By Tae Kim

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Self-Defeating. Hi everyone. "Do no harm" is an important medical concept whereby doctors must consider the balance of treatment and affliction, doing everything possible to avoid additional problems for the patient.

U.S. trade policy under President Donald Trump has arguably already failed the "Do no harm" principle. But it's the policies to come that could truly threaten the health of the country, specifically around artificial intelligence.

In January, the Biden administration outlined new rules that divided the world into three buckets and imposed caps and license restrictions on the number of advanced AI chips that can be exported to more than 120 countries. The so-called "AI Diffusion" rules are scheduled to take effect next month.

Wall Street expected the Trump administration to revise Biden's policy, with some hoping for less onerous rules. But now the government could be weighing a policy that is actually more rigid.

Earlier this month, the administration effectively banned Nvidia's H20 chips to China, and a new report this week suggests the White House could be considering changes that move from three tiers to a country-by-country policy, which may be used as leverage in trade negotiations. The Commerce Department didn't respond to a request for comment asking about such a move.

Analysts say the H20 restrictions alone cost Nvidia more than $10 billion in annual sales. That's billions of dollars Nvidia could have used for R&D, which is the lifeblood of technology companies.

But revenue aside, tying chip exports to trade deals would be a strategic error. It would hurt America's credibility as a trusted and reliable partner for a generation. AI computing is crucial for every country's ability to innovate and compete in business. If our closest allies can't trust America to reliably provide chips without an extraction of trade concessions, countries would be incentivized to use alternatives, including offerings from China.

Bernstein analyst Stacy Rasgon, who covers the chip sector, isn't a fan of a country-by-country system for AI. "Replacing a global framework with individually negotiated bilateral agreements seems clearly worse," he wrote. "We see potential risk that such rules open up further opportunities for non-US options like Huawei."

Huawei's latest chips still don't compete with Nvidia's three-year-old H100 since they requires much more power per chip. On a level playing field, no large company, even in China, would choose Huawei over Nvidia.

Nvidia's main advantage is its programming ecosystem, CUDA. The company and its customers have spent over a decade fixing software and driver issues, which means the platform offers unrivaled stability. But increased usage of Huawei chips would lead to more revenue and user optimization, providing more resources for its chip R&D. As more companies use Huawei's chips, and the company refines its software, Nvidia's CUDA advantage could erode.

The U.S. wants and needs American technology standards to dominate global markets. Starting in the 1990s, the strength of Intel's x86 PC chip ecosystem underpinned decades of software and technology superiority for the U.S. Nvidia's CUDA has already effectively won the AI chip race.

But making it more difficult for companies around the world to acquire Nvidia chips opens the door for China to expand its market share globally and potentially become the standard upon which other countries build.

Through three decades of hard work and American ingenuity, Nvidia's technology has become a national asset that every country in the world clamors for. The U.S. would be well served to let it compete without new burdens.

Overregulating exports would be a self-inflicted mistake and could give China a foothold in the critical AI battle.

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Write to Tae Kim at tae.kim@barrons.com or follow him on X at @firstadopter.

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