Chips are the fuel driving the global AI race, essential for both training models and running real-time applications. While the US leads in chip design, manufacturing is concentrated in Taiwan’s TSMC, which produces over 90% of the world’s most advanced chips. This dependence has become a geopolitical risk, especially amid tensions with China.TSMC’s dominance stems not only from technology but from decades of investment, scale, and expertise that are difficult to replicate. Some have even proposed destroying its facilities in the event of a Chinese invasion.
To limit China’s access to this strategic technology, the US introduced the AI Diffusion Rule, aiming to block not just hardware exports but also the proprietary model parameters behind advanced AI systems. The policy sparked immediate backlash and was eventually repealed by the Trump administration.
The Biden AI Diffusion Rule Explained
In its final days, the Biden administration introduced the AI Diffusion Rule—a national security measure aimed at preventing adversarial states, primarily China, from accessing high-performance AI chips and proprietary model parameters developed by US firms such as Nvidia and AMD.
Proprietary model parameters are the learned numerical values—like the DNA of an AI model—that determine how it processes inputs and makes decisions. If someone gains access to a model’s parameters, they can recreate that model exactly.
The rule established a three-tier system to govern the export of AI chips and model parameters:
- Tier 1 – Strategic Allies (G7, Taiwan, Japan, South Korea): full access with no restrictions.
- Tier 2 – Friendly but Controlled (over 100 countries including India, Switzerland, Singapore, Israel): subject to export caps and licensing requirements.
- Tier 3 – Adversarial States (China, Russia, Iran, North Korea): total export ban.
For example, Tier 2 countries could receive up to 100,000 Nvidia H100-equivalent chips in 2025, but US firms were required to ensure that no more than 7% of their global compute capacity was deployed in any single Tier 2 nation.
Why It Faced Heavy Backlash
The aim was to prevent indirect access by Chinese firms via intermediary countries such as India, Switzerland, and Singapore—but critics argued the policy was deeply flawed.
Unworkable Complexity
The licensing regime was overly bureaucratic and difficult to enforce. Exporters had to manage thresholds, government notifications, and fragmented approvals—creating a logistical nightmare.
Damage to US Industry
The rule restricted legitimate exports to friendly and strategic partners, putting billions in sales at risk. Industry leaders warned it would hand market share to Chinese competitors like Huawei, who could step in to fill the void.
Industry Reaction
The Trump administration’s decision to abandon the rule was warmly welcomed by the tech sector. Nvidia called it a “once-in-a-generation opportunity” for the US to lead a new industrial era, highlighting potential gains in jobs, infrastructure, and the trade balance.
The market reacted positively:
- Nvidia +3%
- AMD +1.8%
- Broadcom +1.5%
Security vs. Innovation
Trump officials made it clear that repealing the rule does not equate to full deregulation. A new framework is in development to better balance national security with US tech competitiveness—potentially through bilateral licensing and more targeted restrictions.
Meanwhile, the administration is reassessing semiconductor tariffs and tightening rules on China-specific chips, reinforcing a more nuanced and strategic approach to export policy.
Broader Geopolitical Implications
In recent Senate hearings, leaders from OpenAI, Microsoft, and AMD emphasised the urgent need for regulatory consistency and sustained investment to maintain US leadership in AI. With Nvidia’s Q1 results due on 28 May, investors are now watching closely to see how ongoing trade dynamics may impact the company’s outlook.
