How Will Tariffs Impact the AI Industry?

0:00Today on the AI Daily Brief, what the impacts of the tariffs are likely to be on the AI industry. The AI Daily Brief is a daily podcast and video about the most important news and discussions in AI. To join the conversation, follow the Discord link at our show notes.

0:18Hello, friends. Three quick notes before we dive into today's show. First up, as I've been mentioning a couple times, for those of you who are looking for an ad-free version of the AI Daily Brief, you can now head on over to patreon.com slash AI Daily Brief to find that. We'll be doing a lot more stuff over there. For now, the first thing that I was trying to do is just give you an ad-free option if that's meaningful to you. Second, next week is spring break, so we will be doing the parental pilgrimage of chasing our kids around Disney World, which means that we will not be doing normal shows on the AI Daily Brief.

0:46I'm really excited to have a bunch of cool conversations digging deeper on some really important topics around agents, enterprise readiness, vibe coding, things like that that are being prepared for you all. So you will not not have shows, but they will be a little bit different than normal. You can bet that if any crazy news happens, I'll use AI of some kind to get my perspective on it out there. But the plan is of now to not have normal shows next week. Please keep me in your thoughts as we dive into the world of the mouse. Lastly, something I want to gauge people's perspective on. The AI Daily Brief community has been hugely supportive of and important in the super intelligence story.

1:19As we build out the agent and agent services marketplace, we're considering reserving part of our current round for investors from this community. However, I'm trying to gauge interest. If this is something you think we should explore, send me a note at nlw at bsuper.ai with super in the title. Thanks in advance for your perspective. And with that, let's get into today's show, which is a deep dive only, no headlines about the tariffs likely impact on the AI industry. Welcome back to the AI Daily Brief. Right now, the most significant and inescapable force driving markets is, of course, the Trump tariffs and the potential total restructuring of the global economic trading order that they represent.

1:56Today, we are going to look at how they are and how they might impact the AI industry. I sort of think that the impacts are incredibly wide-reaching and incredibly wide-ranging. There are implications for data centers, chip export controls, relationships with China, other key ally relationships that relate to AI. There's going to be impact on AI startups. I think there'll be an acceleration of AI-based job transformation. So let's get into all of it. And let's start with some of the more obvious areas. One of the big glaring issues that hit the headlines earlier this week was around GPU supply.

2:29The administration had provided an exemption in the tariffs for semiconductors, but not for finished GPUs. It's a little unclear whether the carve-outs were intended to allow NVIDIA to bring in their crucial hardware without paying the tariff, but for now, it looks like GPUs just got a whole lot more expensive. NVIDIA is still looking at big price increases any way you slice it. They largely deliver GPUs for AI applications as full server racks which require memory, storage, and dozens of other electronic components. The entire supply chain flows through China. So essentially all of these manufacturers will be caught up in the spiraling escalation of tariffs.

3:03I literally have two podcasts that this is relevant for, and I can't even keep track of the tit-for-tat acceleration that we're seeing between the US and China when it comes to adding more tariffs on. What's more, China has been targeting their retaliation at electronic supply specifically, including export controls being imposed on crucial rare earth minerals. Their latest escalation, at least that I saw, who knows it could have changed in the last 10 minutes, was 84 % tariffs on all U.S. goods, announced just recently to match the 104 % levied by the U.S. You may be thinking to yourself, at that level, the tariffs may as well be a ban on trade, and you wouldn't be all that far off.

3:37Given that even in a world where there weren't tariffs, there were huge GPU shortages, and this key infrastructure was one of the major challenges for AI companies. Having all of the inputs across the entire supply chain be effectively twice as much can't be doing anyone any favors. Beyond the GPU price squeeze, the US is also in the middle of a data center construction boom, a boom that is meant specifically to address some of these issues. The tariffs could add massively to the cost of raw inputs like steel, concrete, and aluminum, and build-out costs could escalate with networking and cooling equipment also being hit with the additional charges.

4:12Matthew Middlestead, a technology policy researcher at the Cato Institute, said,

4:18Aside from construction, the ability to get the gigantic energy supply needed to power the AI revolution could also be in jeopardy. The U.S. imports around a fifth of our solar panels from China and another fifth from countries in Southeast Asia who are all facing heavy tariffs as well. To the extent that renewable energy is being used to power data centers, the cost just went up. The bulk of data center projects are being powered by gas turbines, which are largely sourced from Germany or Japan. These crucial inputs are already in scarce supply, so manufacturers will pass on all the tariff costs to an already expensive piece of equipment.

4:47To give a sense of how tenuous the power supply build-out could be, the administration has reportedly drafted an executive order to expand coal production in order to meet data center demand. Now, outside all of these practical effects, on the opposite side of the trade wall, chip exports are likely to be a difficult task for U.S.-based companies as well. In the first quarter, Chinese firms rushed to order $16 billion worth of NVIDIA chips to get ahead of tariffs. Despite being limited to underpowered chips, China still represents around 13 % of NVIDIA sales, or even more if you're skeptical about demand out of Singapore or other countries in Southeast Asia.

5:19NVIDIA might be able to cut the U.S. out of their logistics and deliver directly, but the company would then risk being demonized by the administration for working around the tariffs. NVIDIA has high margins, so can arguably afford to absorb the additional costs, but the strategically important company is increasingly a political football in the competition between the US and China and could be uncomfortably forced to pick sides. There's also something broader going on here as well. Up until now, despite the rhetoric, thriving open-source communities in both China and the US have been building on each other's work, accelerating things as that happens.

5:49However, the AI Cold War has been getting colder more recently. We'd already seen reports, for example, of top Chinese-born AI scientists returning home, and things like that are only set to accelerate as tensions rise. What's more, to the extent that one sees the battle between China and the US when it comes to AI supremacy as fundamentally about whose models are used around the world, the US, by effectively isolating itself from everyone, certainly seems to be creating an incentive for other countries to become AI vassal states of China and not us. All right, AI Daily Brief listeners, today I'm excited to tell you about the disruption incubator.

6:22One of the things that our team sees all the time is a lot of frustration from enterprises. There's a fatigue around small incremental solutions, a concern around not thinking big enough, tons of bureaucratic challenges, of course, inside big companies. And frankly, we just hear all the time from CEOs, CTOs, other types of leaders that they want to ship some groundbreaking AI agent or product or feature. In many cases, they even have a pretty well-thought out vision for what this could be. Their teams are just not in an environment conducive to that type of ambition. Well, it turns out our friends at Fractional have experienced the exact same thing.

6:55Fractional are the top AI engineers specializing in transformative AI product development, and to answer this particular challenge, they have, with perhaps a little bit of help from Superintelligent, set up what they're calling the Disruption Incubator for exactly this type of situation. The idea of the Disruption Incubator is to give a small group of your most talented people an overly ambitious mandate, something that might have taken one to two years within their current construct, send them to San Francisco to work with the team at Fractional, and within two to three months, ship something that would have previously been impossible.

7:27The idea here is that you are not just building some powerful new agent or AI feature, but you're actually investing in your AI leadership at the same time. If this is something interesting to you, send us a note at agent at bsuper.ai with the word disruption in the title, and we will get right back to you with more information. Again, that's agent at bsuper.ai with disruption in the subject line. Today's episode is brought to you by Vanta. Vanta is a trust management platform that helps businesses automate security and compliance, enabling them to demonstrate strong security practices and scale.

8:01In today's business landscape, businesses can't just claim security, they have to prove it. Achieving compliance with a framework like SOC 2, ISO 27001, HIPAA, GDPR, etc. is how businesses can demonstrate strong security practices. And we see how much this matters every time we connect enterprises with agent services providers at Superintelligent. Many of these compliance frameworks are simply not negotiable for enterprises. The problem is that navigating security and compliance is time-consuming and complicated. It can take months of work and use up valuable time and resources. Vanta makes it easy and faster by automating compliance across 35-plus frameworks.

8:36It gets you audit-ready in weeks instead of months and saves you up to 85 % of associated costs. In fact, a recent IDC white paper found that Vanta customers achieve$535 ,000 per year in benefits, and the platform pays for itself in just three months. The proof is in the numbers. More than 10 ,000 global companies trust Vanta, including Atlassian, Quora, and more. For a limited time, listeners get$1 ,000 off at vanta.com slash nlw. That's v-a-n-t-a dot com slash nlw for$1 ,000 off. Today's episode is brought to you by Plum. If you're building agentic workflows for clients or colleagues, it's time to take another look at Plum.

9:14Plum is where AI experts create, deploy, manage, and monetize complex automations. With features like one-click updates that reach all your subscribers, user-level variables for personalization, and the ability to protect your prompts and workflow IP, it's the best place to grow your AI automation practice. Serve twice the clients in half the time with Plum. Sign up today at useplum.com. That's U-S-E-P-L-U-M-B dot com forward slash NLW. Indeed, one of the key areas to watch will be how third-party nations react to the fragmentation of foreign relations. During the recent escalation of chip exports, countries like India and Israel were excluded from a list of close allies with open access to U.S.

9:51tech. China, meanwhile, has made it a national priority to make open-source AI as widely and cheaply available as possible. One of the major flashpoints for this potential global reordering is, of course, the Middle East. The Gulf states have been pushing hard to establish themselves as an AI hub, and both geographically and strategically, the region straddles the U.S. and China. Even before any of this tariff stuff happened, Gulf countries were already walking a thin line. Gulf company G42, for example, has been in the spotlight for more than a year now. Microsoft wanted to take a minority stake in the company, and at first there was big consternation about it, which forced G42 to effectively pick sides and pick the U.S., and then ultimately the Commerce Secretary for the Biden administration, Gina Raimondo, was involved in the final deal that came together at the end of last year.

10:34Now, when it comes to the tariffs, Saudi Arabia and the UAE were both included in the basket of countries subjected to the 10 % baseline tariffs. Relative to others, then, we might see them as relatively unscathed. Still, the geopolitical sundering in general could force the region to pick a side, and that doesn't necessarily point back to the US. Another dimension where I think tariffs are going to have a significant impact on the AI industry is in the startups themselves. First of all, let's zoom out to Wall Street. AI has been propping up markets for two and a half years now. The launch of ChatGPT coincided with the beginning of the hiking cycle, and even as markets were tanking with the unwind of Zerp era policies, enthusiasm about AI kept things afloat.

11:13AI's ability to sustain the market, however, has looked more and more shaky over the last three to six months. And certainly it would not be surprising to see all of the volatility around tariffs accelerate the pullback that we're already seeing from tech companies when it comes to data center and general AI infrastructure investment. Now that doesn't just matter for Wall Street, it has downstream effects. Already we're seeing IPO delays, which puts even more pressure on an already beleaguered VC space. Without IPOs and exits, the venture ecosystem doesn't have money to return and reinvest in new startups.

11:43That's both in the case of funds returning to LPs who can then reinvest in other funds, and it's also the case for angels who, without liquidity, have limited means to invest in the next generation of startups. The information took this specific example of Charles Hudson's precursor ventures, who very bluntly described what he was likely to have to do over the next half decade or so. He said that secondaries, basically selling stock of private startups to other investors, will represent 75 to 80 % of the dollars that LPs get back in the next five years. Effectively, Charles is anticipating having to stay in private markets to get liquidity because of the difficulty of the larger exit situation.

12:18I'm already seeing in my conversations with funds, especially funds that are trying to raise new funds right now, LPs are clamming up, which means venture firms are having a harder time raising new funds, which means that everyone is going to be doing more sitting on their hands, which reduces access to capital for all companies in general, inclusive of AI even if it remains the hottest category. One more little piece of evidence around some maybe volatility in the space. Owen McCabe, the CEO of Intercom, tweeted, I've been receiving about one new AI acquisition opportunity in my inbox every day recently.

12:48Today, already I've got two. Not sure what it means, if anything. Jason Fried from 37 Signals writes, me too, and we don't buy companies, never have. And I'm not really an investor either. Could all be BS or signaling the obvious? Almost all these AI-think companies have no path to survival. Now, it is a longer conversation around how much this represents the natural consolidation of the AI industry a couple years after the post-ChatGPT boom, or whether this is a leading indicator of troubled waters. Now, even outside everything with tariffs, AI was already adding some weird complication to the VC model.

13:20Ethan Mollick recently tweeted, Startups take five to seven years to exit on average, more for biotech. Most of the VCs seem to believe that American AI advancement will happen in that timeframe, but I'd love to hear more about their vision for the world in five to seven years and how their portfolio firms maintain advantage. I totally get how right now is an amazing time to be a startup with the huge multipliers that LLMs can provide to founders. But VCs and their LPs get paid on exit, and exit requires a strategy that lasts for the next decade. Given the uncertainty over timelines, what is that?

13:46He continues, Yes, I have asked this question before in other ways, but have generally never gotten good answers. I know plenty of VCs follow me on this site. Care to share? And finally, he wrote, reader, they did not. Another dimension of this, we also have this new phenomenon of companies seed strapping, basically raising one round of funding and then trying to turn to profitability, using the new efficiency gains and opportunities that AI represents. All of this, I think, was already happening and was likely to lead to some amount of transformation of the venture capital business. But I actually think that tariffs are going to radically hasten this transformation.

14:17My logic is this. AI was already making teams reconsider how much capital they needed. Now, as LPs freeze up and VCs also start to slow down, portfolio companies and entrepreneurs are going to accelerate their move to a defensive cash-efficient posture. Those that make that transition successfully, many of them will probably decide that actually they don't need venture the same way they might have expected before. And so in this way, I actually think that the natural tendency of VCs to turtle up right now is going to hasten their own decline. That's not to say that big companies that want to go after Blue Ocean's opportunities won't still need capital.

14:51They will. And that's not to say that VCs can't adapt their model. They can. But it's very clear that the venture capital scene of today looks very different than the venture capital scene of tomorrow. And I think tariffs are going to significantly accelerate forces that were already happening. Lastly, of course, there are the job implications. And this is not just for startups, but for every company. Yesterday's show was all about the Shopify AI memo, which, as I argued, I don't believe was just strictly about a soft hiring freeze. And yet still, the implications of it were functionally a soft hiring freeze.

15:20Some even speculated that that was the actual point underneath, and it was a market-palatable way of doing that without spooking investors. AI was already creating some very dynamic conversations internal to companies around how they think about staffing going forward. With recession predictions being updated by the minute this week, those conversations have to be accelerating. We've already seen how devastating the relatively normal downturn was for the tech sector in 2023, and this could be much, much worse. Now, of course, layoffs traditionally aren't a particularly welcome option for corporate leaders.

15:50They tend to be seen as a sign of weakness and slowing growth. However, if a recession or downturn does come to pass, it'll be the first one where AI is a viable replacement for some amount of that human labor. I've talked about how I think we have to get through the efficiency phase of AI, where companies treat it primarily as a way to cut costs as opposed to harness new opportunities. I think that's going to happen a heck of a lot faster because of everything going on with tariffs and their downstream impacts like recession. None of this is for certain. Part of what makes it such a difficult environment is that it's really not clear to anyone exactly what the endgame here is.

16:21Because we don't know that, it's hard for anyone to make clear decisions. And so we're going to be operating in a period of instability for the foreseeable future. The impact on AI is, of course, just one small set of impacts in a radical sea of transformations that these new policies beget. But even over here in our little corner of the world, there are clearly going to be some big changes that come from all of this. For now, though, that is going to do it for today's AI Daily Brief. appreciate you listening or watching as always and until next time peace