USA vs China – Wrong Villain pt. III

Compared to Xi, Trump is a pushover.

• The White House will allow Nvidia to sell its H200 chips into China, but the 25% tariff represents a disincentive to sell chips to China, especially when demand is so high that Nvidia can sell everything it can make with no tariffs.
• Furthermore, the real hurdle to Nvidia restarting sales remains President Xi, whose policy remains that technological independence is more important than economics.
• The H200 chip is far more capable than the H20 that Nvidia was previously licensed to sell, but it is already two (soon to be three) generations behind the cutting edge that everyone else is buying.
• Furthermore, Blackwell represented an unusually large jump in performance, meaning that while the H200 will be an advance on where China is today, it will still be meaningfully behind where the leading edge currently is.
• The idea that China will not develop cutting-edge algorithms has long since been debunked, as DeepSeek and now Alibaba et al are proving on a regular basis.
• Furthermore, Chinese models are now considered to be the best and cheapest open-source models available, meaning that many start-ups are basing their services on them.
• This doesn’t mean that everyone is developing their services in China, but it does mean that they are downloading the models, fine-tuning them and then running them on their own or other Western infrastructure.
• Hence, it is clear that China is perfectly capable of developing leading models even when they are using older silicon or their own homegrown variants.
• In the most recent policy statement, the priority of the Chinese state is to obtain technological independence to avoid a repeat of the huge problems it has had in semiconductor manufacturing.
• This is why the Cyberspace Administration of China (CAC) recently instructed the model makers to stop testing on Nvidia and AMD silicon and to only use homegrown variants.
• There are a number of these, but they all suffer from the same problem, which is that they are all using the N+2 7nm process first developed, then abandoned by TSMC and picked up by Huawei.
• This technique allows a 7nm chip to be made with older semiconductor equipment, but the process has more steps and results in a much lower yield than if one were to use advanced manufacturing techniques and equipment.
• The net result is that Chinese AI chips are much more expensive to make and result in devices that are larger, more expensive and consume more power.
• Nowhere is this more evident than in Huawei’s SuperPod system, which I have estimated is 32x less efficient than Nvidia for the same amount of compute produced (see here).
• This means that in practice, while China can compete on the performance of its models, it is and will be, for the foreseeable future, unable to compete on economics.
• This means that in all markets that it cannot control, Chinese AI technology will be unable to compete, meaning that no rational person would choose it over its Western equivalent.
• This is a new state of affairs, as historically, Chinese versions have always been cheaper, and I think it will greatly alter the competitive dynamic outside of China.
• However, the policy of the Chinese state at the moment is to achieve technological independence and should the Chinese discover the secret of super-intelligent machines, there will be nothing that anyone can do to stop them.
• Until the CCP changes its policy and is willing to allow technological dependence back into its supply chain, I think that Nvidia and AMD will remain frozen out of the Chinese market.
• I do not see this happening anytime soon, and as a result, I think Nvidia will continue to have no AI sales in China, which I don’t think matters very much in the long term.
• This is because I continue to think that whatever Nvidia and AMD lose in China, they will more than make up elsewhere due to the Chinese offerings being uncompetitive.
• This is why I think that China is behind, and that there is little scope for it to catch up, given that it has no access to cutting-edge hardware.
• This will be crucial to the ideological struggle that is being played out between China and the West, and at the moment, I continue to think it is the West that has the advantage.