Years ago, when I was a baby lawyer living in a group house in DC, we had a toaster—my toaster. I had owned the toaster since college and it was showing its age. Eventually, you had to hold down the thing[1] to keep the bread lowered in the slots and toasting. But the appliance still heated bread and produced toast. One morning, I became so frustrated with that toaster and the thing-holding-down effort that I threw the toaster out, fully intending to get a new toaster.
The following day, my housemate, we’ll call him Mike,[2] raised an important series of questions:
Mike: Did you throw away the toaster?
Me: Yes. I was frustrated that it did not work right.
Mike: Did you get a new toaster?
Me: No, but I will soon.
Mike: Did our old toaster make toast?
Me: [pause] Ah . . . well, I mean, umm, yes. I see your point.
Anyhow, on a possibly related note, on May 14, 2025, BIS that it will rescind the AI Diffusion Rule and that, until the time of the official recission, would not enforce the Biden-era regulation.
Stop-Gap Stopped
Reading the BIS announcements, it appears that, once the AI Diffusion Rule is officially rescinded, there will not be any U.S. export control that restricts the provision of cloud computing through Infrastructure as a Service (IaaS). While the export of the certain ICs will still be controlled, ICs already owned or lawfully obtained could be put to any purpose, such as providing IaaS services for the development of AI in China.
If we return to October 2023, we see a comment made regarding the 2022 semiconductor regulations, highlighting that those rules, as then written, “may give China computational access to their equivalent ‘supercomputers’ via an IaaS arrangement.” (88 Fed. Reg. 73467). BIS acknowledged that the semiconductor regulations did not then cover IaaS, when it recognized that it was “concerned regarding the potential for China to use IaaS solutions to undermine the effectiveness of the October 7 IFR controls and [BIS] continues to evaluate how it may approach this through a regulatory response.” A plain reading of that statement indicates that the semiconductor regulations were not meant to (or could not be read to) cover IaaS.
However, the 2025 AI Diffusion Rule attempted to cover to that regulatory loophole and prohibit IaaS access for Chinese AI development. The Rule created ECCN 4E091 to cover certain AI models and then created a presumption that certain IaaS services would result in an unauthorized export of those 4E091 AI models. Effectively, that presumption created a restriction on cloud service providers to be able to provide certain IaaS services to entities in the PRC. With the recission of the AI Diffusion Rule, it appears that the loophole has been reopened.
Guidance Through and Inter-Rule Interim
In tandem with the rescission of the AI Diffusion Rule, BIS also issued three guidance documents that (1) put companies on notice that the Huawei Ascend 910 series chips are presumptively subject to General Prohibition 10[3], (2) provides guidance on due diligence that companies can conduct to prevent diversion of controlled ICs, and (3) reiterates existing controls that put restrictions on certain end-users and end-uses.
Those three guidance documents give the impression of a certain tension in the rulemaking process and they provide some hints as to be in store for the replacement AI rule:
On one hand, the new administration rescinded the AI Diffusion Rule in line with, if not in response to, calls from U.S. AI-related industry. The administration also recognized that there may have been flaws with the AI Diffusion Rule. For instance, the tiered approach to limiting and restricting exports of controlled ICs exclude many countries that are friendly to the U.S.—such as Iceland, Israel, and much of the EU and Eastern Europe. The AI Diffusion Rule did not put those U.S.-aligned countries on a tier in which they could freely acquire U.S. AI-supporting chips and, additionally, did not present a clear path for how those countries could move into the more favored tier.
As an alternative to the tiered approach researchers have suggested the idea of a country-by-country approach. That approach appears to be consistent with the administration’s recent trip to the Middle East, where it is reported that agreements with Saudi Arabia and the UAE have been negotiated to purchase U.S. producers’ GPUs (notwithstanding the fact that, under current regulations, those countries face restrictions on the purchase of certain advance semiconductors because of diversion risk).
While major semiconductor manufacturers have been the face of the recission effort, other major AI infrastructure players have been lobbying the administration to have the rule rescinded. Those companies had established or were working on data center projects in countries like Malaysia, Brazil, or India that were affected by the AI Diffusion Rule, particularly in how it limited compute capacity in those countries and restricted the use of the data centers.
On the other hand, with the AI Diffusion Rule scrapped, and no replacement ready, we suspect that officials at Commerce could be concerned about the re-opening of the IaaS loophole. The guidance documents appear to attempt to try to cover the gap left by the recission of the AI Diffusion Rule. In those guidance documents, BIS explains a policy whereby sellers of controlled ICs would need to conduct additional due diligence of IaaS providers when red flags are present. That approach stands in contrast to the AI Diffusion Rule, which put some diligence requirement on the service providers. In that we see a significant clue that a new replacement rule will likely find some way to restrict IaaS providers, but balance the interests of U.S. chip manufacturers and AI hyperscalers.
The guidance also announced the Huawei Ascend 910-series chips were presumptively a foreign direct product and subject to the EAR, presumptively violative of the EAR, and ultimately subject to General Prohibit 10. Ostensibly, that guidance could have a chilling effect on the purchase of Huawei chips, particularly in countries that wish to align with U.S. policy, and would help U.S. semiconductor manufacturers regain any ground lost to Huawei in those markets.
Striking a Balance in the New AI Rule
Looking to the future, the yet-to-be-seen replacement rule is going to have to balance the competing interests of a U.S. semiconductor and AI industry that want to expand freely and globally, and the national security concerns of those in government who would want restrict access to advanced semiconductors and AI technology by countries of concern.
For example, U.S. chipmakers will want to continue selling their leading edge GPUs to data centers in Malaysia and India. At the same time, U.S. export policy hawks would want to mitigate the risk putting immense compute power proximate to, and potentially at the disposal of, PRC AI developers. Additionally, cloud service providers in Southeast Asia will want to be able to sell their services to the largest customer in the region, and would consider using Huawei chips over U.S. alternatives if it meant they could do so. That may mean that BIS cannot put too many restrictions on the region before the chipmakers and hyperscalers begin to voice objections and press to reduce the regulation.
Now that we have thrown away the toaster, selecting a new one—writing a new AI diffusion regulation—will require regulators to walk a narrow line to satisfy the interests of both industry and national security. Those interests are not necessarily opposed to one another, but their interests may be divergent, and it will be up to drafters to find a potentially very narrow common ground.
FOOTNOTES
[1] You know. The thing. It’s a technical term in the appliance repair world.
[2] Because that was his name. In fact, it still is.
[3] General Prohibit 10—or GP10 as it is affectionately known around the Sheppard Mullin offices—is a comprehensive prohibition on essentially doing anything with an item, including destroying or moving the item, if has caused a violation or will cause a violation of the EAR.