President Donald Trump has consistently emphasized the importance of maintaining American leadership in artificial intelligence (AI). However, a rule from the Biden administration is poised to significantly undermine U.S. global AI leadership. Fortunately, policymakers can reverse course before the rule goes into effect this summer.
In January 2025 – just weeks before Inauguration Day - President Biden’s U.S. Department of Commerce's Bureau of Industry and Security (BIS) introduced the Framework for Artificial Intelligence Diffusion, commonly known as the AI Diffusion Rule. This regulation revises export controls on advanced computing integrated circuits (ICs) and imposes new restrictions on artificial intelligence (AI) model weights for certain advanced dual-use AI models. While the rule aims to protect national security and foreign policy interests, it has sparked significant debate regarding its potential adverse effects on American businesses and the country's leadership in AI innovation.
Overview of the AI Diffusion Rule
The last-minute AI Diffusion Rule was ostensibly intended to enhance national security, but will have dramatic commercial consequences and could run counter to U.S. policy interests in maintaining global AI leaderships. National security experts have commented that unrestricted AI chips and technology “could help U.S. adversaries develop sophisticated military systems, reduce barriers to developing WMD, enhance offensive (and defensive) cyber capabilities, and turbocharge human rights violations through mass surveillance technologies.” Industry leaders, including Nvidia and Microsoft, warn that the Rule will stifle American leadership in AI without meaningfully contributing to national security.
Nvidia, a global leader in AI chips, has said “the new Biden rules would only weaken America’s global [AI] competitiveness, undermining the innovation that has kept the U.S. ahead.” Microsoft wants to strengthen national security protections against chip diversion, but predicts that the restriction on international data centers and confidence in sustainable chip supply chains “will become a gift to China’s rapidly expanding AI sector.”
The AI Diffusion Rule categorizes countries into three tiers, each subject to varying levels of export controls:
- Tier 1: The United States and key allies with minimal restrictions.
- Tier 2: Countries such as India, Israel, and Switzerland, facing quantitative limits on the import of American AI technology.
- Tier 3: Nations under arms embargoes, including China, with stringent controls or outright bans on AI technology exports.
The rule also introduces a licensing system for AI chips and model weights, aiming to prevent adversaries from acquiring advanced AI capabilities.
Implications for American Businesses
1. Erosion of Global Competitiveness
By restricting exports to Tier 2 countries, the rule hampers U.S. companies' ability to compete in rapidly growing AI markets. Nations like Switzerland, Poland, Greece, India and Israel are emerging tech hubs, and limiting their access to U.S. AI technology may drive them to seek alternatives from non-U.S. suppliers, diminishing American firms' market share and influence.
2. Supply Chain Disruptions
The rule's quantitative caps on AI chip exports can lead to supply shortages in allied countries, disrupting global supply chains. This uncertainty may deter international partners from relying on U.S. technology, prompting them to develop indigenous solutions or collaborate with competitors, thereby weakening U.S. companies' global supply networks.
3. Financial Impact on Tech Companies
Major U.S. tech companies have expressed concerns about the rule's financial implications. Nvidia could face significant revenue losses due to restrictions on exports to key markets like China. Analysts estimate potential revenue decreases between $4 billion to $6 billion, with an earnings per share reduction of 13 to 18 cents for fiscal 2026.
4. Innovation Stagnation
The rule's restrictions may inadvertently stifle innovation by isolating U.S. companies from global collaboration. AI development thrives on diverse perspectives and data; limiting international partnerships can slow technological advancements, reducing the competitiveness of American businesses in the global arena.
5. Risk of Regulatory Overreach
Critics argue that the AI Diffusion Rule represents an unprecedented level of control over the global distribution of computing resources, effectively imposing a centrally planned global computing economy. This regulatory overreach could lead to market distortions, favoring certain companies over others, and potentially resulting in regulatory capture where privileged entities influence policy to maintain their market position.
Conclusion
While the AI Diffusion Rule is rooted in legitimate national security concerns, its potential adverse effects on American businesses cannot be overlooked. The erosion of global competitiveness, supply chain disruptions, financial impacts on tech companies, innovation stagnation, and risks of regulatory overreach present significant challenges. Policymakers must carefully weigh these factors and consider adjustments to the rule that protect national security without compromising the vitality and leadership of American businesses in the global AI landscape.
President Trump has declared that "[c]ontinued American leadership in Artificial Intelligence is of paramount importance to maintaining the economic and national security of the United States." With appropriate revisions to the AI Diffusion rule, American ingenuity can make that a reality.
John Koufos leads Cottage Four, LLC, a consulting firm in Washington, DC, that serves the private and public sectors on technology, healthcare and justice issues. Follow John on X @JGKoufos or at www.cottagefour.com
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