Nvidia may design its chips in California, but manufacturing them depends on Dutch lithography, Taiwanese fabs, Japanese chemicals and Malaysian packing. It’s a deeply global, interdependent system.
Volatility across tech stocks, particularly semiconductors, has surged amid escalating tariffs and shifting trade policy. Now, a key regulatory change looms: the Biden-era AI Diffusion Rule, a tiered export-control framework set to take effect on May 15. This policy will determine who can access advanced U.S. chips, adding fresh strain to an already fragile and interdependent semiconductor supply chain.
While the Trump administration has kept the core framework from the Biden announcement intact, recent actions suggest a more restrictive approach. A Section 232 investigation on chip imports is underway, raising the prospect of additional tariffs on national security grounds. Meanwhile, unexpected restrictions from the Commerce Department have already delivered a blow to U.S. chipmakers. Nvidia reported a $5.5 billion inventory write-down tied to stricter export limits on its China-focused H20 chips, while AMD anticipates charges of up to $800 million. These announcements underscore the financial risks involved with sudden policy shifts—and the investment risk, for investors with concentrated exposure to tech names.
What is the AI Diffusion Rule?
The framework classifies countries into three tiers:
- Tier 1: Trusted allies (i.e., Japan, UK, South Korea) enjoy broad access.
- Tier 2: Over 100 countries (i.e. India, UAE) are subject to quotas and license requirements.
- Tier 3: Nations under arms embargoes (i.e. China, Russia, Iran, North Korea) are restricted entirely.
While the rule is framed as a national security measure, its broader aim appears more ambitious: limit China’s access to advanced chips, which could curb its AI and military capabilities, while incentivizing Tier 2 countries to adopt U.S policy positions.
What should investors watch?
- AI Diffusion Rule enforcement: The rollout will clarify how license requirements and distribution constraints affect near-term revenue, and companies selling into Tier 2 and Tier 3 countries may come under pressure.
- Tariff escalation risk: Recent tariff exclusions for smartphones and laptops were explicitly temporary, and a Section 232 finding could introduce new tariffs on imported chip components or manufacturing tools, raising costs and pressuring profit margins for chipmakers.
- Global responses: How key partners respond will shape the rule’s effectiveness and may reveal unintended consequences. For instance, China is already pouring $100+ billion of government incentives in building Chinese fabs and the DeepSeek breakthrough earlier this year revealed their relative success in AI capabilities despite U.S. restrictions (see chart).
- Supply chain realignment: Near-shoring and friend-shoring efforts to countries like Mexico, India, and Japan will likely continue, presenting opportunities. However, costs, labor and infrastructure needs could present roadblocks.
Ultimately, the semiconductor supply chain wasn’t built to align with geopolitics—it was built for efficiency. Nvidia may design its chips in California, but manufacturing them depends on Dutch lithography, Taiwanese fabs, Japanese chemicals and Malaysian packing. It’s a deeply global, interdependent system. Even so, the direction is clear: chip supply chains are becoming more politicized. In this new environment, investors should expect uneven impacts—some companies may adapt quickly, others more painfully. Resilience matters just as much as innovation.