Semiconductors, Tariffs, & Chip Restrictions Under Trump | Chris Miller
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What's up, everybody? My name is the major cafes. And you're listening to hit in forces, a podcast that inspires investors, entrepreneurs, everyday citizens to chAllenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guess in this episode is Chris Miller, an associate professor of international history at the graduate school of global affairs and tough university and the author of chip war, a book that chronic the history of a decades long battle to control the worlds most critical resource, the microsite and the commercial industry that supports IT. This podcast was recorded the day after trumps Victory in the twenty twenty four us.

Elections, which means Chris and I had the opportunity to discuss the state and future of the semiconductor industry in the context of that win, with all its implications for industrial policy, defense spending, tariff s, export controls, trade wars and much more, we dive deep into the semi doctor supply chain. Between the first and second hours of this conversation, we discuss how money is currently being allocated under the chips and science act, the progress being made in domestic U. S.

Semiconductors, Richard, the chAllenges facing tms arizona facility and the troubles in intel. We also take a hard look at the outcomes resulting from the U. S. Semi conductor export and end use controls implemented against china. How effective or in effective they've been in ways to improve them.

We also assess china is own efforts are building out its domestic chip ecosystem and some of the loopholes that chinese companies are systematically exploiting in order to become fully independent of and eventually overtake western chip makers and equipment manufacturers. We discuss the three largest limiting factors to scaling A I. Data centers, the national security threat posed by chinese companies, leapfrogging their U.

S. Competitors in the race toward ji, and much more. If you want access to all of our conversation and you're not already subscribe the hidden forces, you can join our premium feet. Listen to the second hour of the days episode on your mobile device using your favor podcast APP just like you're listening to this episode right now by going to hidden forces that I O slash subscribe if you want to a join in on the conversation and become a member of the hidden c's genus community, which includes Q A calls with guests, access to special research and analysis in persons, events and dinners. You can also do that on our subscriber page.

And if you still have questions, feel free to send an email to info at hitting forces that I, O and I, or someone from our team will get right back to you. And with that, please enjoy this timely and deeply educational conversation with my guest, Chris milk. Chris Miller, welcome back the hint forces.

It's great to be back. It's great.

Have a new backman. Hi, doing.

doing good. It's been we're just saying it's been a while since we recorded our first two years ago, probably this month. So nice to be back on the show, right?

I actually think I was believe in or not. I am pretty good with numbers and for summer. And I think I was september six when we recorded the episode. I'm pretty confident was in september and you came on the our genius community for A Q N A at some point a year later.

So to give us an update, IT might have been around some news or I might have just been a general update on how the export controls and and use controls on semiconductors are going or we're going at the time. We're going to a chance to talk about that today as well as the chips act, how money is being spent and allocated there, how it's going over all tmc, a arizona sem abri ation facility l has also been in the news, is dealing with a lot of problems. That said, integrated device manufacturer and important one and important part of the U.

S. Industrial strategy to reassure the same, make supply change. That's a big part of this conversation. We're going talk about china domestic typical system, how the export controls are going. The A I built up, but coincidentally, in fact, I had never planned this.

We're recording this the day after the election, and we have a definitive result on the truck is one the decision of Victory is also won a majority of popular vote. And also I believe the republicans will have control of both houses. So it's going to be a real opportunity for the vision of a trump team and a republican White house to really manifest through industrial policy in the economy.

Trop is talk about tariff. s. I'm curious when you look at and given the conversations you've had with people that are affiliated with the trouble administration, when looking also at the outside studying what the proposals have been made, how do you think this impacts the policies around reassuring semiconductor usage, the chip restrictions, the trade words, the china, all of that, what is the impact of a trumpet administration in twenty twenty five?

You know, I think if if you step back and look at the last three administrations, from the obama, through the first trump term and through biden, lose acx ious, surprise him on unity and all these issues in terms of subsidizing domestic manufacturing, the chips act was first passed under trump, implemented under biden.

If you're looking at restrictions on china, those were really wrapped up under trump and then continued and provided even more structure under biden. Turfs ramped up under trump, continued to actually expanded under biden. And so I think I just look at that trajectory is safe to assume that all three of those sets of policy is continue.

Now what the level that trump pursues them at, I think, is the question. He's obviously articulated tariff as a priority. Others micon, that issues haven't really been part of his focus.

the campaign why we're going to a chance to dig in into that. I just start a curiosity since you again, we haven't spoken too often and although we did have one chance, but IT wasn't for the podcast what your life been like since publishing chip wars. Just everything has happened in the industry.

Well, it's been a fun time to focus on micron doctors. Obviously, the U. S. china. Extensions are a big part of that. A I is another big part of that, which I think I expected some degree of that when I published war. But just a surge of investment and there for the interest in A I and data centers and in video and ChatGPT and its some icon doc implications has been a surprise for level. And I think the third thing has been electronics and computing in general, the supply change shifts that are under way due to both of those dynamics are also really interesting. So I spent a lot more time that I would have guests in the last two years, not just in taiwan and korea, in japan, but also went india, for example, in middle east, both of which want to become bigger players in this industry.

Yeah because you publish the book in twenty twenty two and ChatGPT three was released when in december of twenty twenty two, november twenty two. So that came out afterwards. Are you what are you seeing in terms of interest from people in the industry, from a filled industries were trying to reaching out to you in order to get a Better grasp on the direction of where things are going.

You know, I think in the chip industry, there's still a tonto focus on U S. China DNA ics and the executives who currently run ship firms, they all came of age in a period which engagement with china, trade with china, investment in china, that was the way you build businesses. And they're all really struggled as a group to acclimate to this new environment where competition with china and restrictions on china are now the status quo.

And I think the chip industry is had a lot of learning to do on that front. I think in in other signals economy, the learning has been how to make sense of the investment in AI and data anners. And so I am struck by not just the number of private equity firms that I end up speaking to our interested in data and investment, but the number of energy investors who are now trying to deliver power to data centers.

I hadn't thought about data centers at all, hadn't thought about ships at all, are trying to put in video on a map. They now realized that power demand is increasing because A I is demanded more power. And that's been a another really interesting change that I had expected.

He is interesting because as i've tried to understand the nature of this dynamic of the the rush too well, they not just the general business imperative to make advancements in the chip industry, but also the geopolitical imperative.

There are some obvious bottle ics like computational capacity capability, also the number of data matters you can spend up to sort of offset, in the case of china, the hit you take to compute by just aggregating more chips together. But there's also energy, energy, another bother. So I I want to have a chance talk about all that.

Let me see one more thing about trump and the trump team before we switched to a conversation with the cheap act, which is the next um the first real discussion point I want to go through who within trumps orbit will be leading the charge of america's industrial policy? Do we know who those people are besides robby light higher? Er.

I think lighters are is going to be the really interesting figure to watch. I ve heard speculation that he might end up with the treasury department or at the commerce department, both of which would be very powerful roles. And I think know he's been the primary person who has been advising and the first from implementing trumps tariffs since that player, really major role in shaping industrial policy. I I think beyond that, we are still waiting to hear some of the names that will be actually implementing these types of policies. And I think that's something worth tracking pretty closer than like a couple of month as we not just hear who are going to the secretaries have given cabin departments, but the undersecretary because they're often actually playing a huge role in implementation.

So I also want to recommend the episode you do. I fail to do that if people haven't heard that episode that we recorded a few years ago, which was based off the work you did in your book, chip. Worse, I recommend them actually pauses this recording and go back and listen to that first because that's really foundational. But i'm curious today, when we look at the amount of money invested in a given calendar year across all aspects of the uc turing industry, how much is being invested on the part of chinese state actors and companies and how much is being invested across the entire western chip ecosystem that also includes countries like japan, taiwan and south korea?

Know IT IT depends how you slice the numbers. If you look solely at chip manufacturing, what you find is that investment in china has increased a lot, but that there is still more investment happening outside of china, in taiwan, in korea, in the U. S, in japan, first and foremost.

And if you look at different types of manufacturing, you can get different nuances. So for leading edge, your close to leading edge manufacturing, the types of chips, I go in phones and pcs in data centers, almost all still happening outside of china, because china can buy the type of tools you need, like the U. V authored phy machines that you need for cutting as ship making.

If you look at lower and chips, the more foundational chips that are going into dish washers and going into cars, that's where china is putting most of its investment dollars, and that's where we are going to see a really dramatic increase in chinese production capacity over the next couple of years. And if you look at the best private sector forecast of the number of facilities under construction in china in the rest of the world over next couple of years, you find china's almost building as much as the rest the world combined, not exactly, but almost, which is a really extraordinary change. Because in the past, china was a very small player when I came to producing even lower and chefs. And that's where the market shifts are by far the biggest.

And what is the strategy there is the strategy there to dominate the supply chain and take market share from western companies that are serving clients and less economically developed an on online part of the world, like countries in africa, that america.

you know, I think that depends on who you are looking at in china. I think if you are running at ship company in china, your goal is to build a business as viable. And so that pointing in different directions, then if you, the government, the government wants independence from western ships, and if you put yourself in china shoes, you're still importing huge volumes of even lower and ships from the west, from taiwan, from the U.

S. From you're up from japan right now. And so I think for policymakers in china, they're still worried in a worst face in aria conflict over taiwan. They're going going to lose access to the chips that their dishwashers require as well as the chips that their AI systems require. So that reason alone is enough to build out this big manufacturing base for for low and chips.

And then if you're receiving big subsidies, the government or from the prevention al leadership from your municipal government or in your factory on or or why not keep building capacity because the government's footing the bill. And so I think you got different rationales for this build out with different actors. But the net of fact is that there's a ton more capacity coming online and is coming online fundamentally for non economic reasons is not that. Demand is Mandating more production of volume in china is that the subsidies .

are making a possible that perspective. What is the calculus that happening at western firms when they're seeing all this money that's being spent in conjunction with the chinese state by chinese companies in the legacy space, legacy chip space? Does this have a chilling effect on investment on the part of western firms in those areas? And then so that the end of focusing on leading edge to the detriment of legacy? Yeah, I mean.

I think he already has had a chilling effect to some degree. Part of the nuance here is that a lot of western firms aren't impacted because they don't produce these types of chips. So you're an NVIDIA or AMD or intel or cocom, you're producing primarily leading edge chips.

And so the chinese lagging edge build out doesn't really affect you. And I could actually benefit you if the systems that your chips are going into are getting cheaper chinese components to listen the short run that could actually, to somebody, be a positive. It's only the western firms that produce legacy chip.

So think of texas instruments or on mi also european firms and japanese firms that are facing really head on competition from a lot of these heavily subsidized new chinese chip makers. And there we've seen, for example, major investors and micron ductor is publicly call for reduce capital investment in western facilities, one of the reasons being that china is going to be flooding the market in certain types of commoditize chips. And know that's why in the U. S. And european japan, ders active discussion about should there be terrifying imposed on the import of chinese ships and the western manufacturing .

supplies action, not specifically wether Terry should be imposed, but what has been the response by government, so is is terrific. The preferred method is there also desire to use import, again, some kind of state subsidies, or maybe that's the right word, but some way to offset the costs for domestic manufacturers to make up the short follows and legacy production .

yeah you know I think chips act in the U. S. And similar u chips act. Japanese subsidies had the effect in part of offsetting chinese subsidies, but the scale of chinese subsidies is much greater than the scale of western subsides going into the legacy segment of the market. And that's why you've seen western governments consider two other policy proposals.

So one is and the by administration actually earlier this year doubled the tariff rate from twenty five percent, fifty percent on chips that are imported directly from china to the us. And that's actually not super impact on because the us. Imports hardly any chinese ships directly there are sent to vietnam and package in alaya and put in a dishwasher in a third country and then imported. And so chips that are part of a bigger system and imported don't today face any terf s because this system faces a terrifying ate based on what type of system is.

And so one of the topics of discussion is, should you impose a component level tariff? So if your dish washers made malaysia, but IT is a chinese chip and eye IT should have pay a terror based on the chinese chip content to one IT crosses into the united states items a lot of support for those types of component based terf s in both congress and in certain parts of the the federal government bureaucracy and that would be one way to disney SE western manufacturers and chinese manufacturers from using chinese ships. So that option one, option two reasons to say we don't trust chinese ships are going to ban them from critical systems, from defensive era space, certainly from autonomous driving.

Are you seen the by demonstration takes steps there from data centers. And so I am going to see more on that front. Two of i've just broad bands of chinese shipped on security grounds. I mean.

I have so many questions, but just one just popped into my head. So there was recently found that some of tmc chips had found themselves inside of willow products despite the export controls and restrictions.

And so my question is like, how effective is IT to do this kind of niche targeting? Or does that an inevitably create loopholes that will be exploded? And do we end up are we eventually going to get to a place we're going to see blanket bans?

yep. no. I think we're already moving in the direction of more blanket bans because niche targeting is really hard.

I think in a lot of ways that twenty twenty two export controls were the first step in that direction. Before twenty twenty two, us rules more or less said you can't sell chips to chinese military companies. And we found that there are lot of examples of that happening into the us. Shift to the rules and said you can sell a AI chips to china period and this that that is kind of a direction of travel towards blank of bans as IT is now.

I think the next potential step in that direction is rather than a tmc can't produce A I chips above a certain thresh hold and sell them to china, or T S M C can't produce for certain chinese firms, I could imagine a future administration saying T, S, M C or any advanced fab can't produce below seven animators for any chinese customer, for example. And that would be of a logical next step if you wanted to move further towards blanket bans. obvious.

Ly, there are downsides to that because the U. S. Also said we're only targeting A I chips because of their dual use applications. And the broader you go, the more also hit smartphones, ships and autonomous driving ships and other types of ships that don't obviously have any sort of to use application.

So this might seem like an obvious question, but actually when I think we most people asked themselves, it'll find that they they lacked specificity in answering IT to themselves, which is what is the real risk of china dominating certain segments of the market. I think it's been very, very clear what the consequences are of a dominating leading edge. But what about this slagging as we're talking about now?

So I think if you put that question to us security officials, you will get the following answer. They'll say, look at the chip shortages. And twenty one, two IT showed that if you were a car manufacturer, for example, you rely on a thousand ships per car.

And if you're missing just one of those ships, your cars could be stranded in parking lots for a months, costing you tens of billions of dollars. If china was the sole producer of one of those ships, wouldn't that give an extraordinary influence over western firms there for western politics? And it's not hard to imagine that because china's been doing that with rare earths, with gale in germanium, with other minerals.

And so the us as well as I think other western leaders are worried if china becomes dominant and certain components that are really critical for the rest of the industrial base that will give you leverage that. In the past, china has had no concerns about using. And so it's not so much.

I don't think I concern that this is going to hurt western firms. That dynamic is present. I think it's really china's going to gain leverage over the west in an economic and a political sense.

So if existing trends continue, what does that mean for china? Share of the global market for semicon conductor production is.

if you look at the market in dollar terms, the most expensive shifts of the high Young ships that for china's face the largest issue. So in pure dollar terms, china share, the market is gone to stay, I think, relatively contained despite the extraordinary investment is underway in china because it's going to focus on the low end and therefore, low cost portion of the market.

But if you look at the more commoditize segments of the low end, I think you can already see china's market share increasing pretty dramatically. And that's the concern not that china is going to take over the chip market, that I can take over certain segments of the commodities low. And western investors won't tolerate western firms building new capacity.

They might even encourage them to close capacity that already exists and that channel become A A potentially monopolistic player in the low end of the market. And that's something that is eminently technologically feasible in china. Is just a question of how many dollars you want to deploy. And I think president SHE is track record suggests he's wing to deploy a lot .

of dollars or so. Let's actually before we get into a conversation about the chip act, let's talk about the expert controls. I want to talk about both others going china's response to them as well as this thing that I keep reading everywhere, which is that we can afford to have china reach A G.

I. Before we do. Let's actually start with that question because I not entire clear on whether that analogy is correct.

The analogy seems to be drawing a parallel with the nuclear bomb, right? Like, obviously the case of nuclear bomb makes sense. You didn't want the notice to obtain the nuclear bomb before the americans because they could immediately use IT. In recap, C, A, G, I doesn't exactly work that way. So one, what do you think about that argument that we can afford to have china achieve A G I, given the fact that we don't quite know what H I is, what IT looks like and it's not as binary in its application?

Yeah you know, I think I would freeze the arguments slightly differently. I would say, first off, is there strategic interest in addition to economic interest in having U. S.

Firms lead in A I A G. I is not just one thing, is a spectrum. And I think he asked, we want us, or at least western firms to to be leaders there.

And so access to compute is one of the things you need to be a leader. The second thing that's probably more important is that the us. Wants to make sure as western firms dominating the infrastructure that undergrads ai. And I think the analogy here is you don't want to find yourself in a situation like in five g where you everyone knew five g was important and there was no compelling western player because while I was able to produce equipment that was just as high quality as ericson and nokia at a meaningful discount in Price, and the us.

Would much prefer the situation like today and A I where if you want to build an A I data center, there are no non U S options, which means that you either don't build A I infrastructure or you use us suppliers, and often not just us suppliers for components, you use amazon or microsoft to google cloud to provide you the cloud computing services. And that creates a lack in effect, that will guarantee not just that the us. Has this generation of the I infrastructure, but I think that the U.

S. Is is betting that it's gonna the next decades worth of infrastructure provision because its firms will will be in the lead. And I think when you think about the ability to influence future regulation of A I think about future.

Capabilities and lacking out chinese espinal h capabilities that when you think about being able to influence which countries get privileges, access in which don't, making sure your adversaries face a harder time than your friends do. These are all areas where having a major role in infrastructure provision really matters. And I think that's the primary thing that's driving us policymakers more than a debate about who gets to a first acknowledging, as you said, that nobody really knows what exactly that means. That is probably not a single destination, something that is developed over time.

That's a good answer. How closely and efficiently are the big private sector firms working with the U. S. Government currently on this issue? And especially if we compare IT to the american companies in the telecom industry during the period or highway became a dominant player.

I think if you look at the personnel that the big A I labs as well as the big cloud computing companies have hired, they've all a large number of former officials on their staff that are are both working with government and managing government relations. I think there's a shared interest in seeing U. S.

Firms play a leading role. But I think there's also a lot of back and forth companies. They want support, they don't want restrictions.

Government wants to be supportive, is good at supporting some ways less good in other ways, but also wants restrictions. And so I think a lot of companies, for example, have found themselves in the position wanting to partner with countries. The middle is like the U.

A, E. Your city and the U. S. Government been publicly nervous about what the shape of those partnerships are.

And so that's been an area where the U. S. Government has actively restrained, or U. S. Taking I firms from doing what the others SE like to do.

Yeah, this brings us to a conversation that happens quite a bit within the A. I. Safety space, which is that the united states is no longer a unipolar power, working within an international rules based framework where the public interest can be, can have more leverage relative to national security concerns.

And this environment, there are competitive pressures, because the united states, as a world power, wants to out copy china. And the context of that, you could see a situation where the public interest falls to the wayside as private firms work with the government for advancing not just your political interest, but the private interests of these large tech companies. Is that a concern that you have when you see how the space evolving?

Yes, I think IT is a concern. I think there's there's always question of what is the public interest in, in which public is interest and is in the public interest of everyone in nigeria to get access to as much a infrastructure as possible. IT might not be in the public interest of the U.

S. Public to have nigeria get as much access as possible. And so I think there are conflicts between different definitions of the public. I think there is also real debate as to what A I safety means and what IT implies for regulation.

And so your definition of the public interest that fear will be shared by your views on the need for A I safety regulation or the the lack there of and so I think this is a spaceship. It's easy to say we should be devising policies in the public interest. And then when you begin to ask which public and what does that mean, IT becomes much less obvious and much more contested. Yeah.

that's true. I was actually meaning the U. S. Public interest. But you can see where that has been a chAllenge in the super national case of the european union and the implementation of GDP r, which now kep gets a lot of blame for europe falling behind an innovation on the AI front.

So it's obviously a very difficult chAllenge, but there are sort of interest to baLancer. So I just curious your thoughts on IT. Let's switch to export controls before we get into conversation about the chip set.

How are they going? How are they working? How are they not working? What do we know about how things .

you're going on that front? So I would say it's clear that they're working in the sense that china has much less access to high and AI chips than IT would in the absence export controls. It's also clear that there's major gaps or loops and in their enforcement.

And I think both can be true simultaneously and both are true a simultaneously. You first on are they having an impact? I think there is no doubt that china wishes IT had more access to A I compute than IT has.

I'll just give you couple of data. Data point. Number one, chinese firms will import hundreds of thousands of the NVIDIA h twenty chips that are specifically downgraded for the chinese market.

You would only do that. You'd only buy second right ships if you can buy first rate ships. And the fact that this is happening at such scale means that there is a need for AI computer that china can't satisfy domestic. I think the second data point is that I C regular anecdotes, I think, generally true of each one hundreds, for example, being smuggled into china in two cases. You only smuggled in these two cases when you don't have access to Better supply chains and you still need high volumes of semiconductors.

And so I think you when you look at all of the evidence of smuggling that is taking place, plus you look at the evidence of very high volume purchases of specifically downgraded ships, it's clear that china does face a deficit compute relative to what I would like. Now the smuggling that i've said, there is also evidence that the expert controls aren't being enforced nearly as effectively as one theoretically could. I think that's partly based on the inherent difficulties in enforcing controls.

It's always hard to limit the sale of of high value products because people are smart and creative when there is money to be made and smuggling. And I think it's also evidence of the fact that the U. S. Government has not historical, had to deal with this type of export control problem, historically, has been trying to prevent the sale of mysore parts to iran in north korea with mixed success. But that's a different enforcement chAllenge.

Not that is not .

delete exactly, exactly. And I think we don't yet have the capabilities at the level we'd like to actually enforce controls on. And do you use products?

So I want my next question going to be where and how our expert controls working Better or worse. But before I asked that question, in my mind, when I think about this race towards A G I, towards artificial general intelligence, there are three vectors that seem to be the most important for training these models. One is data, not just quantity, but quality.

And there IT seems, theoretically speaking, I don't know someone's in a position to actually be able to measure this. IT seems that china has an advantage, not just because there more people, I don't know that, that's necessarily relevant or as relevant, but their regulations are different. There just isn't as much emphasis on privacy.

And so that's also reflected infrastructure build out and how much data being collected. The other one is computing power and obvious ly, the chip restrictions are meant to diminish that, at least on a chip by chip basis. But then china can also work really hard to subsidize the build out of larger data centers may be even more clustered at the moment.

I think there's more cluster ing happening in the ad states. Maybe you can explain why that is, but that also seems to be an important Victor and some entirely clear who's in a Better position there. And then there's energy.

The energy actually run these facilities. And also, i'm not entirely clear on who has the advantage maybe in the short term, which is china, but sort of long term is sungar either. Do you generally agree with that? And how do you view the chAllenges to both countries in both ecosystems in trying to win that race?

Yeah, I think those are of the key potential bottle max. I think start with data. I think there are certain fears where china does have advantages due to its privacy regulations, facial recognition.

The obvious example here where I think most people would say china is ahead in facial recognition. But if you look at the l ms, they are largely, at least thus far, they've largely been trained on text on the internet. And no one has an advantage in text of internet.

It's all of the internet. Now I think the next generation and increasingly going forward, it'll be about your ability to generate synthetic data and to use A I to create Better data, to train on and to filter your data. And that's a sphere where um no one has a guarantee advantage, is all about your ability to innovate and provide Better mechanisms for creating quality synthetic dinner.

And so I I I guess that the us. Is going to be the leader in synthetic data just because the us. Is where most of the leading AI investment is happening. But that's not guarantee that uh, hypos about the future. But I don't think china's got an inbuilt advantage except in specific fears where privacy regulation really matters like like facial recognition.

So i'm probably already a bit out of my depth here, but I just think exempt ously when IT comes to synthetic data, how import is the prompt? And is that where a lot of innovation comes from on the prompt side? How do you actually create prompts that encourage A I to generate Better data?

Yeah you know synthetic that that means a bunch of different things. And so it's not just asking an A I system to create, you know, random strings of data. Is asking a yet to help sift through your data, for example, to check your da, to generate certain types of data.

And so the engineering around that is actually really important. And that's where talent, I think, is gonna matter much more than the raw data that exists in the real environment. One of you here, I think, is worth mentioning is, is data of the physical world. And this is when you think of the Thomas driving, for example.

This is a fear where it's not clear yet who's got an advantage in terms of data, but that I do worry that if china's going to be much more to supportive in terms of its autonomists driving regulation than you ask regulator, you could imagine a scenario where they're just more autonomous cars gathering more data and therefore building Better autonomous systems in china. I think you take this seriously. leave. And though it's not clear right now that tesla not in the lead, for example.

in the total driving, is that also trone robotics. So for example, we saw recently with the long short man strike, they one of their demands was putting curbs on autonomy at the doc facilities for fear being replaced by robots. At some stage, that's not the case in china, which have someone I ve been told the leading edge of automation at these stocks. Is that an example? We could also fall behind in their concern within the robotics industry that actually happening.

Yeah, I think that is A A justifiable concern. I'm not sure i've got a high confidence view as to who's got the Better dynamic there. I think if you're in china, the primary deterrent to using robots is that labor cost are lower or is in advances economy, you've got a higher labor cost. So you need robots a lot more than you do in china. And so that would make me think that advances economies are going to a try harder on robots because no choice.

That's a great counter. What I said, I love that, especially given some of the economic chAllenges are having going to move, you know, beyond the rest of the economy, although china does have demographic issues. So who knows? Anyway, that's interesting thing to think about will go back to IT. So another question I wanted ask you is, where and how are sanctions working Better in some parts than in others of the supply chain? Where are they working most effectively when IT comes to china?

Do you want to go to the question of computer and energy access first?

And you rought to bring I got, you're right. So we talked about data, we talked about computer, and then we were gonna. I think we talked about computer, but maybe you want to to flesh IT out more. And then we definitely did not talk about energy. So no ahead, please.

And answer that. Well, on computer, I think we know who's got access to the Better chips at scale. I think the interesting question is why we haven't seen clusters in china at the scale.

One might expect that, as you alluded to, the army artigue export controls was that if you've got worse ships, you just build larger clusters. And so far as we can tell, china is not doing that right now. In fact, I think one of the most interesting charts you can make is the chart of cap CS at big us.

Tech firms since, for example, the release of ChatGPT versus the chart of cap packs, a big chinese tax firms by do tencent, alibaba. And what you find is that us firms have increased cap packs because they're building these massive clusters. And chinese firms really happened.

There is not a clear trend and capable expenditure. And the size of plumbers being built, those seem to be meaningful ly lower in china and the quality being built is lower. Why is that is a really interesting question.

My best gas, my best explanation is that the chinese private sector doesn't think you can make money off of big clusters like that. The chinese government has been much more skeptical of AI for consumer applications of the U. S.

government. Has you ve got to make sure I doesn't say the wrong thing about chairman SHE. For example, in any way, the consumer internet in china had a really bad five years since the tech crackdown.

And so you're willingness to invest billions or tens of millions of dollars in a cutting as bluster. I think if this can be lower in china as a result of that. And we haven't seen the state step in to fill that gap to the degree that would be necessary to make up for the private sector limited investment relative to the U.

S. And so it's not just that china doesn't have high and ships is also that china doesn't appear to be building clusters of the scale of the U. S, I think for its own internal political economy reasons, that is also a key dynamic.

Is that also concerned from a national security standpoint that large data clusters will be a target. IT was suvoroff ing that mean circulating on the internet about bombing the data centers?

No, I would think if I were devising china's now security strategy, I would be much more worried about not having a large cluster. And I would be worried about the large cluster being target just because IT seems like we know that large clusters are pretty critical of the building next generation AI systems because of .

economies of scale.

economies of scale. That's right. That's right. And china seems have concluded that, that's not how it's going to deploy the capital, which is a very big difference from the us.

strategy. Do you expect that pulsate change?

I'm surprised that it's now been two years since chat P. T. It's been two years since all the big us.

Tag firms of pushing restriction. And we haven't seen this move in china yet, so I don't know what would make a change. now. IT hasn't been happening last two years.

so I hit brian janes on the podcast sometime over the summer. Can't quite remember when maybe was the spring talking about the increased energy demand usage, reformatting the grid, expanding the grid, getting more energy to these data centres. And part of that also included discussion about amazon's recent purchase of a nuclear power generating facility to power one of its data centers.

I think I song use that the U. S. Government has temporarily suspended that deal, or put the go back on that, whatever tell me, want to use.

What do we know about that and how big of an impediment or regulations when IT comes to sourcing energy in the U. S. For data centers versus china?

So I think that that is a he issue. I saw the same amazon, the headlines, I don't know if they're repealing of those rules are not on an expert in that every regulation. But I also saw my soccer bird talking about how a species of bees and the in dangerous species act was slowing one of facebooks efforts to build to deploy nuclear for dating centers as well.

I think that does speak to the regulatory burdens, you know, I think in china, on the one hand, one might assume that because of an authority in government, because they've got a long track record, for example, of bulldozing housing to build new apartment blocks, there is no property rights protection anywhere. News, people in the U. S.

That you'd be able to build lot more power. I'm not sure that that's true though because that assumes you've got political backing for building big data centers, which doesn't really appear to be the case given how it's not a regular topic of shaping speeches and how they're not building nearly is bigger a centers as right now. So unless the party Operate gets behind data centers and therefore, m energy provision for data centers as a really core priority, I think it's possible that china faces the same regulatory road blocks as A U. S. Providers do because there's a lack of political support.

What about the build out of nuclear facilities? We've seen a harmony like at least one hundred nuclear power pants commissioned in china. Maybe you of the numbers, you can tell me.

So is that an important vantage even when taking into account the U. S. Is natural gas in oil production capabilities and also doesn't suggest that we will inevitably see a change in policy towards nuclear in the united states.

You know, I I think on china's nuclear build out is happening to some degree. The extent to which the announcements actually translate into new nuclear plans is, I think, somewhat open to question. Just like in in the us, no one actually wants a nuclear plant next door.

At least a new nuclear plant that's true in the U. S. Is also true in china.

And so I think we should be have some skepticism that the number of a nuclear announcements that we've seen in china all translate into new nuclear plants. China, a lot, plenty call to. And so if you don't have nuclear, you can easily powered all the data centres.

You want vehicle. There's no intermittency problems. I think IT really is the the question of can you get the power plants built next to the data centers with the grid or connect? That's the real chAllenge, probably both in china and in the us. My guess with the us is that nuclear plays a role, but it's actually a pretty small role because the time horizons for nuclear are long, time prizes for natural gas are short. And I think we are going to see more gash used to power data centers, even if that comes up the expense of carbon neutrality of goals.

So i'm glad ask you know about the the sanctions in the loops. But before I do, do you ever sort of listen to yourself in these conversations or listen other people who are having conversations about this problem? And what do yourself? How did we go so fast from having this minded that global warming is the exception throw of humanity? How do we burn more coal?

How we build more nuclear facilities? How more energy online isn't interesting? How this conversation change so rapidly after twenty two?

Yeah, yeah. You know, I think that, I think that's right. I guess it's combination of energy Prices rising and filtering the politics pretty much everywhere.

Plus I think the trade ffs, have become starker. It's one thing to say I think we're just gonna change our auto fully. Ly, that's hard enough.

But to say we're also going to potentially slow progress in A I heightens the trains that are involved. And so that, that does explain that why the politics have shifted and is interest to watch the big tech firms in the U. S. They've got really ambitious Green power. And the companion ation targets are are going to get a harder and harder.

I think, to meet one of the book. I have my library where back there, but it's met Simons twilight in the desert. And that was, of course, the time when we thought we were at p oil and oil pressure.

We're going on a sky rock. We're going run an energy. And just another example of why people should be humble about what the future holds because what you think is certain can change just like that no matter a few years. So let's talk about this, the export controls and the chip restrictions where they working well right now.

I think they're working well when IT comes to certain types of tools that are illegal to transfer to china. The best example, ephod, phy tools, you can transfer to ina. There is really no way to smuggle them.

There is no evidence that these have been broken at all. There's a blanket of ban on unship mr. To china. So it's super clear these are huge tools, hard to smuggle, no circumvention. They're working less well on the chip making tool side where you can sell tools to certain factories but not other factories.

And then the question comes where which types of chips have been producing, which type of factory? And the reality is that chinese firms have got a lot more scope to obvious ate that question. Then we have ability to enforce.

And indeed, there has been some really fantastic research that some of my colleagues have done showing how there's two fabs next each other. One is supposedly producing less advanced ships. There are supposedly producing more advanced ships.

You can sell certain tools to one that you can sell to the other. And there are wafer bridges. So an erie tunnel from one to the other where you can transit a silicon way for between them and were asked to believe that only.

Restricted, not advances, wafers are transfering between them. This is almost certainly evidence of the tools being used in a fashion that illegal. And I think the U. S. Government has written the rules and a way that makes that type of investigation too easy.

And I I wouldn't be surprised if that changes in the next round of export controls, or at least of those rules get tightened up in a way to make that much harder. I think the third area of controls, which is the the controls on GPU themselves, I think those have been effective in the sense that china's struggling to access to the G P S. That IT needs at scale, but obviously in effective in the sense that there are still a whole lot of smuggling .

around them yeah so I think the the case are describing involved S M I C and either an affiliate company or a sary company where they had a way for the bridge connect between them. In other cases, they are also using shell companies to purchase the equipment and then actually use IT. And the restricted in the case where they supposed be restricted from using IT.

So that's one of them. This example of a way for bridge. What are some of the other examples of how china is Evans? These sanctions are these extra controls and which I just follow, the category sanctions and why have the loopholes remained unclosed?

I think the other big example from recent headlines is using shell companies to produce at T S M C A, which on on the one hand is an admission of extraordinary weakness. You're going to get around the restrictions by going to taiwan to produce the chips for you. That is the best piece of evidence that you don't have a capacity unit at home.

But on other hand is that we see a hugely poll if you can get the most advanced production capabilities in the world at T M C. Y. I think there are three reasons why we haven't seen all these loopholes been closed.

So one is, is just administration of capacity. IT does take time for the government earn that these loops holes exist probably longer than IT should. But IT takes time and then wants the desire to close the loopholes becomes consensus in the government.

Then you have to undertake a really long process of negotiation about when it's okay to issue the extra to export controls. And so we had one package export controls in october twenty two, a second package in october twenty twenty three, IT wasn't that nothing new was learned in that year. IT was that the decision was made will do one round of updates a year.

And so there were six or nine months in which several loops were left open because you didn't have a consensus about when the issue latest controls october twenty twenty four has passed. And I think because of the election, there is a new round of controls that will probably drop at some point this month. And again, that will close loops that everyone knows exist but couldn't be closed for six reasons.

And that's one explanation. Why a second explanation is that you your loops could be my market access. And for the equipment firms, A S mills and applied those in lam research, they have been very public in advocating their market be kept open in spars that are deemed to not have national security importance.

And that line is, of course, vae and debate. And it's certainly case those companies now often have half the revenue going from china. And so closing loops means also closing off the revenue.

We've been politically fluently al voices japan and in the netherlands. And the third reason is that the U. S.

Is genuinely afraid of chinese retaliation, and the chinese signal materials, for example, gallium, germanium, an red earths and others, will be, may focus retaliation. And I think the U. S.

Wants to find the right time to issue these controls as so that is, either minimizes the risk of chinese retaliation or gives the U. S. Time to prepare for the retailer, err, steps that beijing might take.

One of the parallels that comes to mind when IT comes to these firms being so interconnected with the chinese market that losing market access becomes in itself for a reason to not tighten the controls.

An analogy gy to that is the cybersecurity market and the fact that the nsa often times will not inform american companies of vulnerability that exists their software, because those vulnerabilities can actually be used to exploit the foreign systems and access to foreign government. So the point is that we live in a deeply interconnected world, and in that sense, and more interconnected than prior world, world one. And in that sense, the threat landscape.

And what a global war. This is something that I spoken to quite a number people about is IT seems that if we were to find ourselves in the world or three situation, Chris, that IT would be something more total, a more total war. In a way, we really never could have concept ze before thrown into that dual use technology that makes things even more complicated.

So i'm going to move to the second hour. I want to talk about this, the commercial knock on effects on companies because one of the concerns has been that by losing market share, these companies, like A S M L, for example, applied materials, lose revenue. That revenue then has a canti zing effect on capex, and they are ability to innovate and stay ahead of the curve.

And so we end up doing more damage if we don't combine those. Export controls are a potential tariffs with industrial policy that supports these companies. I also want to talk about the risk escalates because that's very real and perhaps becomes more real under a prompt administration.

And then we'll a chance talk about the chips act, the allocation of funds. Two companies building out domestic facilitation states will have the chance talk about the S, M, C. And their arizona fabrication facility.

They also made some recent claims about yield that i'm a bit suspicious about. I want to ask you about. We're going to do we move all of that to the second hour. Chris, friday, one who is new to the podcast hidden forces is listener supported. We don't accept advertisers or commercial sponsors.

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