Another day brings another shot across the bow of the ever-deepening US-China rivalry, this time focusing on optical transceivers that power fiber optic-based data transmission, and where China's Zhongji Innolight currently controls over a quarter of the global market.

Reuters is now reporting that the US FCC, which regulates the American telecom sector, is considering a ban on China-sourced optical transceivers that convert electrical signals into light pulses via an LED, and at the other end of a given fiber optic cable, convert the incoming light into electrical signals via a photodiode.

Of course, the move directly impacts China's Zhongji Innolight, which currently commands a 27 percent global market share, with over 90 percent of its revenue coming from outside China . Moreover, China accounts for over 70 percent of global shipments of optical transceivers.

Even so, an immediate ban is quite unlikely, especially given the fact that Innolight is a major supplier of optical transceivers to NVIDIA and Google.

Do note that optical transceivers are not an interchangeable commodity, and require extensive testing and compatibility validation in relation to a given data center's network switches, DSPs, and broader network architecture.

As such, a potential FCC ban unlocks sizable medium-term tailwinds for the US-based manufacturers of these components, including Coherent Corp. (NYSE: COHR) and Lumentum (NASDAQ: LITE). Even so, given the sheer scale of Innolight's dominance, its American counterparts might not have enough capacity to provide a sufficient offset in the near term, not to mention compatibility issues with the ongoing data center build out in the US.

All of these factors suggest that an immediate ban of China-sourced optical transceivers is unlikely to materialize. The FCC can, however, ban upgrading the existing 800G optical transceivers from Innolight to the next-gen 1.6T ones that deliver an aggregate data transfer rate of 1.6 Tbps, allowing Coherent and Lumentum to focus on ramping up the production of these next-gen components.

This development offers another evidence of the Trump administration's determination to de-risk critical supply chains by gradually eliminating China-sourced components, leading to a bifurcation of the global economy into the Cold War-style American and Chinese camps

Finally, might this be a gambit on the part of the Trump administration to force China to export more Indium Phosphide (InP), which is used as a foundational substrate material in AI data center optical interconnects, and within lasers in silicon photonics and 5G/6G high-frequency wireless communications?

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