TMT update (AI/semiconductor export controls/tariffs)

Recent/upcoming developments… In reaction to the Chinese app DeepSeek showing high levels of performance using less than fully advanced semiconductors, China hawks in Congress are calling upon the Trump administration to strengthen semiconductor export controls.  Howard Lutnick, President Trump’s nominee for Commerce Secretary (which has jurisdiction over export controls) said in this week’s Senate confirmation hearing that he would be “very strong” in this area.  He also signaled interest in backing export controls with tariffs on semiconductors, something which Trump also expressed interest in the last week.  The White House memo on America First Trade Policy issued on Trump’s first day in office called for a review of export controls and tariffs relevant to national security, the results of which are due by 4/1.  Meanwhile, Nvidia’s CEO Jensen Huang is meeting with Trump at the White House today.

* Trump himself has said that “the release of DeepSeek AI from a Chinese company should be a wake-up call for our industries that we need to be laser-focused on competing to win,” he said. “I would say that’s a positive, that could be very much a positive development. So instead of spending billions and billions, you will spend less and you’ll come up with hopefully the same solution.”

*  Throughout the last Congress, leading China hawks, including then-Senator, now Secretary of State, Rubio argued that China was evading export controls and that the U.S. was allowing too many licensing exceptions, which led to China’s tech sector being able to thrive.  Now, in reaction to the DeepSeek news, the White House Office of Science and Technology said the Biden administration failed to cut off Chinese access to U.S. tech, allowing it to “make gains in AI development.” Sen. Moore Capito (R-WV) suggested China is stealing our stuff,” and Sen. Rounds (R-SD) said that DeepSeek “largely circumvented” U.S. export controls.  And, the House Select Committee on China wrote a letter to Trump’s National Security Advisor Waltz urging him to close loopholes in existing export controls, specifically citing Nvidia’s H20 chips.

* In the week prior to Trump’s inauguration, the Biden White House issued an “AI Diffusion” rule that imposed restrictions on exports of semiconductors used to run AI models.  The rule is currently subject to a comment period that ends in mid-May, after which it will go into effect, unless the Trump administration choses to alter it.

* The White House trade policy memo calls for the “State and Commerce secretaries to review U.S. export controls to maintain the U.S. “technological edge’” and for the “Commerce secretary, with the Defense secretary to review the U.S. industrial and manufacturing base with an eye toward adjusting imports that threaten national security.”

Our outlook… Upon its release earlier in January, our view had been that the Trump administration would side with China hawks and strengthen the Biden administration’s AI Diffusion rule.  The DeepSeek news gives us more confidence that the Trump administration will do so, likely by extending its application to less sophisticated chips, something for which China hawks are calling at the moment, and for which some of them have consistently advocated in recent years.  The interest Trump and Lutnick expressed in tariffs on semiconductors does not appear to be spontaneous, as it is consistent with deliberations that have reportedly been taking place among their team even prior to Trump’s inauguration.  It’s likely Trump will wait until after the findings of his American First Trade memo are submitted on 4/1 to take action on semiconductor export controls and tariffs, with the mid-May deadline for the AI Diffusion rule also serving as a catalyst for action.  While we ultimately expect Trump will side with China hawks and strengthen export controls for AI chips, there is some potential that he sides with Nvidia and others in U.S. industry who strongly objected to the AI diffusion rule, and rather than strengthening it, instead focuses on tariffs, a tool that has much less relevance in addressing concerns about China’s AI capabilities, but is one with which Trump is clearly comfortable.

Watch for these developments… We are watching for any comments Trump makes coming out of his meeting with Huang today, and whether he signals a desire to protect Nvidia, as this would suggest he may not be interested in strengthening the AI Diffusion rule.  We are also continuing to watch for the intensity of focus China hawks put on semiconductor export controls.  There is some potential that if Trump does not act to their satisfaction in this area, that they could begin to criticize him more generally for not fulfilling his promise to be aggressive in dealing with China, possibly citing his lack of tariff action and unwillingness to ban TikTok.  If this narrative develops, it could motivate Trump to take a more hawkish posture than he might otherwise on export controls.