Trump Administration Modifies Direction of Regulating AI Chips

The export of AI semiconductors and related technology continue to be a major area of national security concern, although the Trump Administration has decided to change the strategy adopted during the Biden Administration. The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced it plans to rescind the “AI Diffusion Rule,” which the Biden Administration promulgated before leaving office in January 2025. See our prior alert (Biden Administration Issues More Restrictions on Advanced Chips and AI Models). Among other restrictions, the AI Diffusion Rule would have capped sales of advanced U.S. artificial intelligence chips to jurisdictions around the world. The Rule was set to come into effect on May 15 and a Federal Register notice formalizing the rescission will be forthcoming.

In withdrawing the AI Diffusion Rule, the BIS identified industry concerns that the restrictions were suppressing innovation, impeding global market access, and hampering U.S. diplomatic efforts with countries in the Middle East, South Asia, and Europe. At the same time, the Trump Administration made clear that it plans to issue a replacement rule in the future.

In parallel, BIS announced plans to strengthen export controls on advanced AI chips, including new guidance that the use of certain Huawei Ascend AI chips anywhere in the world likely violates U.S. export controls, because those chips were likely developed or produced using unlawfully obtained U.S.-origin software or technology. Accordingly, any use of the specified Huawei Ascend chips without a license from BIS could result in enforcement action.

Implications

For U.S. semiconductor companies, the immediate consequence is the ability to continue to export advanced AI chips to jurisdictions without obtaining BIS authorization. Exporters, including U.S. chipmakers and cloud-service providers, can continue shipments to countries that would have been subject to caps under the AI Diffusion Rule such as India, Switzerland, the United Arab Emirates, Saudi Arabia, Singapore, and Israel without needing to submit to additional license reviews. However, the revocation of the AI Diffusion Rule does not change or loosen existing restrictions on exports to China including Hong Kong and Macau, or affect the stringent licensing requirements that continue to apply to transactions involving companies designated on the Entity List. Restrictions enacted in 2022 and 2023 on advanced chip sales to China and other countries that China could use as intermediaries to access banned technology remain in place. The revocation also does not lift the requirement to obtain US government approval for advanced chip exports on places like the United Arab Emirates and Saudi Arabia, which were implemented in the 2023 restrictions.

Alongside its recission of the AI Diffusion Rule, BIS issued guidance advising that any use of Huawei Ascend 910B, 910C, and 910D chips “risks violating U.S. export controls and may subject companies to BIS enforcement action.” BIS explained that such chips were likely designed or produced with certain U.S. software, technology, or semiconductor manufacturing equipment, which brings any use of such chips worldwide within the scope of the Export Administration Regulations. BIS also published new guidance outlining “red flags” companies should screen for, and due diligence steps companies should take, to prevent diversion of advanced chips.

The Trump Administration is expected to replace the AI Diffusion Rule with a more country-specific approach, which could involve individual negotiations with countries on chip export rules and caps based on particular national security concerns as well as broader foreign policy and trade considerations. Companies should be prepared to respond quickly to license requirement changes, especially after BIS issues its replacement rule.

Key Takeaways

• The withdrawal of the AI Diffusion Rule forestalls the blanket geographic caps on the sale of advanced U.S. AI chips to major non-Chinese markets from taking effect.
• Compliance obligations toward China and other adversary destinations remain unchanged and the Commerce Department has signaled that those rules will be aggressively enforced. See our prior alert (DOJ Declines Prosecution of Company Following Voluntary Self-Disclosure and Cooperation in Export Control Matter). Companies should, therefore, continue to prioritize robust end-use and end-user screening.
• Proactive license-management processes will be critical to maintaining export compliance if the Administration shifts toward tailored, country-by-country controls.
• A new rule to replace the AI Diffusion Rule is forthcoming, exporters should remain alert to this evolving regulatory landscape.
• Companies should assess whether they use Huawei Ascend chips and obtain the requisite authorizations from BIS before continuing such use.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta L. Nightingale, an O’Melveny partner licensed to practice law in the District of Columbia; David J. Ribner, an O’Melveny partner licensed to practice law in the District of Columbia and New York; Jonathan P. Schneller, an O’Melveny partner licensed to practice law in California; Reema Shah, an O'Melveny partner licensed to practice law in New York; and Hannah V.L. George, an O'Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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