What President Joe Biden’s last-minute chip export restrictions mean for Nvidia

Nvidia CEO Jensen Huang.

The Biden administration’s Commerce Department released 168-pages of fresh regulations for the US semiconductor industry Monday that could drastically change Nvidia’s year.

The new rules target exports of graphics processing units, the types of highly powerful chips made by Nvidia, and challenger AMD. Global data centers are filling up with GPUs and Nvidia has so far claimed an estimated 90% of that market share.

Highly complex chips like GPUs are largely manufactured in Taiwan, but most of the companies that design them are based in the US and so their products are within the Department of Commerce’s jurisdiction.

“To enhance U.S. national security and economic strength, it is essential that we do not offshore this critical technology and that the world’s AI runs on American rails,” the White House’s announcement reads, adding that advanced computing in the wrong hands can lead to “development of weapons of mass destruction, supporting powerful offensive cyber operations, and aiding human rights abuses, such as mass surveillance.”

In response to previous export restrictions, Nvidia created a less powerful chip model just for the Chinese market to keep doing business there after the Biden administration changed the rules in 2022.

The new regulations go further — grouping countries into three categories and placing different export controls on each.

The first is a group of 18 allies to which GPUs can ship freely. These are Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, the Republic of Korea, Spain, Sweden, Taiwan, and the United Kingdom.

The second group is listed as “countries of concern” where exports of the most advanced GPUs will be banned entirely. These are China, Hong Kong and Macau, Russia, Iran, North Korea, Venezuela, Nicaragua, and Syria.

All other countries would be subject to a cap of 100,000 GPUs. The rules lay out a verification process for larger orders, in which the businesses looking to set up larger clusters in these countries would need US government approval to do so.

The administration said the regulations had provision that would keep small orders of chips flowing to research institutions and universities.

Nvidia has opposed the regulation along with The Semiconductor Industry Association.

“While cloaked in the guise of an “anti-China” measure, these rules would do nothing to enhance U.S. security,” Ned Finkle, Nvidia’s VP of government affairs wrote in a statement on the company’s website.

Impact on Nvidia

Any restriction on the sale of GPUs anywhere is bound to hit Nvidia’s sales.

“The Biden Administration now seeks to restrict access to mainstream computing applications with its unprecedented and misguided “AI Diffusion” rule, which threatens to derail innovation and economic growth worldwide,” Finkle wrote.

But will the regulations dampen sales or shift them?

Chris Miller, the author of “Chip War” and a leading expert on the semiconductor industry told B-17 he was uncertain if the overall volume of GPUs sold would be substantially impacted since demand for Nvidia’s products is so high.

“I suspect that these rules will generally have the impact of shifting data center construction toward US firms,” Miller said.

If demand does goes down, “it would change due to a reduction of GPU demand from countries or companies that are unwilling to rely on US cloud providers,” Miller said.

The drafted rules had been circulating ahead of the Monday announcement and reactions from tech leaders have been fierce.

Oracle EVP Ken Glueck blogged about them for the first time in mid December and again in early January.

Both Finkle and Glueck zeroed in on the country caps as the most consequential element introduced.

“The extreme ‘country cap’ policy will affect mainstream computers in countries around the world, doing nothing to promote national security but rather pushing the world to alternative technologies,” Finkle said in an emailed statement Friday.

It is particularly notable that Singapore, Mexico, Malaysia, UAE, Israel, Saudi Arabia, and India, are not in the unrestricted tier of countries, Glueck noted.

The exclusion of several Middle East countries could seriously change the course of the global AI infrastructure buildout, Miller said.

“The primary impact of these controls is that they make it much more likely that the most advanced AI systems are trained in the US as opposed to the Middle East,” Miller said.

“Without these controls, wealthy Middle Eastern governments would have succeeded to some degree in convincing U.S. firms to train high-end AI systems in the Middle East by offering subsidized data centers. Now this won’t be possible, so US firms will train their systems in the US,” Miller said.

Glueck wrote that country quotas were the worst concept within the draft regulations, which will be formally published Wednesday, according to the Federal Register.

“Controlling GPUs makes no sense when you can achieve parity by simply adding more, if less-powerful, GPUs to solve the problem,” Oracle’s Glueck wrote in December. “The problem with this proposal is it assumes there are no other non-U.S. suppliers from which to procure GPU technology,” he continued.

Republican support

The fate of the Biden’s unprecedented export control rules is uncertain given their timing.

The Monday statement from Nvidia’s Finkle referenced the Trump administration, stating that in his first term, Trump, “laid the foundation for America’s current strength and success in AI.”

The new rules are subject to a 120-day comment period before they are enforceable. President Biden will have left office when they are set to take effect.

Though they stemmed from an outgoing Democratic administration, the rules do have some support on the President-elect’s side of the aisle.

Republican Congressman John Moolenaar and Raja Krishnamoorthi, chair and ranking member of the House Select Committee on the Chinese Communist Party, are in favor of the framework.

“GPUs, or any country that hosts Huawei cloud computing infrastructure should be restricted from accessing the model weights of closed-weight dual-use AI models,” the two legislators published in a written statement.

Matt Pottinger, who served on the National Security Council in Trump’s first term and current chairman of the China program at the Foundation for Defense of Democracies along with Anthropic CEO Dario Amodei penned an op-ed published in the Wall Street Journal on Jan. 6. They suggest that the existing export restricitions have been successful, but still allow room for China to set up data centers in friendly third-party countries, so more restrictions are needed.

“Skeptics of these restrictions argue that the countries and companies to which the rules apply will simply switch to Chinese AI chips. This argument overlooks that U.S. chips are superior, giving countries an incentive to follow U.S. rules,” Pottinger and Amodei wrote.

“Countries that want to reap the massive economic benefits will have an incentive to follow the U.S. model rather than use China’s inferior chips,” they continued.

Miller confirmed that the fact that China is still purchasing Nvidia’s “defeatured” GPUs is sign enough that locally-designed chips are not competitive, yet.

“So long as China’s importing US GPUs, it won’t be able to export, in which case these controls will be effective because there is no alternative source of high end GPUs,” Miller said.

But Huawei is catching up, said Alvin Nguyen, senior analyst at Forrester. Additional US export controls could speed that work up in his view.

“They’ve caught up to one generation behind Nvidia,” said Nguyen.

Another concern is that restricting the flow of advanced chips could segment the economic opportunity of AI spreading equally around the globe.

“If you’re not working with the best infrastructure, the best models, you may not be able to leverage the data that you do have — creating the haves and have nots,” Nguyen said.