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The flag of China is displayed on a smartphone with a NVIDIA chip in the background in this photo illustration.
Nvidia delays could slow down China at a crucial time
Chinese tech giants like Tencent, Alibaba, and ByteDance are buying chips as they race to build AI systems that can compete with American companies like OpenAI and Google. The shortage means these companies might face serious delays in launching their own AI projects, some of which are based on the promising Chinese AI startup DeepSeek’s open-source models.
It also comes at a critical time when China is pouring resources into developing its own AI industry despite having limited access to the most advanced computing technology due to US trade restrictions. New shipments are expected by mid-April, though it could mean months of waiting for Chinese firms to go through the proper channels.
Did Biden’s chip rules go too far?
The “AI Diffusion Rule,” which was announced on Jan. 13 by the last administration, divides countries into three tiers with varying restrictions on American AI chip imports. While close allies like Canada and the UK face few limits, many partners, including India, Switzerland, and Israel, fall into the second tier with significant restrictions on how many chips they can order. A third tier of rivals like China and Russia are completely cut off.
Microsoft’s critique
Microsoft Vice Chair and President Brad Smith didn’t mince words. The rule “undermines” US AI leadership and will ultimately give “China a strategic advantage,” he wrote in a blog post. Smith argued that the rule’s restrictions on allies would backfire, forcing countries to look elsewhere for AI infrastructure — likely to China. While Microsoft waited until now, Nvidia criticized the rule immediately after it was announced, saying that it “threatens to derail innovation and economic growth worldwide.”
The goal of Biden’s export controls has been clear: prevent China from accessing cutting-edge AI infrastructure needed to train and deploy top models while maintaining sales to friendly markets. While Biden’s chip controls began in 2022, the AI Diffusion Rule represents the broadest attempt to prevent advanced computing power from reaching China.
What the Diffusion rule accomplishes
Xiaomeng Lu, director of geo-technology at Eurasia Group, sees the rule as “a move to alienate US allies and partners.” While the Trump administration might tighten rules for China, it could potentially relax them for other countries, she says.
Jeremy Mark, a nonresident senior fellow at the Atlantic Council's GeoEconomics Center, said the implementation seemed rushed. ”As with any wide-reaching policy that is put together in a rush, there will be unintended consequences.”
Jacob Feldgoise, a data research analyst at Georgetown University’s Center for Security and Emerging Technology, questions the primary assumptions of all of Biden’s export controls on chips. “They assume that compute scaling will continue and that algorithmic improvements can’t substitute for compute,” he said. “If those assumptions break down, the controls will further struggle to control the spread of AI capabilities.”
The loopholes in the plan
The Biden export controls haven’t worked as expected. The Chinese company DeepSeek has claimed that it has trained an industry-standard model with much fewer chips than top US labs, though the US is currently investigating whether it had access to restricted chips.
Meanwhile, Chinese buyers have been circumventing the export rules anyway. On Sunday, the Wall Street Journal published an investigation that found Chinese firms ordering Nvidia’s Blackwell AI chips through third parties in neighboring countries. And underground markets across China have long sold Nvidia chips sourced from unknown places.
What Trump could do
Mark said thatTrump could “tighten restrictions on technology sales to China even more than Biden” but said it’s impossible to tell what will come through as policy and what is posturing for future negotiations.
Feldgoise believes further tightening on China is likely, but notes that softening the policy on other countries could undermine that effort. “The challenge with loosening controls on other countries is that doing so would likely undermine the administration's objective of cracking down on chip smuggling to China.”
Domestic chip production and cutting off China will likely remain priorities under Trump, continuing two rare areas of bipartisan agreement. Silicon Valley has been ingratiating itself with the Trump administration in recent months and, on this front, hopes that deregulation in key areas could clear the way for better sales around the world.This illustration photo shows the DeepSeek AI application logo on a black background displayed on a cell phone with a kaleidoscope-effect China flag in the background.
What DeepSeek means for the US-China AI war
A Chinese startup might have achieved what many thought was impossible: matching America’s best artificial intelligence systems at a fraction of the cost.
DeepSeek's latest AI model, DeepSeek-R1, was released earlier this month. The open-source model performs as well as top models from OpenAI and Google while using just a fraction of the computing power and cost to develop; it’s also a fraction of the cost to use.
DeepSeek claims that it only needed $6 million in computing power to develop the model, which the New York Times notes is 10 times less than what Meta spent on its model. The R1 model received the fourth-highest score on Chatbot Arena, which crowd-sources evaluations to rank large language models by capability, only behind two of Google’s Gemini models and ChatGPT-4o and ahead of Anthropic’s Claude 3.5 Sonnet.
If you take DeepSeek at its word, then China has managed to put a major player in AI on the map without access to top chips from US companies like Nvidia and AMD — at least those released in the past two years. Joe Biden’s administration placed strict export controls on these chips, so if the company has had access it may not be forthright about that.
For now, the US markets are indeed taking DeepSeek at its word. Nvidia stock fell nearly 17% on Monday, erasing a record sum from its market capitalization — $589 billion in a single day. The Nasdaq stock exchange ended the day down 3%, as a result.
The revelation about DeepSeek has come as Donald Trump tries to spur AI infrastructure in the United States, heralding the $500 billion Stargate project. But China’s new open-source model might have just changed the landscape when many thought the United States was running away with the race.
In a speech Monday evening, Trump called news of the DeepSeek model a “positive” due to its cheap cost but said American industry needs to compete. “The release of DeepSeek, AI from a Chinese company should be a wakeup call for our industries that we need to be laser-focused on competing to win.”Biden has one week left. His chip war with China isn’t done yet.
On Monday, the US Commerce Department announced new export controls on advanced chips used to train and run artificial intelligence, the latest in a series of increasingly tough restrictions enacted by the Biden administration in the past few years. It’s primarily a mechanism for maintaining American dominance in artificial intelligence while also cutting off adversaries — first and foremost China — from access to the chips they need to level the playing field commercially and militarily.
Under the new export regime, the US will use a three-tier system: Companies from the US and 18 close allies, including the UK, Germany, and Japan, are fully free to buy these chips. Those from countries subject to US arms embargo, such as China and Russia, are completely cut off from acquiring high-powered chips. And countries from every other country will face a set cap restricting the number of AI processors they can buy each year without special permission. This latter group even includes strategic partners such as Mexico, Switzerland, and Israel.
“This policy will help build a trusted technology ecosystem around the world and allow us to protect against the national security risks associated with AI, while ensuring controls do not stifle innovation or US technological leadership,” US Secretary of Commerce Gina Raimondo said in a press release.
But the chip industry isn’t happy — particularly America’s most important chip designer, Nvidia, which said that the rules are “misguided.”
“While cloaked in the guise of an ‘anti-China’ measure, these rules would do nothing to enhance US security,” Ned Finkle, Nvidia’s vice president of government affairs, wrote in a statement. “Rather than mitigate any threat, the new Biden rules would only weaken America’s global competitiveness, undermining the innovation that has kept the US ahead.” The Semiconductor Industry Association criticized the timing — just days before the presidential transition.
Tinglong Dai, a professor at Johns Hopkins Carey Business School, said that US companies are increasingly aligned with national security concerns and “face ever greater challenges to making a profit or even operating in China.” In that way, he said he expects that short-term discomfort will give way to companies falling in line with national security priorities.
Xiaomeng Lu, director of geo-technology at Eurasia Group, expressed concern about implementation. “Under this regime, only a small number of trusted allies have unrestricted access to high-end semiconductors,” she said. “Data centers located in over 100 countries will have to apply for licenses through an onerous process, even if they are owned and operated by US cloud service providers.” She added that the rules could discourage many countries from buying US products.
“This rule is not just about China, but it may make China’s chip smuggling efforts more difficult,” said Jacob Feldgoise, a data research analyst at Georgetown’s Center for Security and Emerging Technology. “The regulation could hurt American businesses, including AI chip companies and cloud service providers, but perhaps more importantly, the rule may hurt the United States’ relationship with a set of allies to which the rule didn’t give preferential treatment.”
Jeremy Mark, a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, said that China is deeply embedded in the semiconductor supply chain, such as supplying important rare earth metals to chip makers. In this way, the US is risking a “serious trade conflict” in further cutting off China.
But there may be more to the story. “There has been clear, bipartisan support in Washington for export controls, and that has empowered several government agencies to act,” Mark said. “However, it’s not clear how much the latest initiatives have been driven by a White House decision to hand Trump a fait accompli.”
Trump won’t want to appear weak on China, but he also doesn’t want to alienate important industry players. Dai said he expects Trump to maintain a tough stance on China and to “tweak the current export rules — because he’s Trump after all.” The rule doesn’t go into effect for companies until May 15, Feldgoise noted, giving Trump time to revise the rules if needed.
As for China, the country is forging ahead even without access to the top chips. Recently, the Chinese startup DeepSeek released an open-source large language model that has impressed outsiders. This development proves it’s “possible to build a quality model with less advanced chips,” Lu said. Meanwhile, the new Commerce Department restrictions will “undermine US companies’ competitiveness in the face of robust competition from China,” she adds.The Harry Elkins Widener Memorial Library is pictured in Harvard yard at Harvard University in Cambridge, Massachusetts, U.S., December 7, 2023
Hard Numbers: Harvard’s books, A whistleblower’s tragic end, Broadcom’s boom, Getting brainworms
1 million: Harvard Law School's Library Innovation Lab has launched the Institutional Data Initiative to make public domain data from Harvard and other institutions available for training AI models, including 1 million books scanned at Harvard.
26: A former OpenAI researcher-turned-whistleblower named Suchir Balaji was found dead in his apartment from an appartent suicide. Balaji, who was only 26, left OpenAI earlier this year and went public with concerns that the company had violated US copyright laws in training ChatGPT.
1 trillion: The chipmaker Broadcom is now a $1 trillion company after its stock surged 20% on Dec. 13 following positive news about its AI business. The company told investors in its quarterly earnings call that its AI chip business was rapidly growing, as a result boosting Broadcom to the ninth-most-valuable company in the world.
250 million: The startup Liquid AI is closing in on a new $250 million fundraising round that would value it at $2.3 billion. Fascinatingly, the company is building “liquid foundation models” that, instead of being modeled off of neural connections in the human brain, are based off of the inner workings of worm brains.
President Joe Biden and First Lady Jill Biden make remarks at the first-ever White House Conference on Women's Health Research in Washington, D.C., United States, on December 11, 2024.
One last crackdown on chips for Biden
Joe Biden might not be done with his yearslong effort to limit China’s access to advanced computer chips. According to the Wall Street Journal, the Biden administration is preparing new rules to cap the sale of chips to certain countries in Southeast Asia and the Middle East that may be acting as intermediaries for China.
While Biden has enacted strict export controls limiting the sale of advanced chips and semiconductor manufacturing equipment to China, there is still an underground market for these products thriving in the Middle Kingdom.
It’s unclear which countries would be capped from receiving large quantities of chips, but the US has kept a close eye on Saudi Arabia and the UAE’s own AI ambitions, even as it has struck deals with both countries. The updated rules are expected to come later this month, mere weeks before Biden’s presidency ends.
A Microsoft logo is pictured on a store in the Manhattan borough of New York City, New York.
Microsoft gets OK to send chips to the UAE
The Biden administration, which reportedly brokered the deal earlier this year, did so to box out the Chinese government, which has sought to expand its influence with the Persian Gulf’s technology sector. In exchange, G42 has been working to assure US authorities that it can be trusted, despite ties to China.
In greenlighting the latest export, which has not yet been formally announced by the US Commerce Department, the administration will place extensive prohibitions on who can access Microsoft’s facility in the UAE, including China, its officials, and any sanctioned individuals. It’s not yet clear which company’s chips Microsoft will be exporting.
Biden tightens China’s access to chips one last time
Throughout Joe Biden’s presidency, the Commerce Department has gradually tightened its chokehold on China’s access to semiconductors needed to access, train, and build artificial intelligence. On Dec. 2, Commerce Secretary Gina Raimondo announced what she told reporters amounted to the “strongest controls ever” meant to restrict China’s access to AI for military applications. Today, China responded with its own new restrictions, sending a strong signal to the incoming US president.
The new US controls announced Monday, the third order in as many years, apply to 24 types of semiconductor manufacturing equipment, three types of software tools, and high-bandwidth memory, or HBM, an interface often used in producing AI chips. The department also added 140 Chinese companies to its Entity List, which requires regulatory approval should a US company wish to sell to a member of the list. “By adding key semiconductor fabrication facilities, equipment manufacturers, and investment companies to the Entity List, we are directly impeding the PRC’s military modernization, WMD programs, and ability to repress human rights,” said Matthew Axelrod, assistant secretary for export enforcement at the Commerce Department.
In response, on Dec. 3, China banned shipments of certain materials using gallium, germanium, and antimony to the US, as well as super-hard materials such as diamonds. These items can be used both for military and semiconductor applications. “China firmly opposes the US overstretching the concept of national security, abuse of export control measures, and illegal unilateral sanctions and long-arm jurisdiction against Chinese companies,” said Lin Jian, a Chinese Foreign Ministry spokesperson.
Jacob Feldgoise, an analyst at Georgetown University’s Center for Security and Emerging Technology, said the new US order plugged holes in the previous year’s rules. It requires a license for many more exported tools, focuses on high-bandwidth memory “because HBM is used by nearly all of the most capable AI chips” and strengthens the US’s grasp beyond its borders. “Notably, this set of controls is newly extraterritorial: It will impose licensing requirements on certain foreign-produced tools so long as they contain US technology,” Feldgoise said.
Xiaomeng Lu, director of Eurasia Group's geo-technology practice, noted that the US excluded the Chinese semiconductor company ChangXin Memory Technologies from the Entity List to appease the Japanese government. CXMT has been buying materials from Japanese suppliers to make its memory chips. “With the Trump administration on its way, they are expected to take a more unilateral approach and will be less likely to make concessions per requests of allies,” she said.
Jeremy Mark, a nonresident senior fellow at the Atlantic Council's GeoEconomics Center, said it’s difficult to judge how significant these new rules are because of the looming change of guard in the White House. Had they come ahead of the transition to a Kamala Harris administration, “they would continue making life complicated for Chinese semiconductor companies and US companies that rely on the China market for a significant portion of their sales.” However, Mark said that Donald Trump could strengthen or weaken export controls when he takes office, so it’s “impossible to say” what the legacy of this final move will be.
For Biden, it marks the end of an era of success: While his restrictions on China could have been tighter or less porous, he leaves office with China still searching for AI breakthroughs. The US, at least under Biden’s watch, is still on top.
But China’s next-day retaliation shows that it is ready to play hardball ahead of the incoming Trump administration. Beijing understands that diplomacy alone might not do the trick, and that to succeed in getting America to the bargaining table it needs to safeguard its own crucial resources. “This is a step up in China’s reaction to US technology sanctions,” Lu said. “China is very frustrated with the lack of communication channels with the incoming administration. They are trying to send a shot across the bow to get attention from the Trump team.”