CNBC's Jim Cramer discussed on Wednesday the challenges China is facing now that the U.S. market for chips used by artificial intelligence software is ramping up.

Semiconductor company AMD announced on Tuesday its new AI chip would start shipping to customers later this year, positioning itself as the strongest competitor to Nvidia, which currently dominates the market.

But the U.S. government has blocked exports of these powerful semiconductors to China, and Cramer doesn't think China's homegrown semiconductor companies can keep up with U.S. production, especially with AMD now joining the fray.

"Without these chips, China simply can't build out the kind of artificial intelligence that the Western world's embracing," he said.

China has been weakened by U.S. policies that have heavily dampened its trade, Cramer said, noting that it has fallen behind Mexico and Canada in recent trade figures. He thinks it will take an enormous stimulus package — much larger than what the government is rumored to be doing — for it to regain preeminence in the manufacturing sphere.

"I think things are getting desperate in China: They can't grow, they're being left behind in tech — can't even steal these high-end super chips anymore," Cramer said. "Other than [Secretary of Commerce] Gina Raimondo, I'm not sure anyone in this administration truly understands the very real threat that a trapped Chinese government finds itself in."

CNBC has reached out to the Chinese embassy in Washington, D.C., for comment.

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Disclaimer The CNBC Investing Club Charitable Trust holds shares of Nvidia.