U.S. President Trump's Controversial Chip Manufacturing Agreement with China
The Trump administration approved the export of Nvidia's H20 chip to China in August, marking a significant move in the global race for AI chip supremacy. However, the state-backed Chinese chip foundry, SMIC, can only produce a limited number of Huawei's top AI chip, the Ascend 910, with relatively low quality.
Nvidia, the world leader in AI chip design, has at least 1.3 million H20s destined for Chinese buyers. The H20 chip is formidable for deploying AI models to users, making it a valuable asset in China's pursuit of technological advancement.
Chinese companies are making every effort to skirt US export controls through sophisticated smuggling operations. A recent analysis estimates that as much as 40 percent of China's AI training capacity in 2024 was gained via smuggling, with the median estimate being 10 percent.
In the USA, the government figures involved in shaping export controls on AI chips include those within the Biden administration. The administration has enacted export restrictions on AI chips as part of national defense policy, such as the GAIN AI Act proposing measures like US firms’ preemptive purchase rights and licensing for importing countries. In China, regulatory bodies like the Cyberspace Administration of China (CAC) have instructed major tech companies to halt orders or testing of certain NVIDIA AI chips, signaling a push for technological self-reliance and domestic chip development.
The length of tasks AIs can perform autonomously is doubling roughly every four to seven months. By the end of next year, the best AI agents will be capable of reliably performing many tasks that would normally take human experts a full eight-hour workday. This rapid advancement in AI capabilities further emphasizes the importance of access to advanced AI hardware, such as Nvidia's H20 chip.
China is pursuing an aggressive buildout of energy infrastructure, adding 429 gigawatts of new generation capacity last year alone. With this increased energy capacity, China aims to power its AI development and compete with the US, which currently has nearly 75 percent of the world's AI supercomputing resources and over half of hyperscale cloud capacity.
The consequences of this intensified US-China tech rivalry could include supply chain disruptions, reinforcement of China’s domestic AI chip industry, and further tightening of export controls internationally. The Bureau of Industry and Security (BIS) has struggled to keep pace with millions of controlled chips exported every year, having only 12 export control officers around the world, including only two for China and one for all of Southeast Asia.
The Trump administration paused H20 exports to China in April, but reversed course after lobbying from Nvidia CEO Jensen Huang. The administration has also requested that BIS's budget be increased 77 percent to enable long-overdue modernizations due to the value of hardware seized in a single busted smuggling operation typically surpassing BIS's entire annual enforcement budget.
Despite China's efforts to catch up, even if SMIC's output doubled over the next year, China's chip production capacity will still be significantly less than the 10 million-plus Nvidia chips TSMC plans to produce in 2026. Critics argue that chip-export controls surrender market share to China's domestic AI chip designer, Huawei, but Huawei's chip performance and SMIC's production capacity remain far behind the curve.
Chinese AI company DeepSeek was forced to delay its latest model after struggling to get Huawei's training chips to work. This struggle highlights the challenges faced by Chinese companies in developing their own AI chips and the potential impact of US export controls on China's AI development.
In conclusion, the race for AI chip supremacy between the US and China is heating up, with Nvidia's H20 chip playing a significant role. The US has access to the world's most advanced AI hardware, but China's aggressive efforts to skirt US export controls and develop its own AI chip industry could disrupt global supply chains and tighten export controls internationally.
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