The US Department of Commerce has implemented stricter restrictions on the sale of American semiconductors to China. However, Nvidia, the world's leading chipmaker, has responded by developing a new AI chip slightly below the threshold of these restrictions for the Chinese market. This raises concerns about the effectiveness of export controls.

China has found ways to circumvent the controls, such as training AI models using older semiconductors. To fully ban the sale of AI-capable chips, the US would need to restrict a broader range of microprocessors to China.

Nvidia's financial statements provide insight into the potential impact of such a ban. The company earns 21-26% of its revenue from China, with$8.4 billion from the Chinese market in the past nine months. Most of Nvidia's products can be used for AI applications.

Smuggling and transhipment have become issues as companies in countries not abiding by the US export-control regime, like Singapore, buy chips and send them to Chinese entities without detection. Nvidia's recent earnings indicate a significant increase in sales to Singapore, suggesting potential transshipment activities.

The restrictions have led Chinese tech giants, like Huawei, to turn to alternative chip manufacturers, such as SMIC. The controls have increased costs for Chinese buyers, incentivizing the growth of China's AI and chip industries and promoting indigenous technological development.

Export controls on chipmaking tools also face limitations. While the most advanced equipment is exclusively produced by ASML, older lithography tools can still be sold to Chinese buyers. ASML's sales to China have grown significantly, and other toolmakers are also experiencing increased Chinese sales.

The US export controls on semiconductors to China face challenges as China exploits loopholes and finds workarounds. The controls have inadvertently encouraged smuggling, transshipment, and the growth of China's chip industry, as well as indigenous technological development. Stricter measures on AI chips and American chip technology are being considered, but gaining support from allies may prove difficult.

Source: The Economist