. China accounts for approximately 70% of global rare earth supply and has repeatedly used these critically needed minerals as a bargaining chip in trade negotiations.
The timing was strategic. China’s announcement came just weeks before President Trump’s scheduled meeting with Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation summit in South Korea, underscoring Beijing’s intent to strengthen its negotiating position.
Trump’s response was swift. In addition to the 100% tariff increase, he declared on Truth Social that the U.S. would impose export controls on critical software, bringing total U.S. tariffs on China to approximately 130%—approaching the levels seen during the “Liberation Day” tariff escalation earlier in 2025.
Economic and Market Implications
The potential scope of software export controls poses profound challenges for global commerce. “Everything imaginable is made with U.S. software,” one U.S. official familiar with the discussions told Reuters, highlighting the extraordinarily broad reach of the proposed action.
Semiconductor and AI Sectors: The technology industry faces the most immediate impact. Export controls have already significantly disrupted China’s semiconductor ecosystem, with Commerce Secretary Howard Lutnick testifying that Huawei would produce only 200,000 AI chips in 2025 compared to the approximately 1 million chips China legally imported from Nvidia in 2024. Expanding controls to encompass software-powered products could further constrict China’s access to advanced computing capabilities.
Yet effectiveness remains uncertain. In January 2025, Chinese startup DeepSeek unveiled an open-source AI research model roughly matching capabilities of advanced models from Google, OpenAI, and Anthropic, demonstrating that Chinese firms can innovate around hardware constraints. Similarly, researchers at Peking University announced breakthroughs in carbon nanotube-based chips that could potentially leapfrog silicon-based technology entirely.
Supply Chain Disruption: The proposed controls would create unprecedented compliance burdens. Companies worldwide would need to determine whether their products contain U.S. software or were manufactured using American software tools—a determination that could prove nearly impossible given the pervasive integration of U.S. technology across global manufacturing.
U.S. stock markets reacted negatively to news of the potential software controls, with the S&P 500 closing down 0.5% and the Nasdaq declining approximately 1% on the day Reuters first reported details of the proposed restrictions.
Industry Reactions and Implementation Challenges
Policy experts expressed skepticism about both the wisdom and feasibility of such expansive controls. Emily Kilcrease, a former trade official now at the Center for a New American Security, acknowledged that software represents a natural point of U.S. leverage but warned that such controls would be extraordinarily difficult to implement and would generate significant blowback for U.S. industry.
The track record of similar export control experiments offers cautionary lessons. In May 2025, the Commerce Department imposed restrictions on electronic design automation software exports to China, only to rescind them in early July as part of a framework agreement reached during trade negotiations. That temporary détente unraveled by late September, setting the stage for the current escalation.
The semiconductor industry, which has witnessed the cumulative impact of export controls since 2022, understands the stakes. While specific industry association statements on the latest proposed software controls are not yet available, semiconductor firms have previously warned that export controls create “negative ripple effects” on research investment by reducing revenues from China, which consistently accounts for around 50% of global chip sales.
Legal and Diplomatic Complexity: Implementing controls on products made with U.S. software would require extraterritorial enforcement of American export laws on an unprecedented scale. Unlike targeted restrictions on specific advanced chips or manufacturing equipment, software-based controls would implicate routine commercial products manufactured worldwide. This raises questions about allied cooperation, enforcement mechanisms, and potential violations of international trade law.
A Chinese embassy spokesperson stated that China opposes the U.S. “imposing unilateral long-arm jurisdiction measures” and vowed to “take resolute measures to protect its legitimate rights and interests” if Washington proceeds with the software restrictions.
Global Supply Chain Reconfiguration
The escalating technology restrictions from both Washington and Beijing are accelerating a fundamental restructuring of global supply chains. The competing deployment of foreign direct product rules—with China now applying American-style extraterritorial controls over rare earths and the U.S. contemplating similar measures for software—signals a new phase in what observers term “tech decoupling.”
“Beijing has realized that it has leverage in this sector and is clearly not shy about using it,” said Wendy Cutler, senior vice president at the Asia Society Policy Institute and former U.S. trade negotiator. The mutual willingness to weaponize control over critical inputs—rare earths for China, software for the U.S.—creates a dynamic where both economies possess the ability to inflict significant damage on the other’s industrial base.
Multinational corporations face mounting pressure to reconfigure operations to navigate these competing restrictions. Companies may need to establish parallel supply chains—one serving China, another serving markets aligned with U.S. export controls—dramatically increasing costs and reducing efficiency.
The defense sector faces particularly acute challenges. Under China’s new rare earth restrictions, companies with any affiliation to foreign militaries will be largely denied export licenses starting December 1, with the Ministry of Commerce making clear that requests to use rare earths for military purposes will be automatically rejected. This threatens to deepen vulnerabilities in the U.S. defense industrial base that already faced limited production capacity for critical technologies.
Assessment and Outlook
The proposed software export controls represent a potential inflection point in U.S.-China technology competition. While previous restrictions targeted specific advanced capabilities—cutting-edge semiconductors, AI chips, manufacturing equipment—software-based controls would cast a far wider net across commercial products integral to everyday economic activity.
Three scenarios appear most plausible:
Negotiating Leverage: Administration officials could announce the measure to pressure China but stop short of implementing it, with narrower policy proposals also under discussion. This approach would mirror the on-again, off-again pattern of export restrictions seen throughout 2025, where controls served primarily as bargaining chips in trade negotiations.
Targeted Implementation: Rather than sweeping controls on all software-powered products, Washington might impose restrictions on specific software categories deemed most sensitive—such as chip design tools, aerospace applications, or AI development platforms. This would reduce compliance burdens while still signaling U.S. resolve.
Full Escalation: The administration could implement comprehensive software export controls, accepting the economic costs and diplomatic friction in pursuit of strategic goals. However, the difficulty of enforcement, allied resistance, and domestic industry opposition make this path politically challenging.
The broader trajectory points toward continued fragmentation of technology ecosystems. Trade negotiations have evolved to normalize bargaining over export restrictions, fundamentally altering the traditional framework of U.S.-China economic engagement. Both nations now routinely deploy control over strategic inputs as instruments of statecraft, transforming commercial relationships into geopolitical leverage.
For allies caught between the two economic superpowers, the message is increasingly clear: the era of seamless global technology integration is ending. Countries must navigate a world where access to both Chinese rare earths and American software may require political alignment—forcing uncomfortable choices about economic partnerships and strategic orientation.
The Trump-Xi meeting in South Korea, if it occurs, may offer temporary relief through another negotiated framework. But the underlying dynamic—mutual efforts to deny the other access to critical technologies—suggests that episodic truces will punctuate a longer-term trajectory toward parallel, competing technology ecosystems. In this environment, software export controls may represent not an aberration but a preview of the new normal in great power competition.
