The Big Gulf AI Deal That's Divided the White House

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1:48Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. It was a few weeks ago, but last month Trump was in Saudi Arabia. He was in the Middle East and he sold a bunch of chips. Yeah, I think the chips announcement was kind of overshadowed by some of the pomp and ceremony around that visit. Did you see the famous hair flipping? No. Oh, you didn't see that? What was that? So you need to look this up. So when Trump arrived in the UAE, part of his big, you know, the greeting and the red carpet getting rolled out for him was a bunch of Emirati women doing a hair flipping dance.

2:25I got to say, I wish I could flip my hair like that, but sadly, I cannot. Can I say, like, Trump seems very at home in the Gulf states. You know what I'm saying? Like, it feels like setting aside many other things that there is like a similar sense of aesthetics. I was about to say, I think he's very comfortable in those countries. I was about to say his taste in interior decorating is exactly the same as what you see in palaces and hotels in Saudi Arabia and places like that. Absolutely. No, I think just the whole vibe is like he's on home territory. But I think the AI stuff is really interesting, obviously, for a lot of reasons.

3:04The U.S. wants to sell more things. One of the things that we can sell in various flavors is AI technology. But there is this weird like, I don't know what the word, cross currents or whatever, which is that we want to sell more stuff. And yet we also don't want our stuff to be in the hands of perceived geopolitical rivals. And so we cut off our own sales. China is obviously the most salient example here. But it sort of makes this interesting tension when we think of the role of AI sales, tech sales in sort of international relations and diplomacy. Yeah. Well, I also find this interesting from the UAE slash Abu Dhabi side of things, right?

3:40Because the UAE, it's strategically aligned with the U.S. in many ways, but it's very commercially aligned with China. And, you know, you have a lot of Chinese commerce coming through the ports and things like that. So I'm very curious what they see in this deal and how they're navigating those two sides as well. Well, I'm very excited. We have the perfect guest, one of our colleagues we've had on the podcast before. We're going to be speaking with Mackenzie Hawkins, tech and geopolitics reporter at Bloomberg News. She's now based in Hong Kong, sadly for us, but thankfully she's staying up late for this recording.

4:16Mackenzie, thank you so much for coming back on OddLots. Thanks so much for having me. First of all, why don't you just give us the specific details, the salient details, as you understand them, in terms of this big AI deal that Trump announced when he did his golf tour? so in the four day span or so that trump was in the middle east you saw american tech companies and companies in gulf nations announce hundreds of billions of dollars worth of ai deals specifically many of them focused on ai infrastructure building out the data centers that house ai chips that are used to train and deploy large language models and that involved one of the biggest data centers potentially in the world, a project anchored by the Abu Dhabi AI firm G42 with key participation from Oracle, from OpenAI, from NVIDIA, huge volumes of NVIDIA chip sales going to both the UAE and Saudi Arabia, as well as sales from NVIDIA's rival, Advanced Micro Devices.

5:20And all told, we sort of ended the week, and the deals announcements actually continued into the following week, we ended this trip going from a world where the two main players with significant AI data center capacity, the US, of course, and then China also has major ambitions. And still, even if all of these deals fall through as expected, which is an if, the US will maintain the vast majority of the world's computational power. But we have two new serious players in the UAE and in Saudi Arabia. One thing I know from living in Abu Dhabi for a couple of years is that Abu Dhabi loves building a giant campus with some sort of foreign partner.

6:01Like that is always happening and seems to be happening more and more. But OK, so from the U.S. side, you know, the U.S. wants to be a powerful player in AI and everything that comes with it, chips, data centers, etc. And they want to sell that technology to other countries. What's the issue with the deal? Why is it controversial? So there are a couple of sort of categories of disagreement in Washington, if you will. The first is a basic economic competitiveness argument. You had people, especially on the Democratic side of the aisle, saying, you know, why are we building a data center in Abu Dhabi when we could be doing that in Ohio or in Pennsylvania?

6:39The response from people who are in favor of these deals is we are building data centers in the U.S. Trump is trying to cut red tape to facilitate data center deals across the country. And the UAE accord in particular, because there's now a bilateral arrangement between American and Amradi officials, includes this reciprocal investment portion where, you know, for the amount that U.S. companies are investing in the Gulf nation, we'll get a reciprocal amount on American soil. But there are still some people who say, why wouldn't we do all of this on U.S. soil for as long as possible? Then there's the China question.

7:13And that has been the sort of central debate in the development of U.S. global export controls on semiconductor chips that really ramped up during the Biden administration. And now the Trump administration has taken a very different tack where the question is not, you know, will we ever sell chips to markets in the Middle East or in Southeast Asia? But what is the risk that those chips could ultimately benefit China, either by Chinese AI companies remotely accessing data centers in third countries to train AI models from the physical hardware being actually diverted and transshipped to China or from those countries taking American hardware and AI know-how and then making technically separate but kind of related investments in Chinese tech?

8:01And so that's the rub. And the question is, what conditions is the U.S. going to put on these deals to ensure that you're safeguarding American technology and know-how and ensuring that in diffusing the technology around the world, you're not inadvertently benefiting a U.S. adversary? Real quick, specific question. Are there stipulations in the deal that, setting aside the implementation of it, that are designed to create safeguards or checkpoints such that the chips that go to the Gulf aren't then trans-shipped to Chinese data centers? Do they have some ostensible mechanism for avoiding that?

8:36Yes. The U.S. government has a small handful of export control officers that operate globally. And by small, I mean like very low double digits that go in and like check physical facilities and see, OK, are the chips still here? They talk to the data center operators and such. The Trump administration has asked for more funding for the agency that executes those controls. And there are high level provisions in this bilateral arrangement between the U.S. and the UAE about preventing diversion to China. There are also high-level provisions about restricting China's remote access to facilities and around inbound and outbound investment from China reciprocated with the Gulf nations in question.

9:20Those are high-level arrangements. And the big company deals were announced when the security arrangements remained at a fairly high level. And so there are some folks in Washington who are concerned that the U.S. didn't hammer out all of the specifics, dot every I, cross every T, before announcing these deals and touting them as major wins for American economic competitiveness and national security.

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11:39Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. So it seems like when we talk about the U.S.-China AI rivalry, there's two potential dimensions, which is one is there's this sort of anxiety like China going to achieve AGI first or is it going to race ahead of, you know, are their labs going to be better than our labs, etc.

12:19But then there seems to be this other one. And actually, like David Sachs, the all-in podcast host, but also Trump's AI czar, seems to have a slightly different spin on the question, which is just like, no, like we really should just want as much U.S. tech currently diffused out in the world that the dominance of the CUDA ecosystem and NVIDIA, et cetera, is what we should really care about, and that we're shooting ourselves in the foot if we get too nervous about where our chips are going in the world. David Sachs basically defined winning in the AI race as capturing the vast majority of the global market for AI hardware.

12:52And of course, the U.S. ability to do that is a function of NVIDIA's dominance and U.S. restrictions that have been levied for years on China's semiconductor industry and its ability to build a chipmaking prowess. So we've seen actually a couple of estimates recently of what China's semiconductor landscape looks like. You had Commerce Secretary Howard Lutnick tell the Senate Appropriations Committee last week, he was asked by a senator, said, oh, I think I've read that China can make less than 400 ,000 advanced chips a year. And Lutnick said, actually, no, they say they're making them and they're not.

13:24it's probably closer to 200 ,000. He didn't define what chips he was talking about. Advanced chips could include mobile processors, for example, in addition to AI chips. But for the sake of discussion, let's say it's Huawei's Ascend AI chips, which are the best domestic model in China. That number is really far short of China's domestic demand, which the market research firm Tech Insights put at around 1.5 million AI accelerators in 2024, compared to what Ludnik says is 200 ,000 that China can domestically produce. There's another estimate out there from the research firm Semi-Analysis that says China can produce around 380 ,000 of its most advanced AI chips domestically, and that will reach multiple millions next year.

14:12Now, in addition to China's domestic chip making capacity, there is also a significant infusion that Huawei got from ordering a reported 2.9 million chips from TSMC, the global leader in actual chip manufacturing, through an intermediary that has since been sanctioned by the US government. And that's not an insignificant one-time infusion into China's stockpile. Now, the Biden administration released a rule in their final week in office, increasing due diligence requirements for foundries, which are the companies that actually make chips designed by others. And TSMC hasn't commented publicly on the 2.9 million number, but they said that they're cooperating with a US investigation into the matter.

14:56So the question for the US is not, will China ever develop good chips that can compete on a global scale? I don't think that policymakers from the Biden administration to the Trump administration have any reservations really about thinking, of course, China's a serious competitive technological player. It's about when that could happen and when that could happen in a way that would allow China to export in significant quantities to foreign markets. So there's this really interesting example that happened a couple of weeks ago, where the deputy communications minister in Malaysia, in a speech that was picked up in local media said, we have this new national AI system that's powered by 3 ,000 Huawei Ascent chips.

15:45Now, 3 ,000 chips is like a super small number of chips. It's a fraction of what's needed for a midsize data center. But it was the first known example, or at least one of the first known examples, at least the first that I attract, of an international deployment from China. And so there was this big reaction in DC of like, oh my god, it's happening. David Sachs tweeted, as I've been warning, the full Chinese stack is here. We rescinded the Biden diffusion rule just in time. That's a reference to global semiconductor controls that the Biden administration imposed on pretty much the entire world in their last week in office.

16:21And David Sachs finished, the American AI stack needs to be unleashed to compete. So I was super interested in this. My colleagues in Kuala Lumpur was super interested in this. And so we called the Malaysian Communications Ministry. We said, hey, can we get some more information about this project? And they said, oh, we're retracting the Huawei part of that speech. Now, important context for this is that it came a couple of days after the U.S. Commerce Department had issued guidance saying that it considers the use of Huawei's Ascend chips anywhere in the world to be a violation of U.S. export controls.

16:56Now, they've since removed that anywhere in the world line. It's like this whole thing and the ongoing US-China trade negotiations, but that's an important piece of understanding Malaysia's reaction here. So we published a story that was basically like Malaysia's distancing itself from this Huawei project. And the response that David Sachs had to that after on Twitter was, that's not a lot of chips, but it does show China's intent to export the Huawei plus DeepSeq stack. Deep Seek was also part of Malaysia's approach. And it's a harbinger of what's to come. Now, Malaysia is like, we're going to assert our sovereignty.

17:37We get to decide which technology we want to use. But it was really interesting to watch the reaction to this play out in D.C. because on the one hand, some people treat it as evidence that the threat they've been warning about is here. And the U.S. therefore needs to be super aggressive about exporting NVIDIA chips as quickly and as widely and in as large quantities as possible. And there are some people who read it as this is propaganda. This is Huawei trying to demonstrate that it can export internationally when really it can't even meet domestic demand. Now, last thing I'll say here before I turn it back over to you guys is there was a really interesting interview with Huawei's founder in People's Daily, the official newspaper of the Chinese Communist Party, just, I guess, today in Hong Kong, yesterday in D.C., depending what time zone you're in, where he said Huawei is actually still behind the U.S.

18:32U.S. is overestimating our capabilities, but we're making progress. Now, Huawei is still constrained in large part due to U.S. restrictions on semiconductor manufacturing equipment. Hmm. Since you brought up the global export controls on chips, it seems to me like there's a fundamental tension here where if you want to export U.S. technology, you kind of have to accept that some of the risk is that it's going to leak into parts of the world where, you know, you might not want it to be. So China. And when I imagine, you know, if the U.S. says it wants to release its tech stack globally. Sorry, I have an image in my mind.

19:11It's like release the hounds, release the tech stack. If they want to do that, it seems like I guess they either have to fine tune the export controls or harden them up. And I'm not entirely sure how they would do that, given that we already have the experience of the Biden administration's export controls. Like what what levers can they actually pull here to ensure that American technology goes global, but at the same time, it doesn't go global in a way that we don't want it to? It's a really challenging question. I mean, that's why you saw the Biden administration essentially pause large scale NVIDIA and AMD AI chip shipments for the better part of a year.

19:53You know, the U.S. restrictions, the like real U.S. restrictions on AI chips started in October 2022, a date that anybody in the Chinese tech industry would remember when the U.S. said, all right, no more NVIDIA exports to China without a license at the highest end of NVIDIA technology. That's a month before ChatGPT launched. And if you think about what's happened in the, you know, nearly three years since then, there's this massive interest from countries all over the world in developing what's, you know, people in the industry call sovereign AI. Basically, the idea that as a nation, you have the hardware and software infrastructure to develop, train, deploy your own AI models.

20:33And the Gulf is a really interesting first case study of a really organized ambition to make that happen. But there are countries all over the world that want that. NVIDIA CEO Jensen Wong has been talking about that for a very long time. I mean, Sam Altman has been going to the Middle East looking for funding for U.S. infrastructure projects, of course, setting up what became this five gigawatt data center in Abu Dhabi. And the Biden administration, after they restricted shipments to China in 2022, followed up a year later, expanding the restrictions not just on the technology that can go to China, but also the global footprint of the controls.

21:12And they added around 40 countries on the basis of the risk of diversion to China. And then about a year after that, in their very final week in office, they released this global framework called the AI diffusion rule that basically split the world into three categories of chip access. In tier one, you had the U.S. and very close partner countries that the Biden administration viewed to have similar export control regimes and capacities to those offered by Washington. In tier three, the bottom, where you have China, Russia, Iran, North Korea, U.S. adversaries that basically just continue to not have effectively access to advanced American tech.

21:53And then you had everybody in the middle, which was most of the world, everybody from treaty allies like Poland to Singapore to Yemen. And the Biden administration's approach was we're going to cap the number of chips that can go to these countries. But a company can apply for a license called a validated end user designation, which is fancy Washington speak for basically, I'll submit to you the security requirements that I'm going to apply for to a data center that I'm going to build an X, Y, and Z place. And in exchange, you're going to make it easier for me to get licenses to ship to that place in the future.

22:36And because I've made all of those security promises, my projects are going to be exempted from the national cap in this place. And the Biden administration's goal was to set that cap at a level that incentivized companies like Microsoft or like Oracle to agree to a bunch of security conditions, apply for licenses, and then, sure, go ahead, build your data centers in the places that you want to, as long as you keep most of your compute capacity in the U.S. and friendly countries and no more than 7 % of your computing capacity in any one country that is in another tier. So it's this immensely complicated regulation, got a lot of blowback from all over the tech industry, although a couple of supporters of some of the provisions.

23:21NVIDIA, while surprise nobody, was one of the strongest opponents. Oracle was also a huge opponent because that cap on putting more than 7 % of your capacity in any one country was a big problem for Oracle's massive plan data center expansion in Malaysia. So you had this big jockeying for position among tech companies and also among countries, some of whom were like, we cannot execute the plans that we want to within the constraints of this cap. Others of whom didn't necessarily have super ambitious data center plans, but were kind of like, what the heck? Like, why are we being put in the same category as this country or this country or this country?

23:59I mean, you had a couple of European Union nations that were put in tier two, but most of them were put in the most preferential tier. And so the EU is like, OK, are we trying to disrupt free trade within the bloc? And that debate sort of carried out all throughout the first couple of months of the Trump administration before the Trump officials decided, all right, we're axing that rule and we're going to work on a replacement. And the deals that we saw happen in the UAE and Saudi Arabia are the best indication that we have so far of what that replacement could look like. And we're shifting from this, you know, big global regulation to a lot of country specific deals that will probably have some commonalities, but will really be negotiated on a bilateral basis.

24:44Absolutely fascinating topic, and you explain it very clearly. Mackenzie Hawkins, thank you so much for coming back on Odd Lots. Thank you so much for staying up late for the recording, and talk to you soon, hopefully. Thanks so much for having me.

25:11I find this story to be extremely fascinating for multiple reasons. I guess one is like, you know, when we think about like export controls or I think about what you sell, you know, you often think like traditionally like defense tech, right? And so it's like, okay, you have to make a deal at the high level before one country can buy jets or whatever from you. But AI is so weird because it's also just this commercial tech that companies are going to use in random chatbots and software as a service applications, et cetera. And yet we still sort of treat it as potentially being defense-like in its implications.

25:47Yeah. It's kind of funny. I'm thinking now imagine like reading one of the stories about um ai and china u.s competition and replacing like chatbots ai with ballistic missiles and like what that language would actually read like but okay two things here so it is true people talk about the race for ai supremacy in these sort of militaristic terms which obviously raises the question of what exactly success looks like in this sphere. And you brought up the point that, you know, some people seem to think it's achieving AGI first, some people like Lutnik, and some people like Sachs seem to think that it's basically taking market share or having dominant market share.

26:30And I don't know, like, it strikes me that there's probably not going to be a moment when the US can declare victory or China can declare victory, but we should at least have some sort of like agreed idea of where we're heading here. And then the second thing I was thinking about is, again, because all of this is constantly couched in militaristic language and basically competition between the world's two biggest economies, you can think of data centers as critical infrastructure, right? Yeah. And so I guess the question is, should we be building more critical infrastructure in a place like the UAE?