AI Diffusion Rule Could Present Host of Enforcement, Compliance Challenges, Researchers Say
The Bureau of Industry and Security’s recent semiconductor-related export controls could place large burdens not only on exporters but also on BIS enforcement, which will face a host of challenges trying to track whether certain countries have filled their allocated chip quotas, researchers said.
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The BIS artificial intelligence diffusion rule, published in January, will set limits on the amount of certain advanced chips that can be bought by nations in Tier 2, the middle-ground category of countries that don’t benefit from Tier 1 nations’ mostly unrestricted access to chips exports (see 2501130026). Tier 2 companies looking to exceed their quota must partner with a Tier 1 validated end-user or apply to BIS for their own National Validated End-User license, the Center for Strategic and International Studies said in a new report, “both of which come with significant oversight and security requirements.”
If they don’t take either path, CSIS said, questions remain about how BIS will make sure Tier 2 companies comply with the rule’s quota restrictions. BIS is likely to be forced to “heavily” rely on self-reporting from ultimate consignees for information about the “available compute quota” for any given transaction, said the report, authored by Fang-Wei Lin, a former lawyer with TSMC, and Barath Harithas, a CSIS senior fellow.
They said it’s unclear if the agency will be able to catch “potential misrepresentations of data” by the consignee if BIS isn’t tracking that data on its own, or whether BIS will expect exporters to obtain some type of certification from the ultimate consignee.
And although the BIS rule also restricts in-country transfers of the advanced chips, CSIS said it’s unclear how BIS will make sure the stated consignee is actually the ultimate consignee. “Do exporters have any due diligence duty except for obtaining the certification from the ultimate consignee?” it said.
BIS may run into challenges, for example, if an ultimate consignee with no remaining quota tries to buy advanced chips by using another company with an available quota, CSIS said. “Exporters generally do not have visibility as to whether their customer consignee transfers their chips again” after its sold.
It’s also unclear whether and how BIS will maintain up-to-date records of the current available quotas for each specific Tier 2 nation, CSIS said, adding that the uncertainty will also create challenges for companies. “Without up-to-date records, businesses face significant challenges in planning ahead,” it said.
The think tank said this uncertainty is likely to cause exporters to send export applications to BIS earlier in the transaction, including possibly before a purchase order is finalized, “simply to secure a spot within the allocated quota.” But what if the remaining country quota changes before BIS has a chance to process the application? And what if, CSIS said, multiple companies submit applications to BIS simultaneously for exports to the same Tier 2 country, and the quota isn’t large enough for each of the companies’ exports?
“How will the BIS determine allocation? How can it ensure fairness among all applicants?” CSIS said. “Such decisions would unavoidably profoundly impact market competition, causing long-term repercussions for industry.”
The report also examines challenges data centers could face in applying to BIS to become a National Validated End-User, which would allow them to “secure access to large quantities of advanced chips required for training advanced AI models,” CSIS said, although “at a considerable cost.” Those data centers must go through an intense application process, which will include proving they can comply with strict U.S. cybersecurity, transit security and export control standards.
“If the overall assessment suggests aligning more closely with U.S. rather than Chinese technology,” CSIS said, “pursuing NVEU authorization is likely the most strategic choice.”
The researchers said BIS could improve its ability to enforce the new chip restrictions with better monitoring tools, enforcement agents and technologies, but they also said export controls will always be “reactive rather than proactive.” The U.S. needs to “focus just as much on outpacing China technologically as it does on restricting its access,” they said, adding that export controls only work as long as the U.S. maintains a technological lead over its adversaries.
“Should this technological advantage erode, the efficacy of the export control regime would likewise diminish,” CSIS said. “Therefore, safeguarding U.S. leadership in technology should take precedence over pursuing the strictest possible export controls.”
This strategy “must be done with allies, not despite them,” the researchers added. “Policies that impose additional costs -- such as semiconductor tariffs on key allied manufacturers as well as reducing the size of markets for U.S. and allied companies -- risk dragging down U.S. AI competitiveness, as well as that of the broader democratic bloc, at the very moment it needs to reach escape velocity.”
The AI diffusion rule takes effect in May, although Trump administration officials are expected to push for changes (see 2503190021 and 2503200002).