Biden ratchets up AI chip war with China

Driving the news: A pending executive order could cap sales of AI chips to countries all over the world, not just China, per the WSJ — with a particular focus on Southeast Asia and the Gulf.

• Biden has already imposed limitations on the advanced chips that companies like Nvidia can export to China, but there are concerns that Chinese firms are able to buy or access them in other countries or from smugglers. There's a thriving black market for Nvidia chips in China.
• The new order would attempt to close that back door. It could also further divide the world along technological lines, with some countries likely getting unfettered access to U.S. tech and others facing limitations.
• Details of the rule, which is pending regulatory review, according to OMB's website, haven't been made public. But U.S. chipmakers and tech firms have been waging an intense behind-the-scenes campaign to prevent more restrictions.

State of the race

The fact that Chinese firms would "opt into a supply chain that involved putting chips in suitcases and smuggling them" is a clear sign of the Western edge in chipmaking, says Chris Miller, a professor at Tufts and author of "Chip War."

• The CEO of one of China's leading AI firms, DeepSeek, said this month that his primary constraint was not the vast sums needed for AI development, but access to high-end chips, Miller notes.

Breaking it down: The chips used to power AI development are mostly designed in the U.S. and fabricated in Taiwan, with chipmaking tools built in the U.S., Japan and the Netherlands.

• Beijing has declared its determination to leapfrog the West in every facet of the semiconductor supply chain. For now, it's locked out.
• The most advanced chips made by SMIC, the largest Chinese chip manufacturer, are on par with the top-end chips Taiwan's TSMC produced five years ago, Miller says.
• The Western advantage in chipmaking tools (such as the extreme ultraviolet lithography machines built by Dutch firm ASML) is so vast that China has little chance of narrowing it over the next five years, says Miller.
• "Everything depends on what type of equipment the West is going to be willing to sell to China. If the restrictions are tight and get tighter, I have high confidence that the West retains its chipmaking lead," Miller contends.

Yes, but: Other experts argue that cutting off access will hamper Chinese firms in the short term, but give them an extra incentive to out-innovate Western competitors in the longer term.

• Beijing is pouring hundreds of billions of dollars into that objective.

The Trump factor

The chip wars have been heating up during the Biden-Trump transition.

• China fired a warning shot earlier this month after Biden's latest export controls were announced by opening an antitrust investigation into Nvidia, causing the $3.3 trillion behemoth's stock to wobble.
• That came a week after China announced it was banning exports to the U.S. of key minerals used in chipmaking.
• The tit-for-tat could continue to accelerate in Trump's second term, given that Biden has been tightening export controls that began during Trump's first term.

The intrigue: While Trump's administration-in-waiting is packed with China hawks, some incoming officials (including Trump himself) have indicated they also want to cut deals with Beijing. One piece of leverage in any such negotiations could be access to chips.

• Meanwhile, Trump's former national security adviser Robert O'Brien argued Tuesday that Biden's looming executive order would "cede the AI market to China" and "drive a wedge between the U.S. and our partners."
• A Trump transition spokesperson did not say whether Trump agrees with O'Brien. The White House referred Axios' questions about the pending executive order to the Commerce Department, which declined to comment.

Beijing's toolbox

For now, China has three main points of leverage:

1. Its massive market:

• U.S. chipmakers like Nvidia and Intel have designed chips for sale to China that fall just within the current regulations, a sign of their intent to continue to fight for market share in China.
• But in addition to the new Nvidia probe, China has announced an investigation into Intel and unveiled a partial ban last year on Micron, the Idaho-based memory chip giant.

2. Its concentration of some of the elementary inputs for chips:

• China cutting off supply of those minerals would have drastic implications for the global economy — but could be hard to execute without hurting China itself, give the global nature of semiconductor supply chains.

3. Its proximity to Taiwan:

• The world's most advanced chips are made almost exclusively on an island around 100 miles off the Chinese mainland, which Beijing has vowed to bring under its control — potentially by military force.
• Taiwan's TSMC claims to make 99% of the world's AI accelerator chips.

What to watch: TSMC is building a fabrication facility in Phoenix and has two more planned in the U.S. as part of a Biden push to onshore semiconductor production.

• For now, though, "all AI progress depends on TSMC production in Taiwan remaining online," Miller says.