Sanctions: The Mother of Invention

Sanctions have long been used as a tool to exert political and economic pressure, with the goal of stifling a rival’s progress. However, history repeatedly shows that when a nation is forced into a corner, necessity drives innovation. Nowhere is this clearer than in the ongoing U.S. sanctions against China’s access to advanced AI chips.

Instead of halting China’s AI progress, these restrictions have accelerated domestic innovation, forcing China to develop its own AI chip ecosystem. The latest example of this resilience? Deepseek, China’s AI breakthrough that competes with OpenAI’s ChatGPT - despite having only a fraction of the investment and computing power.

This article explores how the U.S. sanctions on high-performance AI chips have transformed China’s tech landscape, the strategies being employed to overcome these restrictions, and what this means for global markets and investors.

The U.S. AI Chip Sanctions and Their Intended Goal

The U.S. government has sought to limit China’s technological and military advancements by restricting access to cutting-edge semiconductor technology. This includes:

• Banning Nvidia and AMD from exporting their most advanced AI chips to Chinese companies.
• Blocking China from accessing extreme ultraviolet (EUV) lithography machines necessary for leading-edge chip manufacturing.
• Pressuring allies, including the Netherlands and Japan, to restrict semiconductor equipment sales to China.

The intended goal? To slow China’s ability to develop next-generation AI models, maintain U.S. dominance in AI, and limit China’s military capabilities.

However, history shows that sanctions don’t always work as intended. If anything, they often drive self-sufficiency and unexpected breakthroughs - and that’s exactly what’s happening in China.

Deepseek: China’s AI Breakthrough Amid Sanctions

One of the most significant recent developments proving this point is Deepseek, a Chinese AI model that has achieved performance levels comparable to OpenAI’s GPT-4 - but with only a fraction of the investment and hardware resources.

How Did China Pull This Off?

The U.S. sanctions severely limit China’s access to top-tier Nvidia AI chips, like the A100 and H100, which are essential for training the most advanced AI models. However, instead of falling behind, China pivoted to optimizing AI performance using lower-tier hardware and alternative chip solutions.

• Software Optimizations: Deepseek’s developers focused on making AI models run more efficiently on older-generation chips, proving that raw computing power is not the only path to innovation.
• Homegrown AI Chips: Companies like Huawei and Alibaba have aggressively developed their own AI chips, such as Huawei’s Ascend and Alibaba’s Hanguang 800, to bypass U.S. restrictions.
• Scaling with Less: Unlike Western AI firms that rely on vast GPU clusters, China has found ways to train high-performance AI models with significantly fewer computational resources.

Deepseek’s rapid progress suggests that restricting access to technology only accelerates the push for self-reliance. If China can build ChatGPT-level AI without the best chips, what happens when they eventually develop their own cutting-edge AI semiconductors?

China’s Response: Building a Self-Sufficient AI Industry

Beyond Deepseek, China is adopting multiple strategies to overcome AI chip sanctions and become independent from U.S. technology.

1. Accelerated Domestic AI Chip Development

• Huawei, Alibaba, and Baidu are leading China’s push to develop AI chips comparable to Nvidia’s.
• SMIC (Semiconductor Manufacturing International Corporation) is ramping up chip fabrication efforts, aiming to catch up to TSMC and Samsung.
• The Chinese government is pouring billions into semiconductor R&D, ensuring that companies have the resources to innovate.

2. AI Software Optimization on Older Chips

• Without access to cutting-edge Nvidia GPUs, Chinese developers are rewriting AI software to extract maximum performance from older hardware.
• This is similar to historical cases where resource constraints forced engineers to develop more efficient solutions, leading to unexpected breakthroughs.

3. Diversification of Supply Chains

• China is partnering with Russia, the Middle East, and Southeast Asia to secure semiconductor supply lines and bypass Western restrictions.
• This reduces dependence on Western chip manufacturers and accelerates the development of alternative supply chains.

4. Expansion of Open-Source AI Models

• Chinese companies are heavily investing in open-source AI models to reduce reliance on Western AI platforms like OpenAI’s GPT and Google’s Gemini.
• Baidu’s Ernie and Tencent’s Hunyuan are being positioned as domestic alternatives to U.S. AI services.
  
  

Lessons from History: Sanctions Lead to Innovation

The response to U.S. chip sanctions mirrors previous cases where sanctions forced nations to develop alternative solutions:

• Russia (2014-Present): After Western sanctions cut Russia off from SWIFT and Visa/Mastercard, it developed its own payment system, MIR, which now processes most domestic transactions.
• Iran (2000s-Present): U.S. sanctions pushed Iran to develop a self-sufficient petrochemical industry, making it a major exporter despite restrictions.
• China (2019-Present): After the U.S. banned Huawei from using Google services, Huawei built its own HarmonyOS, which now has millions of users.

Rather than stalling technological progress, sanctions have historically forced rapid innovation - and the AI chip restrictions on China are following the same pattern.

What This Means for Investors

The rapid adaptation of China’s AI sector presents both risks and opportunities for investors:

Bear Case: Risks for Nvidia and U.S. AI Leaders

• If China succeeds in developing high-performance AI chips, it reduces Nvidia’s dominance in the global AI market.
• Western AI firms like OpenAI and Google could face stronger competition from China’s emerging AI ecosystem.
• The geopolitical risks of a fully independent Chinese semiconductor industry could shift global tech leadership.

Bull Case: Growth in China’s Tech Sector

• Chinese semiconductor stocks (like SMIC, Huawei, and AI-focused firms) could see massive growth as the country builds its own AI infrastructure.
• Alternative chip technologies and software-based AI optimizations may create new investment opportunities.
• A divided global AI market (U.S. vs. China) could drive innovation on both sides, leading to faster advancements in AI technology.
  
  

Final Thoughts: Sanctions Are Accelerating AI Innovation

The U.S. sanctions on high-performance AI chips may have been designed to limit China’s AI development, but they are having the opposite effect. Rather than crippling China’s tech industry, they are pushing it towards self-sufficiency and accelerating innovation.

Deepseek’s success proves that AI breakthroughs don’t require cutting-edge chips—they require creativity, adaptation, and resilience. As China continues to close the gap with U.S. AI leaders, investors should prepare for a shifting global tech landscape.

Sanctions may slow China down in the short term, but history shows that in the long run, necessity breeds innovation—and China is proving that right before our eyes.