TMT update (AI/semiconductor export controls)

Recent/upcoming developments… The Commerce Department has issued an “interim final rule” creating three tiers of restrictions on AI chip exports – a license exception for allies, bans on adversaries, and end-user quotas for all other countries. The rule is subject to a 120 day comment period, which creates an opportunity for the incoming Trump administration to implement it in its current form, modify it, or potentially even eliminate it all together.  Industry largely opposes the new restrictions, while Congressional Republicans and allies of President-elect Trump have taken both sides of the issue.

* Eighteen of the U.S.’s closet allies are exempt from the new restrictions, while countries on the U.S. arms embargo list, like Iran, Russia and China and others, are banned from accessing AI chips.  All other “Tier Two” countries face caps on how many AI chips they can import, with countries in this tier being allowed about 50,000 advanced AI chips through 2027.

* Companies headquartered in Tier Two countries can access more chips if they apply for national Validated End User status, which requires them to make security commitments and offer assurances that they will not use the imported technology to violate human rights.  If a company obtains this status, its imports won’t count toward a country’s overall cap.

* In Tier One countries, tech firms can export an unlimited number of chips.  Firms headquartered in Tier One countries that want to export elsewhere can apply for validated end user status, which gives them permission to export chips to most other countries. Those firms must keep 50% of their computing power in the U.S., can deploy no more than 25% of their total computing power outside of Tier One countries with no more than 7% in any singular Tier Two country.

* The new rule also limits the export and training of proprietary AI model weights above a threshold that no existing model currently meets.  No open weight models – those that allow public access to the underlying code – are impacted by the restrictions, and the rule adjusts upward the threshold for controlled models as open weight models advance.

* The rule has been vigorously opposed by industry. NVIDIA, the Information Technology Industry Council (ITI), the Semiconductor Industry Association (SIA) and the National Foreign Trade Council (NFTC) all issued statements criticizing the rule, with ITI and the NFTC calling for the Trump administration to nullify it. These groups argue that the rule stifles innovation and growth.  Additionally, Trump ally and China hawk Sen. Cruz (R-TX) said he would consider using the Congressional Review Act (CRA) – a procedure that allows Congress to override executive rulemaking.  Cruz says the rule is “misguided” and that President Biden is seeking to “jam President Trump and his team.”

* Elsewhere, China hawks such as Reps. Moolenaar (R-MI) and Krishnamoorthi (D-IL), Chair and Ranking Member, respectively, of the House Select Committee on China, preemptively praised the rule.  Matthew Pottinger, who served as the deputy national security adviser in the first Trump administration, wrote in support of export controls on AI chips in the Wall Street Journal .

Our outlook… One of Trump’s enduring motivations is to maintain a technology and economic edge over China, which suggests his incoming administration will likely adopt new restrictions on AI exports.  Our expectation is that Trump will want to put his own stamp on new export control rules – instead of just adopting what the Biden administration put together – which would also allow him to address the needs of the various relevant stakeholders that have raised concerns about it.  We expect the Trump administration will take advantage of the entire comment period, and potentially even extend it beyond 120 days, before modifying the rule, a process that will take additional months, and thus push its finalization into the latter part of this year at the earliest.

* Industry stakeholders, key players in Congress such as Cruz, and China hawks will be able to argue their case before Trump officials during the rule’s comment period over the coming months, which will allow the Trump team to shape the rule to their liking.  If the China hawks prevail, the rule will likely remain the same, but could be tightened to restrict even further the flow of chips to Tier Two or even Tier One countries, while an industry win would do the opposite and result in more flexibility in the volume and nature of chips that could be exported to these countries.

* While Trump’s hawkishness toward China was a hallmark of his first term, it is worth nothing that in some limited instances, Trump has gone against China hawks on important export control issues. For example, in 2018, Trump overturned a ban on Chinese telecom firm ZTE doing business in the U.S.  Trump lifted the ban after speaking with Chinese President Xi.

* Trump has repeatedly indicated that one of the key technology policy goals of his administration will be to establish/maintain U.S. leadership on AI.  As part of this effort, he appointed tech investor David Sacks to be his “AI and Crypto Czar” in the White House.  Sacks and other tech industry players, such as Elon Musk, will likely have influence over Trump’s approach to the AI export rule, and will presumably support its eventual implementation in a modified form.

Watch for these developments… We are watching for comments from Sacks and Musk, as well as Republicans in Congress beyond just Cruz as a signal for how Trump is likely to balance the need to be hawkish on China while fulfilling his goal of establishing/maintaining U.S. leadership on AI.  Visits to Mar-a-Lago by relevant officials, or others in industry who are opposed to the rule, could also signal a favorable outcome for industry.