Legal Limits on Nvidia’s AI Chip Exports
Author: Marko Laughlin
Introduction
In April 2025, the US government imposed export restrictions on Nvidia's H20 artificial intelligence (AI) chips to China, citing national security concerns. The H20 chip, Nvidia's most advanced AI processor available in the Chinese market, was designed to comply with previous export regulations set by the Biden administration has now been subjected to new licensing requirements. This has significant legal consequences under international trade laws and escalates geopolitical tensions between the US and China.
Navigating International Trade Laws
The US Department of Commerce's decision to require export licenses for the H20 chip falls under the Export Administration Regulations (EAR), which govern the export of dual-use technologies with civilian and military applications. The justification is to prevent advanced AI technology from enhancing China's military capabilities, particularly in supercomputing. However, this action raises questions under World Trade Organization (WTO) rules, which generally prohibit export bans. The US justifies its restrictions under the national security exception outlined in Article XXI of the General Agreement on Tariffs and Trade (GATT). While this clause allows for trade restrictions to protect essential security interests, its broad application has been a point of contention among WTO members. Semiconductors are essential components in the production of technological devices, ranging from smartphones and EV cars to the Internet of Things. China's rapid technological advancement has pressured the global technology industry, particularly in the highly competitive sectors of EV cars, cameras, and drones. The implementation of a ban on semiconductor exports would significantly hinder these development efforts, framing the regulation as an act of economic protectionism. Thus, China may challenge the U.S. measure as a violation of fair international trade, potentially leading to a legal dispute within the WTO framework.
Impact on Businesses and Markets
The export restrictions have immediate and long-term effects on Nvidia's business operations. China represents a significant market for Nvidia, accounting for approximately 13% of its sales, or about $17 billion, in the last financial year. Given the high demand from Chinese tech giants such as Tencent, Alibaba and ByteDance to use the H20 chip to develop advanced AI processors for their operations, the regulation disrupted Nvidia’s ability to fulfill the existing orders to the Chinese clients, resulting in an anticipated loss of $5.5 billion in the first quarter of the 2025 fiscal year. This financial hit derives from inventory write-downs, purchase commitments, and related reserves.
The policy-induced supply chain risk may also lead Chinese technology firms to seek alternative suppliers, potentially accelerating China's efforts to develop domestic AI chip capabilities. This suggests an anticipated decrease in the sales of Nvidia in the long term. Corresponding to this foresight, the company's stock experienced a 7% decline in after-hours trading following the announcement, reflecting investor concerns over future growth prospects.
The restrictions also have broader implications for the global semiconductor industry. Other US chipmakers, such as AMD, face similar export limitations, which could lead to a loss of market share in China and impact their financial performance. Ultimately, the limited access to advanced technology components from exports may incentivise Chinese companies to invest more heavily in domestic semiconductor research and development, potentially reshaping the global competitive landscape in the AI chip market.
Implications for Law Firms and Their Clients
The US export restrictions on Nvidia's H20 AI chips to China present various challenges for law firms and their clients, particularly those operating in the technology and semiconductor sectors. Law firms must proactively guide clients through export compliance, supply chain management, and strategic planning to mitigate legal and commercial risks.
Clients involved in the design, manufacture, or distribution of AI technologies must implement robust export compliance programs. This includes classifying products under the EAR, determining licensing requirements and establishing internal controls to monitor compliance. Law firms can assist by conducting audits, developing compliance manuals, and providing training to ensure adherence to export controls. Law firms must keep clients informed about updates to the EAR, new licensing requirements, and shifts in enforcement priorities. Staying abreast of these developments enables clients to adapt promptly and maintain compliance.
These restrictions also necessitate supply chains to identify and mitigate risks associated with indirect sales or unauthorised resales. Law firms should advise clients to scrutinise their distribution networks and implement "Know Your Customer" (KYC) protocols. This is crucial in preventing violations that could lead to significant penalties. Given the potential for legal challenges under WTO rules, law firms should prepare to represent clients in international trade disputes. This includes advising on the implications of the national security exception under Article XXI of the GATT and developing strategies to address potential retaliatory measures from affected countries.
The export ban's impact on revenue and market access requires clients to reassess their business strategies. Law firms can provide counsel on restructuring operations, exploring alternative markets, and navigating the legal aspects of shifting manufacturing or research and development activities. For instance, Nvidia plans to invest up to $500 billion to build AI supercomputers within the US over the next four years, considering complex legal considerations regarding domestic regulations and incentives. Clients may seek to develop or source alternative technologies to mitigate the impact of export restrictions. Law firms can provide guidance on the legal aspects of research and development collaborations, intellectual property considerations, and compliance with export controls related to emerging technologies.
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