Microsoft (MSFT) called on the Trump administration to change a last-minute Biden-era AI rule that would cap tech companies' ability to export AI chips and expand data centers abroad.

In a blog post Thursday morning, Microsoft criticized the so-called AI diffusion rule imposed by the Biden administration in the former president's final days in office. Aside from 18 "key" US allies, the rule capped the amount of AI chips that roughly 150 countries can purchase from US companies without obtaining a special license, with the aim of thwarting chip smuggling to China. These "tier two" countries include Israel, Switzerland, and India. 

The AI diffusion rule also states that US companies can only build data centers representing up to 7% of a given firm's total compute capacity. 

China and other countries, including Russia, North Korea, and Iran, are already banned from importing such chips.

"[T]he Biden rule goes beyond what's needed," Microsoft president Brad Smith wrote. "It puts many important U.S. allies and partners in a Tier Two category and imposes quantitative limits on the ability of American tech companies to build and expand AI data-centers in their countries."

"This includes many American friends, such as Switzerland, Poland, Greece, Singapore, India, Indonesia, Israel, the UAE, and Saudi Arabia," Smith added. "The unintended consequence of this approach is to encourage Tier Two countries to look elsewhere for AI infrastructure and services." Microsoft has been pushing to expand in the United Arab Emirates in particular.

Some of these tier two countries are sources of smuggling chips to countries banned from purchasing AI chips from the US. For example, AI policy expert and director of the Wadhwani AI Center at CSIS Gregory C. Allen noted that Singapore has been a "massive” source of chip smuggling to China.

Under the AI diffusion rule, tier two countries can import GPUs with equivalent compute power of up to 50,000 Nvidia Hopper AI chips through 2027, or 100,000 Hopper GPUs if they reach an agreement with the US government.

"Ironically, the Diffusion Rule discourages what should be regarded as an American economic opportunity — the export of world-leading chips and technology services," Smith wrote.

Smith also argued so-called tier two countries would look to China if they cannot meet their tech needs with US products. "[I]t's obvious where they will be forced to turn. If left unchanged, the Diffusion Rule will become a gift to China's rapidly expanding AI sector," he wrote. Chinese firm DeepSeek recently unveiled a new, cost-effective AI model that rocked US markets.

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While Microsoft's Smith said that "there are important elements in the rule that should be retained," he said the Trump administration should simplify what he called the "overly complex rule."

"Stop relegating American friends and allies into a second tier that undermines their confidence in ongoing access to American products," Smith said, referring to the tier two status. "Eliminate the quantitative caps that would interfere with a well-functioning economic market."

Meanwhile, companies like Microsoft have a longer-than-typical 120-day period to provide commentary on the restrictions, which are set to go into effect next year.

Microsoft's criticism of the AI diffusion rule echoes earlier commentary from Nvidia (NVDA). The chipmaker's vice president of government affairs, Ned Finkle, said in a statement in January that the Biden administration's restrictions "threaten to squander America's hard-won technological advantage."

Laura Bratton is a reporter for Yahoo Finance. Follow her on Bluesky @laurabratton.bsky.social. Email her at laura.bratton@yahooinc.com.

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