U.S. export control on advanced semiconductors is starting to become counterproductive. While the intended goal is to strengthen national security by preventing China from obtaining cutting edge American-designed AI chips, the real effects are hurting leading American companies, particularly Nvidia, while helping China’s national champion, Huawei. 

The first round of export control, announced in October 2022 by the Department of Commerce, was reasonable enough – banning the selling of high-end GPUs like the Nvidia’s A100 and H100 to China. Being a nimble and adaptive technology company, Nvidia came up with two alternative models, the A800 and H800, that could comply with the regulations and still be sold to China. One year later, a second round of more restrictive and expansive export control is squeezing Nvidia’s entire China business, roughly one-fifth of its revenue, by not only banning the two alternatives, but also signaling further scrutiny of future similar alternatives, like the H20 model that Nvidia is currently developing.

Last month, when Commerce Secretary Gina Raimondo was asked about Nvidia’s alternative products at the Reagan National Defense Forum, she called the behavior “not productive” and would immediately ban any future alternative chip that enables China to “do AI” or has “AI special sauce.” To anyone with a basic understanding of how these GPUs work, “AI special sauce” sounds like meaningless gobbledygook. Is it referring to each GPU’s raw processing power? Or the networking that links multiple GPUs together to enable parallel processing among the chips? Or the High Bandwidth Memory (HBM) that is packaged right next to the GPUs to boost training performance on the type of large foundation AI models that power applications like ChatGPT?  

Nvidia’s China business holds important geopolitical value for the U.S. It is not just about one company making more money. It is about maintaining some access to a competitor’s vast market that would reveal clues and information to its current progress and future direction. In other words, knowing how many H800s or H20s are sold in China is perhaps the best way to estimate and predict how far behind (or ahead) China's AI capabilities really are. If one day Nvidia’s China business becomes a sacrificial lamb, that would only undermine America's own geopolitical positioning. 

Things are already trending in that direction.

Large Chinese technology companies, like Alibaba, Tencent, Baidu, and ByteDance, used to be aggressively stockpiling the H800 chips before they were banned – a proofpoint of Nvidia’s, and by extension America’s, dominance. Now, they are on the fence about doing the same for the H20 chips, because the performance may no longer be compelling enough, while the specter of future export ban makes any effort to stockpile not worthwhile. Instead, budget allocation and purchase orders are being spent on Huawei’s Ascend 910B chips, a product that is still two to three generations behind Nvidia’s best offering but can be reliably obtained. These are millions of dollars from China’s own technology companies that could have gone to Nvidia’s R&D, but are instead diverted to fund Huawei’s advancement. And instead of helping Nvidia compete better, we are holding up the punitive stick of more export control, while dragging its CEO, along with the CEOs of Intel and Micron, to testify in front of Congress for more political theater.

Huawei’s progress has already blindsided US officials once. Its newest smartphone model, the Mate 60 Pro, surprised everyone in Washington last August by sporting a homemade 7nm processor – a level of chip-making capability that US export control was supposed to prevent China from achieving. Hurting Nvidia and letting Huawei fill the void only adds more fuel to its engine, more opacity to our knowledge of China’s AI capabilities, and more unpleasant surprises ahead.  

“The Art of War” by Sun Tzu is widely studied by generals, policymakers, and business leaders everywhere. One of its most fundamental and widely-cited principles is: “Know yourself and know the enemy, and you can fight a hundred battles without defeat.” There is also a second part to this principle that is less known: “If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.”

America is still in the lead by many measures when it comes to AI specifically and technological innovation broadly. To maintain that lead versus China, ironically, it would serve us well to brush up on the wisdom of a Chinese military strategist from 2500 years ago, before we commit more strategic mistakes that shoot ourselves in the foot.