Is the US AI Chip Ban on China Failing? DeepSeeks Circumvention Casts a Shadow of Doubt

Is the US AI Chip Ban on China Failing? DeepSeeks Circumvention Casts a Shadow of DoubtBloomberg reports reveal that US officials are investigating DeepSeek, a Chinese AI startup, on suspicion of circumventing US restrictions on the sale of advanced semiconductors to China by purchasing Nvidia chips through a Singaporean intermediary. DeepSeeks recent release of its R1 chatbot, which rivals and in some aspects surpasses OpenAIs ChatGPT, has sent shockwaves through the market, establishing it as a key competitor to OpenAI's flagship product

Is the US AI Chip Ban on China Failing? DeepSeeks Circumvention Casts a Shadow of Doubt

Bloomberg reports reveal that US officials are investigating DeepSeek, a Chinese AI startup, on suspicion of circumventing US restrictions on the sale of advanced semiconductors to China by purchasing Nvidia chips through a Singaporean intermediary. DeepSeeks recent release of its R1 chatbot, which rivals and in some aspects surpasses OpenAIs ChatGPT, has sent shockwaves through the market, establishing it as a key competitor to OpenAI's flagship product. This event highlights China's potentially underestimated strength in the AI race and raises questions about the effectiveness of US technology controls.

The impressive performance of DeepSeek R1, along with its low cost and high efficiency, has drawn significant attention and speculation within the industry, with engineers expressing amazement at its capabilities. However, R1s powerful performance has also led competitors to suspect reliance on Western technology. According to anonymous sources, White House and FBI officials are trying to confirm whether DeepSeek obtained Nvidia AI chips, prohibited from sale to China by the US, through intermediaries in Southeast Asian countries.

In response to the allegations, an Nvidia spokesperson reiterated the company's commitment to ensuring its partners comply with all applicable laws and stated that it would take appropriate action if any violations were discovered. Notably, while Nvidia previously stated that it believed DeepSeek had not violated US restrictions, former Commerce Secretary Howard Lutnick hinted at DeepSeek's successful circumvention of US export controls during a Senate hearing on Wednesday. He pointed out that DeepSeek purchased a significant quantity of Nvidia chipsthe very chips powering its modeland found a way to bypass the chip ban. Lutnick emphasized: "This situation has to end. If they want to compete with us, let them compete, but don't let them compete with our tools."

DeepSeeks R1 model, released earlier this month, possesses human-like reasoning capabilities, posing a potential threat to the AI market currently dominated by OpenAI and US companies, and potentially causing a trillion-dollar market crash. This breakthrough has sparked intense debate about the effectiveness of US attempts to cut off China's access to advanced technologies.

US government restrictions on technology transfers to China encompass various chips and their manufacturing tools, aiming to slow down China's semiconductor industry development and prevent it from acquiring AI technologies that could provide military advantages. While DeepSeek hasn't fully disclosed the AI semiconductors used to develop R1, its researchers mentioned in a paper that its V3 model, released last month, was trained on 2048 Nvidia H800 chips. The H800 is a chip Nvidia specifically developed for the Chinese market in response to the Biden administration's previous ban on more powerful chips. However, US officials further restricted the sale of H800 and other Nvidia chips to China in October 2023, forcing Nvidia to design the lower-performing H20 chip for the Chinese market.

According to Bloomberg, Trump administration officials are currently discussing whether to also restrict the H20 chip, continuing a policy debate begun under the Biden administration. Concurrently, the US has not only expanded the types of chips banned from sale to China but also broadened the geographical scope of trade rules to encompass more countries. In 2023, the Biden administration imposed restrictions on over 40 countries, aiming to prevent them from acting as intermediaries for chip shipments to China. This includes much of the Middle East and parts of Southeast Asia, but notably not Singapore. Earlier this year, the Biden administration further expanded the rules' reach to cover most of the globe, excluding only a few US allies. Now, most large shipments to Singapore require licenses, with only those from fewer than 1700 processors requiring only notification.

According to regulatory filings, Singapore accounts for approximately 20% of Nvidia's revenue. However, Nvidia argues that Singapore-related revenue doesn't necessarily represent funds flowing to China, as public filings reflect the location where invoices are sent to customers, not the shipping location. Many customers have business entities in Singapore and use these entities to sell products to the US and Western countries.

In a letter to National Security Advisor Mike Waltz on Wednesday, senior Democrats and Republicans on the House Select Committee on the Chinese Communist Party also referenced Nvidias revenue from Singapore and called for stricter licensing requirements for countries like Singapore to prevent them from becoming conduits for circumventing export restrictions on China. Representatives John Moolenaar and Raja Krishnamoorthi wrote: If unwilling to crack down on exports to China, countries like Singapore should face stringent licensing requirements. The DeepSeek incident has cast significant doubt on the effectiveness of US technology controls on China, raising global concerns about the security of the global chip supply chain. This battle over AI chip bans is far from over.

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