New Rules

New Rules
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​In a never-ending battle with China, the US has continued to tighten export control rules concerning semiconductors, particularly high-performance GPUs that are used for AI.  The US government has been working to close any loopholes that might allow companies to skirt the restrictions and are constantly updating the rules to be more inclusive, further limiting China’s ability to purchase these essential parts of Ai infrastructure.  Nvidia (NVDA), the primary producer of such devices, has made a number of modifications to its processors in order to meet the specifications that the government has imposed and continue selling in China, yet invariably those specifications are tightened, forcing Nvidia to lower the performance of processors it is able to sell to Chinese customers.
In Nvidia’s most recent quarter China represented ~15.4% of sales, making it an important customer and one willing to pay a premium to obtain such GPUs, however it is expected that over the next few days the Biden administration will put in place a new trade mandate that will not be based on performance as much as customer location, separating the globe into three tiers.  While Nvidia and the SIA are adamantly against this new rule set and are appealing to the Biden administration not to put them into effect, especially considering the possibility that the new administration might modify or reduce their limitations, there seems to be a last minute urgency by the Biden administration.  Here’s how the new rules are expected to work:

• Tier 1 - The U.S. and 18 allies (including Australia, Belgium, Canada, Denmark, Finland, Germany, France, French Guiana, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, South Korea, Sweden, Taiwan, and the U.K.) will have 'near-unrestricted access' to advanced AI processors developed in the U.S as long as they do not install more than 25% of their processing capacity outside of Tier 1 countries or more than 7% in any single Tier 2 country
• Tier 2 – These countries face a cap of 50,000 GPUs purchased over the two-year period between 1/1/25 and 12/31/27, although companies in Tier 2 countries can gain a higher level if they comply with US regulations and are validated.  The countries in Tier 2 are primarily those in Eastern Europe, the Middle East, Mexico, and Latin America
• Tier 3 – These countries (Belarus, China, Iran, Macau, Russia, Cuba, North Korea, Syria, Sudan, Myanmar, Zimbabwe, Afghanistan, Central African Republic, DR Congo, Eritrea, Ethiopia, Haiti, Iraq, Nicaragua, Libya, Somalia, and Iraq), will face a near total ban, but details as to the level of performance that will be allowed has not been made available yet, although they will likely tighten the performance specifications further. 

While it would not affect semiconductor companies directly, the new rulers are thought to include more detailed restrictions on AI companies that wish to host large models outside of the US.  The hosting and model restrictions are thought to completely restrict Ai companies from exporting the trained parameters (weights) of their models to Tier 3 countries, while hosting in Tier 2 countries is allowed if US security standards are met.  Potentially there could be limitations on open-weight models (those that make the model’s internal structure available publicly) if they are fine-tuned for specific applications even in Tier 2 countries, where they would have to be licensed by the US government if the tuning requires significant computing power.  Should these direct model rules be implemented it could slow global AI development and deployment, while giving the US a technical advantage over others, even our allies.  Depending on the scope of the AI limitations we expect an intense focus on how to circumvent such rules if implemented by Tier 2 countries.
It is questionable as to whether there is a reason to put new rules into effect just days before the new administration is installed as the likelihood of material changes is high.  While the public face of the Biden administration was steadfast as to restricting China’s semiconductor and Ai growth, we expect the Trump administration to use existing or new rules as a lever rather than a mallet, not only with China, but also with allies, particularly Taiwan and Singapore, that are either very substantial semiconductor importers or are major producers.  That said, what the public sees and what is really being negotiated could be even less transparent going forward than it was previously.