Will the U.S. tighten the cordon on AI chips?

Shares of ambitious chipmakers like Nvidia and AMD fell in pre-market trading today after The Wall Street Journal reported that the Biden administration is considering imposing new restrictions on exports of artificial intelligence-related semiconductors to China.

Chip stocks were down in pre-market Wednesday: Nvidia ( NVDA ) -4.6%, AMD ( AMD ) -3.5%, Qualcomm ( QCOM ) -1.7%, TSMC ( TSM ) -1.6% and Intel ( INTC ) -1.3%.

The deliberations underscore the White House's concern about falling behind in the race to dominate artificial intelligence and Beijing's potential to use the technology in military applications - and they show that it is willing to tighten trade policy to stay ahead. The new export controls are designed to make it harder for China to access advanced technology, including artificial intelligence chips that can be used for everything from hypersonic weapons development to nuclear weapons modeling.

The development is an update to export controls imposed in September that restricted sales to China of Nvidia's cutting-edge A100 and H100 chips designed for high-performance computing. In response, Nvidia introduced a less powerful AI chip, the A800, as a solution to the export restrictions. But now that chip may also be subject to further restrictions and may require an export license before it can be shipped to China, according to The Wall Street Journal.

The U.S. government is also considering restricting the leasing of cloud services to Chinese artificial intelligence companies, according to the Wall Street Journal. That would deal a blow to Chinese companies that use such arrangements to circumvent the chip ban. But the broad definition of "artificial intelligence companies" could cause collateral damage to a large number of Chinese tech companies caught in the crossfire of the chip wars.

The aim is to hinder China's AI advances in the name of national security. The White House has repeatedly said it considers AI a key technology for a variety of applications from military weapons to cybersecurity, and has asked allies, including Japan and the Netherlands, to limit exports to Beijing as well.

Semiconductor giants in a dilemma

That puts business leaders in a dilemma: supporting efforts to protect U.S. interests while defending their own businesses. "I can't emphasize this point enough: If we treat every economic interaction as a risk, we will lose focus on those that pose a real threat," Clark, president of the U.S. Chamber of Commerce in Susana, said in a speech last month.

Nvidia CEO Jen-Hsun Huang recently told the Financial Times that existing export controls could cause "enormous damage" to the U.S. technology industry. He said they prevented the Silicon Valley conglomerate from selling its most advanced chips to China, leaving his company "tied up in knots.

Tencent, Alibaba, Baidu, Byte Jump and other Chinese groups placed additional orders for Nvidia chips when a wave of generative artificial intelligence exploded in China this year, according to two people familiar with the matter.

NVIDIA Chief Financial Officer Colette Kress (Colette Kress) said Wednesday that if Washington tightens export controls on the A800 and H800 chips, the group will not suffer a "direct material" impact. But she added that, over time, the move will have an impact on the company.

In the long run, Kress said, restricting the sale of data center GPUs to China would "result in a permanent loss of opportunity for U.S. industry to compete and lead in one of the world's largest markets, with implications for our future business and financial performance.

Deteriorating U.S.-China Relations

It is unclear how Beijing will respond, but the prospect of a further escalation of the U.S.-China trade war is real. Last month, Beijing banned domestic companies that handle critical information from buying chips made by Micron, citing "relatively serious cybersecurity issues.

A renewal of the export controls is expected sometime in the summer. This comes as the U.S. and China continue to try to stabilize their relationship, which has deteriorated to its worst state since diplomatic relations were established in 1979.